International Trade Committee on March 27th, 2013

[The Vice-Chair, NDP, Don Davies]

I'd like to call to order meeting number 70 of the Standing Committee on International Trade. Pursuant to Standing Order 108(2), we are hearing evidence today for our study of a comprehensive economic partnership agreement, or CEPA, with India.

We have two witnesses today. Representing the Canadian Council of Chief Executives, we have Ms. Ailish Campbell. As an individual, we have Professor Zhan Su, international business chair, Laval University.

Each of you will have 10 minutes to make an opening statement, and then we'll have questions for you from the members of the committee.

I'll start with you, Ms. Campbell. You have 10 minutes.

[Ailish Campbell, Vice President, Policy, International and Fiscal Issues, Canadian Council of Chief Executives]

Thank you, Mr. Chairman and committee members. It's wonderful to be here. Thank you for the invitation to appear before the Standing Committee on International Trade concerning the negotiation of a Canada-India comprehensive economic partnership agreement.

The Canadian government's actions to advance foreign market opportunities are critical. It is a difficult time for economic negotiations. The need to continue efforts towards open, dynamic trade has been described as a bicycle. To avoid backsliding into protectionism, countries must stay on the bicycle and keep pedalling, even if the terrain covered looks quite minimal on a day-to-day basis.

Despite our best efforts, the large bicycle built for the 159 members of the World Trade Organization has, regrettably in our view, stalled. We, Canada, and the rest of the WTO members who've invested in the Doha Round are regrettably somewhat off this bicycle, in fact, and riders with the best support teams are now mounting new, smaller bicycles and pedalling off, and frankly, in many directions.

In this challenging context, we commend the government for having developed a strong suite of bilateral and plurilateral negotiations for Canada. The suite of ongoing negotiations is of course very well known to this committee, and includes the Canada-EU comprehensive economic trade agreement negotiations and bilateral agreements in Asia, including with South Korea, India, and Japan, as well as plurilateral options, namely, the Trans-Pacific Partnership. These agreements will be a vital source of future jobs and opportunities for Canadian workers and families.

As an element of this ambitious agenda, the negotiation of a timely Canada-India comprehensive economic partnership agreement is one that the Canadian Council of Chief Executives fully supports. This negotiation must be well resourced, both in terms of negotiating staff and political will, and should be a top priority given the size and projected growth of the Indian market, in particular once the Canada-EU negotiations conclude, we hope.

GDP is rising in developing countries faster and at a greater scale than ever before in human history. Canadian firms from agriculture to energy, and to financial services and IT, must be part of this growth story.

In our view, the CEPA should be comprehensive and include the elimination of tariffs and non-tariff barriers on the majority of trade within 10 years of entry into force; the liberalization of services trade in most sectors, including, most critically, financial services, and a strong exchange of offers between Canada and India on all four modes of services supply; strong investment provisions to promote Canadian investment in India; simplified rules of origin; a binding dispute settlement mechanism; regulatory coherence and cooperation to promote market transparency; government procurement; transparent and simplified customs procedures; and high standards of IP protection.

Our commercial relationships should develop not simply through the exchange of goods and services, but through dynamic interactions, including investment in foreign subsidiaries and joint ventures, licensing, IP, and supply chains, and across multiple jurisdictions. In short, we call on the negotiators for both Canada and India to ensure that the CEPA aligns and keeps pace with the ways in which business is in fact done on the ground today.

As such, a critical piece to promoting a deeper relationship is the conclusion at the earliest opportunity of a comprehensive Canada-India foreign investment promotion and protection agreement, or FIPA. These negotiations have effectively concluded, but no final deal has been signed. We should examine the FIPA to ensure it is of the highest quality and, in our view, then put in place a clear timeline to finalize this agreement.

For our part, to raise awareness in the Canadian business community and among policy-makers of the opportunities in India and Asia more broadly, the Canadian Council of Chief Executives has launched an initiative called “Canada in the Pacific Century” to promote and identify key policy solutions to enhance Canada's ability to succeed in a transforming global economy. The results of this initiative are available online on our website, www.ceocouncil.ca.

As the secretariat for the newly created Canada-India CEO Forum, along with our critical partner, the Confederation of Indian Industry, the Canadian Council of Chief Executives will continue to promote private sector relations to improve our commercial activities. We are pleased to support our CEO forum co-chairs, Tom Jenkins of OpenText, and Hari Bhartia of Jubilant Life Sciences, and the CEOs who form the committee and working groups.

