Canada-China Relations Committee on Feb. 5th, 2024

[Rob Oliphant, Liberal, Don Valley West, ON]

Thank you.

I want to turn to Professor Nagy. You mentioned North Korea as being a country we need to work with. You're the first person I have heard say that in several years, so I'm wondering what you mean by working with North Korea.

[Stephen R. Nagy]

I don't think I said that. I said that we need to work with other countries to deal with the challenge of North Korea. The reality of North Korea's weapons of mass destruction and proliferation is a challenge to the region.

[Rob Oliphant, Liberal, Don Valley West, ON]

Thank you for that clarification, because you did say it. We all noticed it, and eyebrows were raised all around the table, so thanks for clarifying that. I wanted you to clarify because I didn't think that's what you meant.

[Stephen R. Nagy]

No, not at all.

[Rob Oliphant, Liberal, Don Valley West, ON]

Okay. The clarification was important.

When you talk about focusing the IPS in certain regions and not in other regions, what criteria are you using to make those decisions? What are you saying they should be? Obviously, there are Canadian interests and values, all those things we all know, but you've been very specific about targeting within the IPS, which I think is already quite targeted. What are the criteria you have used to suggest the South China Sea, etc.?

[The Chair, Liberal, Ken Hardie]

We'll ask for a brief answer, Professor Nagy. Thank you.

[Stephen R. Nagy]

One, an abidance to the rule of law is critical as to which countries we choose to deepen our relationships with. Two, converge strategic interests. This creates more opportunities to work with countries that don't share the same political system—for example, Vietnam.

This is a challenge. How do we match these two contradictory positions? If we want to have a sustained position within the Indo-Pacific and in particular in and around Southeast Asia, we'll have to have some flexibility in how we deal with countries with different political systems.

In terms of criteria, countries like South Korea, Japan and Singapore are clear priorities, but we need to have some flexibility to ensure that we have partnerships with countries that don't share the same respect for democracy, human rights and the rule of law, such as Vietnam. I think this is the only way to have a sustained, meaningful presence in a heterogeneous region that has so many different political systems.

[The Chair, Liberal, Ken Hardie]

Thank you very much, Mr. Oliphant.

We'll now go to Monsieur Bergeron for six minutes or less.

[Stéphane Bergeron, Bloc, Montarville, QC]

Thank you, Mr. Chair.

Ms. Lilly and Mr. Nagy, thank you for being with us this evening. I think your comments will enlighten us as we move forward.

Ms. Lilly, what I'm going to raise here will be helpful to Mr. Nagy, who obviously wasn't able to hear your testimony. Right off the bat, you stated that Canada is economically dependent on the United States. In many cases, Canadian companies are dependent because it's easy for them to do business with the United States. We take the easy way out, even though we tend to put all our eggs in one basket as a result. Therefore, when the United States adopts more protectionist policies, it necessarily has an impact on our economy and our businesses. As the saying goes, when the United States sneezes, Canada is bedridden.

I don't know if you both agree with me, but it seems to me that one unstated goal of Canada's Indo-Pacific strategy is to diversify our economy. Several attempts have been made to do that in the past, first during the Pierre Elliott Trudeau years, then during the Jean Chrétien years, and finally during the Stephen Harper years. However, none of their efforts were successful, or at least not as successful as expected.

Ms. Lilly, you partly addressed the following issue when you talked about the need to do business with various countries that are signatories to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. However, my question is for you and Mr. Nagy. From both your perspectives, how will this Indo-Pacific strategy lead us to succeed when we have so often failed in the past?

[Dr. Meredith Lilly]

Thank you for the question.

How will the Indo-Pacific strategy help us succeed? To be honest, I'm not sure we will move from our current situation. Upwards of 75% of Canadian exports are now going to the United States. I'm not sure we'll see much of a change to that.

I would agree with you that the Indo-Pacific strategy is framed as something that is supposed to help Canada diversify its trade. The reality, as I said in my opening comments, is that only once a company is exporting to the United States will it also consider exporting to the the Indo-Pacific, Europe or anywhere else. A small minority are exporting somewhere other than the United States. As we diversify, we will also trade more with the United States as a result. That is just what our firms will do.

It's not that Canada is lazy, in my view. This happens the world over. In all regions of the world, you are most likely to trade with your neighbours and large economies. Our next door neighbour happens to be the world's largest economy. It fits theory and evidence that we do that.

It is important for us to trade with other economies. It can help in our relationship with the United States to demonstrate that we have relevance elsewhere and to demonstrate to the Americans how we can be helpful to them.

I will be honest. Thinking about trading with the Indo-Pacific as a way to move away from the United States is not the right tack, and I don't think it will be successful.

[Stéphane Bergeron, Bloc, Montarville, QC]

Mr. Nagy, what do you think?

[Stephen R. Nagy]

Thank you for the question.

