I'd like to make four points, one about the past and three about the future, and start with a context that goes back to 1986, when I and a Japanese colleague published a study of Canada-Japan relations. At that time, we situated the Canada-Japan relationship within the Canada-U.S.-Japan triangle, since when asked what they thought about Canada-Japan relationships, many would answer, “We think about the U.S.”
So one of our recommendations in 1986 was that we deepen our trade ties with the U.S. through a bilateral FTA, since that would attract Japanese producers to situate in Canada and take advantage of lower costs and a favourable exchange rate at that time in order to serve the U.S. market. Well, what a difference a quarter of a century makes. In 1986 Americans were lamenting their lack of competitiveness and pressuring the Japanese to allow yen appreciation, and sociologist Ezra Vogel was counselling Americans to adopt more Japan-like institutions to manage the economy and labour relations.
Then, in 1999, I chaired a task force that again studied the future of Canada-Japan relations. This time, it was sponsored by the Japan External Trade Organization, or JETRO. At that time we recommended that the two governments set a 2010 target to achieve comprehensive liberalization of bilateral trade and investment flows. Stressing the importance of greater specialization on both sides as the basis for greater intra-industry trade, we encouraged governments and business groups to explore common interests in such areas as communications, health and social services, and medical devices, as well as environmental goods and services.
Well, 2012 misses that target by only two years.
In the intervening period, the Japanese economy has endured near-stagnation, and the vaunted resilience of the Japanese people has been sorely tested by lingering fears of radiation and the decommissioning of its 54 nuclear power generating plants. The country's governance is also gridlocked by political infighting, something we're familiar with in our neighbour to the south.
So here's one of my questions today. Is dynamic Asia—since certainly Asia is the most dynamic part of the world right now—passing both countries by?
Well, on the Japanese side, Japan is now the third-largest economy after China and the United States, but it's still one of the richest in per capita income terms. Its technological dynamism is highly impressive in a number of sectors, and it is one of the largest investors in dynamic Asia and a key player in the regional production networks that tie the region together.
Japanese business is in the midst of a transformation from the traditional keiretsu-based model, which exports finished goods, seeks global market share, and tolerates underperformers—which we now call zombie firms—to one that allows and sees much greater diversification in models with highly focused firms and major positions in Asian supply chains.
As much as 20% of Japanese manufacturing is now located abroad. Its exports increasingly consist of highly innovative and advanced components and materials that in turn are used in the production of electronics and vehicles in the rest of the region and beyond. Examples of such exports include fine chemicals, the machinery that makes electronic components, and the carbon fibre that's now used in the bodies of airliners like the Dreamliner.
Japan has also actively pursued economic partnership agreements—and I use that term carefully—with eight Asian countries and with the Association of Southeast Asian Nations, or ASEAN, as well as Switzerland, Peru, Chile, and Mexico. There are good reasons these agreements are called EPAs—because they're not comprehensive free trade agreements. The earliest agreement, with Singapore in 2002, comes closest to across-the-board liberalization, for the simple reason that Singapore has no agriculture sector aiming to penetrate the Japanese market—beyond orchids.
What of Canada's side of the relationship? Beginning with the Asian region, since I believe any strategy on our part toward a particular Asian economy has to be formulated within an Asian regional context, Canada has earned a reputation for turning up but not following through. We've completed no FTAs with any major Asian economy, even though our own talks with Singapore began a decade ago.
There are good reasons to pursue the proposed CEPA initiative with Japan within the larger Asian strategy. One reason relates to current Asian preoccupations. We tend to be extremely preoccupied with our own internal issues and forget about what's going on in the rest of the world.
In Asia, the economies are busy integrating. Most Asian governments have engaged in unilateral liberalization of both trade and investment to catch up with the cross-border initiatives that are taken by their own businesses. The smaller economies are also increasingly concerned about being swept up into a tight Chinese embrace, reminiscent of the historical tribute relationships in which the neighbours acknowledged the superiority of the emperor in exchange for political stability and positive commercial relations.