At that inaugural meeting of the CEO forum on November 6, 2012, members identified priority sectors, including natural resources, infrastructure, education, ICT, and financial services. Forum members clearly expressed support for a timely and comprehensive CEPA negotiation.

I trust that my remarks here today underscore that the private sector itself is of course taking action, working with government enablers, such as Export Development Canada, the trade commissioner service, and our dynamic diplomatic assets in India to deepen our commercial relations.

While firmly keeping our paramount economic relationship with the United States robust and dynamic, Canada must also expand its activities in growing markets such as India. These large markets provide the scale of customer demand required for Canadian firms to create jobs, growth and global presence. The member firms of the Canadian Council of Chief Executives wish to see more businesses using Canada as the staging ground for their global operations. In that regard investment and economic agreements with India and other large economies are particularly critical.

Thank you for your time.

[The Vice-Chair, NDP, Don Davies]

Thank you, Ms. Campbell.

Professor Su, can you hear us?

[Zhan Su, Professor, Director of Stephen A. Jarislowsky Chair in International Business, Laval University, As an Individual]

Yes, I can hear you.

[The Vice-Chair, NDP, Don Davies]

Okay. Welcome to the committee. You have 10 minutes to make your presentation.

[Zhan Su]

Thank you, Mr. Chair.

I want to thank the committee for inviting me to participate in this discussion on a project I think is important.

I will first say a few words about what we are doing at Laval University in the area of international management. I have been working at the faculty of business administration since 1990. In other words, I have been a professor at Laval University for exactly 23 winters.

We have been very active in international management training, especially since 2008. I am the Director of the Stephen A. Jarislowsky Chair in International Business. We provide training to students at all levels of education—Ph.D., MBA and undergraduate. We are also conducting a lot of research, especially on emerging countries, including India.

Over the past few years, my faculty has organized trade missions with students. The students leave with company-issued mandates to explore business opportunities abroad. We have already organized four student groups that went on a trade mission to India. A total of 80 mandates have been given by companies.

When it comes to our companies—in Quebec, for instance—we see a net benefit in exploring business opportunities in India. It is usually not very difficult for our students to convince companies or find mandates. That is why I think this initiative or economic partnership we are discussing with India is a rather worthwhile idea.

I know this project is causing quite a bit of controversy, both in Canada and in India—I was in India not too long ago. There are numerous concerns in Canada. Many people are wondering about the economic importance of that project. It is true that, in terms of figures, trade and economic ties between Canada and India are unfortunately still relatively weak. We are not one of India's key partners, and India is not one of our key partners either. In light of that, many people are wondering what the point is.

I think that India should be seen as not just a potential large market, but an existing one. The fact that the Indian market is still fairly marginal to us is all the more reason to make an effort to increase it. That market is large, if only in terms of population, youth, and a savings rate of over 35% of the GDP.

We have to consider the events of the past few years. Two comparisons need to be made to understand that type of a country. In Canada, we often compare India's situation to our own. Conclusions are drawn very quickly in such cases. For instance, it is said that India's market and economy are still very small and do not account for much. I think another comparison should be made regarding India's recent past. Since 1991, when India committed to making reforms, an incredible change has occurred. Every time I visit, I see economic progress and progress in every sense of the word. You should know that the famous summit of the BRIC countries was held in South Africa today. India has a great deal of potential. Given that country's potential importance, we should prioritize the development of its market.

In addition, India has a lot of potential as a supplier for us. When suppliers are mentioned, many fear offshoring, and that's something people resist. It is true that we must do everything we can to keep more jobs at home. However, the real issue consists in not keeping jobs artificially. We have to increase our competitiveness, and one way to do that is by knowing how to take advantage of other countries' strengths.

I work with businesses, where a very simple principle is applied. Today, given the numerous opportunities around the world, a business must know how to choose. It must decide what activities it should do alone, what it should do with others, and what not to do or to stop doing. That's an important decision. If we manage to capitalize on the strengths of others and, ideally, to create a win-win situation, we will all come out better for it.

Our students' mission led us to the clear realization that our companies needed to find new suppliers. Over the past few years, many of our companies have used China or other countries, such as Mexico, as a sort of a subcontractor. However, the situation in those countries is changing. India seems to be a very intriguing option.

The other reason we should try to promote our trade and relations with India is that this country has a very specific economy. It is often said that the state is fairly weak, but companies are very strong in India. The number of companies is relatively small, but some of them are very large. Even when it comes to R and D, some of them are very successful. In these conditions, if our companies can work with them, we may all come out winners.

Canada, like Quebec, needs more foreign capital. We see that, over the past 20 years, India has begun to invest abroad more. Last year, its foreign investments totalled over $15 billion. So it would really be good for Canada and India to establish a positive relationship.

