Thank you, Chairman.
Bonjour. Good morning, everyone.
It's my pleasure to present to the Standing Committee on International Trade on an issue we think is of great importance: the Canada-Southeast Asia relationship.
Canada's importance as a trading partner for ASEAN has declined in the past decade, as has ASEAN's importance for Canada. However, ASEAN's importance for Canada as a trading partner relative to the rest of Asia has held up, which is to say simply that we have fallen overall in our importance for Asia as a whole, but ASEAN's share within Asia has remained steady. Furthermore, the stock of Canadian investment in ASEAN in 2002 was more than a third of total Canadian investment in all of Asia, and greater than the stock of investment in Japan, Australia, China, or South Korea. All of this is to say that ASEAN, while not performing quite as we would have liked in the last decade, remains an important trade and investment partner for Canada.
The declining importance of Canada-ASEAN trade in the 1990s can in part be explained by economic integration initiatives in North America and Southeast Asia during the last decade. NAFTA, as you all know, made it easier for Canadian businesses to sell in the U.S. at a time when the American economy was going through an unprecedented expansion. Across the Pacific, East Asian and Southeast Asian economies were undergoing a process of natural integration through electronics production networks. These links were further strengthened by formal proposals to create bilateral and sub-regional free trade agreements in the aftermath of the 1997 Asian crisis. The crisis itself led to a sharp fall in real incomes of many Southeast Asian countries, depressing import demand from Canada and from the rest of the world.
That was the past, and despite the setback of the late 1990s, ASEAN is expected to return to its long-term high-growth path, which over the last 25 years has created large pockets of high- and middle-income consumers in most economies of ASEAN. We estimate the middle class, defined as those with household incomes of more than $3,000 U.S., to be as large as 100 million consumers throughout the ASEAN region.
Also, increasing westernization can be seen in the tastes and preferences of consumers through Southeast Asia. For example, many urban consumers are showing dietary changes toward more wheat-based foods.
Even taking into account the recessions of the late 1990s and of 2001, the combined GDP of ASEAN has increased from $242 billion in 1980 to something approaching $850 billion today. Increasing affluence in many ASEAN countries has led to a demand for a diverse range of products and services that Canadian companies are in a position to supply.
ASEAN is not yet a single market, but it is on its way to becoming one, and Canadian companies can begin to consider ASEAN-wide strategies in their approach to Southeast Asian markets. The ASEAN economies collectively are larger than those of India and Brazil, and almost half as large as that of China. In pure economic terms, therefore, we think Southeast Asia has as much claim as does Brazil or India to be seen as a priority emerging market for Canada.
Most trade within ASEAN is already conducted free of tariff barriers. Likewise, with growing integration between ASEAN and neighbouring regions, Canadian investors can look at the viability of using ASEAN as a base for doing business not only within the region but also with India, China, and other parts of Asia.
At the same time, rapid industrialization and economic transformation in Southeast Asia have changed the comparative advantage of ASEAN vis-à-vis Canada. A number of the more advanced ASEAN countries are major exporters of high-value-added manufactured goods, as well as of sophisticated machinery, equipment, and services. The trading relationship between Canada and ASEAN, therefore, is no longer simply that of labour-intensive, cheap exports from Southeast Asia in exchange for natural resources and high-end manufactured goods from Canada.
Another very important new factor in the Canada-ASEAN relationship is the emergence of China as a competitor, as well as a new source of demand for both ASEAN and Canada. The so-called “China price” phenomenon, or the China price problem, is affecting global production and sourcing decisions, especially in Southeast Asia but also in Canada. Canadian firms are increasingly conscious of the need to develop a China strategy in their business plans, and they may well look to ASEAN as an alternative or as a complement to whatever approach they take to deal with the China threat. Production networks in electronics, for example, which were once dominated by ASEAN, now include China. In fact, China is the leading player in electronics production networks in the world. As ASEAN economies adjust to the competitive threat of China, through a process of industrial upgrading, in electronics, in automotive parts, there will be opportunities, we think, for Canada and Canadian firms to provide input into these new supply chains.
The Asia Pacific Foundation of Canada conducts an annual investment intention survey where we ask Canadian companies about their plans for investment in Asia over the next year. Our 2006 survey shows the highest level yet of Canadian companies planning to invest in Asia. China, no surprise, was at the top of the list, with 26% of respondents saying they plan to increase their investment in that country; but Southeast Asia, ASEAN, was not far behind, at 16% of respondents. So once again, we are looking at ASEAN as a promising source of investment for Canadian companies, as borne out by our annual studies.
What about the question of a free trade agreement with ASEAN? Should Canada initiate discussions with Southeast Asia for trade-barrier-free access to both markets? We believe that at this time there's limited appetite in ASEAN to open negotiations with Canada. Whereas Canada was among the top 10 export markets of ASEAN in the early 1990s, it no longer belongs on the top 10 list. It stands to reason, therefore, that Canada and ASEAN should strengthen trade and investment relations before broaching the issue of an FTA. And yet the discriminatory nature of trading arrangements that are already in effect or under negotiation within Southeast Asia, and between Southeast Asia and other partners, have the potential to make it that much more difficult for Canada to expand its presence in the region. It is very important in this respect to bring to a rapid conclusion to the Canada–Singapore free trade agreement, which has been under negotiation since 2001, and to use this agreement as far as possible as a platform for expanding economic ties with all of Southeast Asia.
There are other initiatives that we think Canada can pursue with specific ASEAN countries, such as the expansion of air services with Singapore and investment protection and promotion agreements with Indonesia and Vietnam. Canada already has FIPAs, or foreign investment protection agreements, with Thailand and the Philippines. These kinds of agreements will enhance the attractiveness of ASEAN as a destination for foreign investment in the light of growing competition from China.
It may also be possible to engage in a dialogue with ASEAN about common standards of foreign investment regulation and protection as part of a broader discussion on investment in the APEC forum. Canada should also look at negotiating social security agreements with ASEAN partners, especially Singapore and Malaysia, both of which have mandatory pension and health care programs for workers. We already have a social security treaty with the Philippines. It has been in force since 1997. These kinds of treaties facilitate the mobility of labour, especially skilled workers, and in so doing they promote trade in services, which is an area of comparative advantage for Canada.
Let me close by saying that Canada has had long-standing good relations with Southeast Asian countries that predate the creation of ASEAN in 1967. We were among the first non-members to be designated as what they called “dialogue partners”, which has provided us with ministerial-level dialogue and access through the annual post-ministerial conferences, and through the ASEAN regional forum. As ASEAN marks its fortieth anniversary this year, Canada should send a very clear signal that it wants to be a strong economic partner for the next forty years and beyond.
Thank you very much.