I would agree with Professor Lilly with regard to the Canadian Indo-Pacific strategy. I don't think it is an effort to diversify away from the United States. I think it is an effort to diversify away from an over-dependence on the Chinese market. We've seen investments in Southeast Asia. We have Paul Thoppil, who's based in Indonesia right now. He is our trade representative there. We have opened an office in Manila. We are likely to invest more resources in Singapore.

These are key elements to diversify away from China. That doesn't mean decouple. I would like to be very clear about that. It means diversify away from the potential weaponization and monopolization of trade by China that could harm Canadian interests.

In terms of the Canadian Indo-Pacific strategy, this is quite clear. How do we manage our relationship with the United States and our economic over-dependence on the United States? We should use the market to be more competitive and to understand how we can diversify not only with the United States but within the United States to create more economic opportunities for Canadians.

I'll stop there. Thank you.

[Stéphane Bergeron, Bloc, Montarville, QC]

Perhaps that will trigger a debate for my second turn.

Mr. Nagy, in your August 2021 article, “Why Does Canada Need an Indo-Pacific Strategy as Part of Its Foreign Policy?”, you advocate for an Indo-Pacific strategy that maximizes opportunities for Canada while adapting to regional challenges and creates an independent Canadian brand so that Canada is not perceived as a secondary partner to the United States.

It's a bit of a chicken-and-egg dilemma. How do we diversify our trade, and how do we ensure we are not perceived internationally as permanently aligned with the United States? What would you suggest?

[The Chair, Liberal, Ken Hardie]

At this point, Mr. Bergeron, your six minutes have expired. We'll park that question with Mr. Nagy, and in the next round he may have the time to give you the answer you're looking for.

Right now we'll go to Ms. McPherson for six minutes or less.

[Heather McPherson, NDP, Edmonton Strathcona, AB]

Thank you very much, Mr. Chair.

Thank you to both the witnesses for being here today and sharing their expertise with us.

I am interested in your discussion or comments on diversifying. Last week we heard witness testimony that even when we diversify, even when we are working with other countries in the region, we are in fact still working with China because of those close relationships they have.

I'm looking at that context. I'm also looking at the United States, where we're talking about the idea of our over-dependence on trade with the U.S. and a potential Trump presidency, which could be extremely difficult for our trade relationships going forward.

What things does Canada need to do to increase that diversification? Frankly, we've had this Indo-Pacific strategy for some time now. Has it led to any diversification, from your perspective, to this point?

Dr. Lilly, I'll start with you.

[Dr. Meredith Lilly]

Thank you.

Has any diversification happened yet? It's difficult to say. Part of the challenge in assessing that is that the Indo-Pacific strategy was officially launched a year ago. While the Minister of Trade and others are very fond of saying that Canadian trade is higher than ever and we've been trading more than ever, the reality is we know for a fact that Canada's increased trade since 2020, since the pandemic, is the result of inflation, not increased volumes of trade. This is in the Global Affairs Canada 2023 report—from Global Affairs itself.

We know that higher prices are fuelling Canada's increased trade with the United States and others. If you're looking at any figures, even a $2-billion increase or a $20-billion increase, first you have to ask yourself if it's the result of prices or increased volumes of trade. We know volumes of trade are actually down and have not recovered.

There are a couple things we can do that are important. First, just because we don't trade very much with the Indo-Pacific doesn't mean those exercises aren't important, particularly if they help us build relationships for the long term for other reasons.

We're talking about wanting to sign an FTA with ASEAN, but Global Affairs Canada's own assessments say that if we were to sign a deal, it would increase trade exports by Canada by $2.7 billion per year. It's frankly a rounding error when you think of the relationship with the United States. This $2.7 billion is great, but it's still not a huge amount of trade. If that helps us improve our relationships and helps both sides, who each have a respective elephant in the room, think about ways to co-operate with each other without always thinking about China or the United States, I think that's good.

Middle power is finding ways to be the fabric that keeps the global trading system together, where the two big powers aren't necessarily in the room or guiding the direction of that. I think that can be a really positive contribution we can make.

[Heather McPherson, NDP, Edmonton Strathcona, AB]

Thank you.

Mr. Nagy, do you have anything from your perspective?

[Stephen R. Nagy]

When we're talking about diversification of trade, we probably need to think about a sectoral approach to it. Western Canada has different comparative advantages, with energy and agriculture resources that are definitely needed throughout the region, and services and other products that can be delivered to Canada may be more suitable to Southeast Asia.

I think we need a more nuanced approach to thinking about what we mean by diversification, but we also need a federal government that's going to unleash or release some of the untapped resources that exist within Canada.

Right now, in terms of energy, critical security and our critical minerals, this is an area that many of the countries within the region are very interested in, but they find the current policies of the federal government frustrating because they're not able to get the kinds of resources that will create more economic security for the partners within the region. We should be very clear that it's not serving Canadians either.

[Heather McPherson, NDP, Edmonton Strathcona, AB]

Thank you.