So the answer in Asia is to create regional institutions where there have been none. That's what their preferential trade agreements are mostly about. That's what their emergency financing mechanism, known by the unwieldy name the Chiang Mai initiative multilateralization, is also about. In the future the East Asia Summit, which includes Australia, India, New Zealand, Russia, and the United States as well as the ASEAN countries and does not include Canada, will be the economic and security institution of the future.
We all know our relationship with Japan is our longest-standing in the Asian region and our commercial ties go back a hundred years. Despite the nuclear disaster and a shrinking population, the Japanese economy will continue to be one of the world's largest and richest for years to come. But Japan is our second-largest trading partner in the region now, and our total trade is roughly half the size of bilateral trade with China. Like that with China, the trade is largely complementary, with Japan buying natural resources and energy and Canada buying finished goods.
What should we do together, looking to the future? I think the history of the bilateral relationship provides a strong base for the future. I would offer three principles for the framework of the negotiation.
First, Japan has a rather uncertain near-term future. I think we should not expect results from this initiative and Japanese politicians, since they continue to struggle with the huge adjustments implied by public insistence on moving away from nuclear power generation. The switch to oil and natural gas imports has already pushed Japan's substantial trade surplus into a deficit.
Second, I don't think the goals of the negotiation should be diminished by Japan's difficulties right now. They should be ambitious, taking into account the rise in the Asian economies and the changing organization of global production.
Both countries should set ambitious goals for these negotiations or be left behind by other Pacific Rim countries. Why do I say that? Because three different regional trade agreements are in train in Asia. One is exclusively Asian. The other two are pan-Pacific. One, initiated by APEC, is called the free trade area of the Asia Pacific, FTAAP, and it's moving slowly, as things do in APEC. The second pan-Pacific initiative was initiated by four small countries on both sides of the Pacific and is now known as the Trans-Pacific Partnership, TPP, which the U.S. applied to join in the waning days of the Bush administration.
The TPP is a significant initiative for a number of reasons, but what matters to us today is its ambition: to be a comprehensive, high-quality, 21st century agreement, which includes investment services, competition policy, intellectual property protection, and other domestic policies that reduce the efficiency to be found in global supply chains. None of the other variants of trade agreements in the Asia Pacific yet measure up to the TPP in its comprehensiveness, and none is as far along.
Both Canadian and Japanese leaders have asked to join the TPP, but the nine countries that are already members have yet to come to a conclusion.
The point I wish to emphasize in these comments is that it is within this context and ambition that our bilateral talks should be pursued. The outcome should be consistent with or superior to TPP provisions so that at some future date this bilateral agreement can be rolled into a larger agreement.
The negotiating framework implied by the joint study published by DFAIT looks promising, in that it does not exclude the most sensitive areas of agriculture, forestry, and fisheries. But in predicting the outcome of this negotiation, one only has to look at Japan’s negotiation with Australia, which began in 2007. It's now in its fifteenth round, and the two sides remain apart on trade liberalization in agriculture. DFAIT's joint study uses language that could also imply that Japan has already taken agriculture, forestry, and fisheries off the table, despite its interest in Canada’s potential role in its goals of food and energy security.
My third principle and my final comment relates to the structure of the negotiation. We're in a world that has moved far beyond the NAFTA-era focus on goods trade. The joint study notes that the structure of our existing trade is largely complementary. In theory, then, this means there's little need for trade-liberalizing negotiations, since the two are not head-to-head competitors. But with the world economy now organizing into global supply chains, Canada’s economic future relies increasingly on achieving high-value-added positions in those supply chains. Thus, the negotiations should explore the possibilities for promoting more intra-industry trade in which Canada and Japan exchange different components, materials, and services in the same industries.
The EPA should be a 21st century agreement, in that it includes trade, investment, goods and services, and relies on a mutual willingness of both partners to adjust to the realities of the 21st century and accord each partner opportunities to compete on a level playing field with other preferential trade partners of the two negotiating parties.
Thank you.