One of the next questions I have—and perhaps I'll start with you, Dr. Nagy—is with regard to risks to Canadian businesses. We spoke about forced labour, and there were some comments about that. So far, the only piece of legislation that has come out from the Canadian government is Bill S-211, which the NDP didn't support because we didn't think it was nearly sufficient. We were told that other legislation would come forward. To date, that has not been done.

What are the risks to Canadian companies? What are the risks that goods made with forced labour are getting into our supply chains, and what should Canada be doing to stop that?

[Stephen R. Nagy]

In general, I think issues such as forced labour are moral issues, but I think the real risks to Canadian businesses revolve around supply chains, sea lines of communication and, if there is a potential kinetic conflict within the region, how this will disrupt critical technology, such as semiconductors, being exported to the manufacturing sectors in Canada.

Let me just give you an example. Of course, semiconductors are all the fashion, but in reality, semiconductors go to the automobile factories that are producing cars in Canada and employing Canadians. If we have a challenge across the Taiwan Strait or in the South China Sea that disrupts these sea lines of communication, this will affect the automobile industries in Canada and the prospects for Canadian citizens.

I think we need to look at this in a more complex way. Any businesses in Canada that use products from the region—critical minerals, lithium, semiconductors or small parts—will be affected by some kind of conflict within the region.

I don't mean to downplay the forced labour issue, because I think it's really important, but unfortunately, I think it's a moral issue that I'm not sure we can deal with. We need to think about, again, the challenges associated with sea lines of communication and the weaponization of supply chains.

Thank you very much for the thoughtful question.

[The Chair, Liberal, Ken Hardie]

Thank you, Ms. McPherson. That is your six minutes.

We will now go to Mr. Chong for five minutes or less.

[Michael Chong, Conservative, Wellington—Halton Hills, ON]

Thank you, Mr. Chair.

I'd like to ask Madam Lilly a question.

You advised the former prime minister on foreign affairs and international trade, so I'd like to ask you a question about LNG exports.

As you know, 15 years ago the United States exported virtually no LNG. I looked it up, and last year the United States exported about 4.5 trillion cubic feet of LNG. It's not inconceivable that Canada could export 4.5 trillion cubic feet of natural gas, which would add almost half a per cent to GDP right there, if not more.

If you were working in a prime minister's office, what legislative, regulatory and machinery-of-government changes would need to be put into place to get us to 4.5 trillion cubic feet of LNG exports? Maybe we can start with the machinery of government.

[Dr. Meredith Lilly]

Some of this is beyond my expertise. I can certainly speak to the trade side of things and to some of the regulatory pieces.

Having everyone sing from the same song sheet is helpful. This is across departments of government and across federal-provincial partnerships, and it includes municipalities and indigenous populations, ensuring that indigenous populations can benefit. There is an imperative there, really, that everyone has to be rowing in the same direction. I don't think we have that today.

I think as well that I wouldn't underestimate the importance of language from the top. It really does matter. When prime ministers are visited by foreign heads of state whose hands are out asking for LNG, and the prime ministers say that we've moved on and that there is no business case for that, it's incredibly damaging, not just to that relationship but to the rest of the world, which is also watching.

I know that your question is specific to LNG, but the other concern I have about this is that the same experience and mentality of everyone watching will then be transferred to Canada's critical minerals approach right now. They say, “Well, they can't build that pipeline and had to sell it to the government, and they've cancelled several LNG projects. Now they say they care about critical minerals because it's the right kind of energy, only we're pretty sure they can't get all of these regulatory processes through.” There doesn't appear to be any urgency or sense that we must move much faster. It's important for all of those things to be moving together in tandem.

Those are a couple of things I would say from a trade perspective.

[Michael Chong, Conservative, Wellington—Halton Hills, ON]

I notice that in other countries, governments are much more directly involved when it comes to LNG imports and exports than we are. The German government directly ordered the construction of six new LNG facilities, some of which have already come online. Japan's government, I think about a month ago, ordered Mitsubishi to sign long-term LNG import contracts. We've not traditionally had that close relationship between the government and our oil and gas sector that you see outside of North America.

I'm wondering how we can get government and industry working more closely together to meet what I believe is in Canada's strategic defence and security interests, which is to get more LNG to global markets, particularly for allies like Japan and Germany, and to reduce reliance on authoritarian states for those critical energy supplies. I'm wondering what machinery-of-government changes and regulatory and legislative changes are required in order for us to get the kind of speed to market that we see in places like Japan and Germany.

[Dr. Meredith Lilly]

I think a lot of it does come down to political will. I have been very impressed by the speed with which the ISED minister, Minister Champagne, has put political will behind the EV battery plants. We've seen rapid movement around regulatory approvals in all departments of government and co-operation with the provinces. That has happened very quickly—at lightning speed by Canadian standards—so I think it's entirely possible. However, I would agree: I don't think it has been prioritized that way in natural resources.