Some people think that concluding a free trade agreement will not solve all of our problems, and I agree. I would say that we should not think that, once the free trade agreement has been signed, we can expect easy results. It must be understood that India's society is very different from ours, despite certain similarities in terms of democracy, or even language.

The major challenge for our companies would be to take advantage of the opportunities provided by India. To do that, they need more help. Companies that will internationalize—especially in countries like India—will have to meet additional challenges, particularly in terms of the institutional gap. The state plays a very different role in India. It's a protector that struggles to get involved. It's also a promoter that gets involved a lot. We have seen this in recent years, for instance, when it tried to conclude all kinds of free trade agreements in order to support its companies and promote its economy.

In addition, India is something of a producer state. The state sector is still very strong. It contributes at least 15% of the GDP. It's a state that plans ahead, and a look at its five-year plan is enough to see that. It directs investments and economic activities.

The cultural challenge is also significant. The way things are done in India is very different from how they are done in Canada. The distance is another obvious factor. A vast distance separates us, and that will complicate the operations of our companies that want to do business in India, and vice versa.

If we were able to conclude such an agreement, it would be a very good first step, but we have to continue investing to make it a win-win situation.

Thank you.

[The Vice-Chair, NDP, Don Davies]

Thank you very much, Professor Su.

We will now begin the question and answer period.

I will yield the floor to Mr. Morin for seven minutes.

[Marc-André Morin, NDP, Laurentides—Labelle, QC]

Thank you.

That was very informative.

In a 2006 study of yours, you talked about major challenges that India was facing. I know things have changed since then. Could you give us a quick update on the situation?

You mentioned a massive debt burden, blatant social inequality, major barriers to foreign investment and a difficulty implementing reforms. Do you think much has changed since 2006? In your view, is it now time for us to consider doing business with India?

[Zhan Su]

Is that question for me?

[Marc-André Morin, NDP, Laurentides—Labelle, QC]

Yes.

[Zhan Su]

I would say that, overall, things have improved significantly since 2006.

India's fiscal year runs from April 1 to March 30. And the expected growth rate for fiscal year 2012-13 is approximately 6%. Between 2006 and 2011, the country's growth rate was extremely high. And given the growth rate, we can certainly say that the country offers elements conducive to business and economic development.

It is important to understand, however, that India is categorized as an emerging country and not one that has emerged. I would still say that, today, India has no shortage of problems. It still has numerous challenges to overcome. But, on the whole, there is a very clear desire to undertake reforms, especially under the current government, which has been in power since 2004. India's anti-poverty measures are one example. Reforms have also been put in place to open up the economy to foreign investors. The country has made great strides, but it still has a ways to go.

In my view, our export market structure, in Canada, is overly dependent on the U.S. market, and in order for us to keep our standard of living high, foreign trade has to play a vital role. What we really need to do, then, is seek out major partners.

And, as I see it, India has the potential to be a very important partner for Canada. But it will take work. Life is a struggle, and knowing when to take risks is key, especially when signing an agreement of this nature. I believe it provides the framework to promote opportunities, to try to take action in that sense and to better protect our businesses. Building this kind of framework is necessary.

[Marc-André Morin, NDP, Laurentides—Labelle, QC]

Some people are worried. Among them is the president of CGI, who questioned the federal government's strategy in negotiating the agreement with India. Outsourcing is a troubling phenomenon.

What attitude should the Canadian government adopt during these negotiations, to avoid adverse effects like job outsourcing?

[Zhan Su]

I believe that, inherently, outsourcing, especially controlled outsourcing, could actually be beneficial for businesses to some extent. Why? Since the 1980s, we've been hearing about the globalization of the economy and competition from all sides. When it comes to Canadian companies, our market is primarily the U.S., and so our products have to be competitive. Domestically, however, our cost structures are extremely high. If we could outsource certain steps while endeavouring to strengthen our competitiveness at other steps, those two things combined could give us a certain competitive advantage.

I've had the opportunity to work with a number of companies in Quebec, including Procycle. Controlled outsourcing has allowed them to sustain themselves, even in the U.S. market. Of course, a free trade agreement can't benefit all Canadian businesses in all sectors. I would say it's important to wait and to try to create an overall climate that benefits the Canadian economy.

As for CGI, I can understand their reservations; India's IT sector is very well-known for its ability to compete. It is, however, a very broad sector, so carving out a place in niche markets is an important first step.

Above all, we need to strengthen our ability to compete. In that sense, I don't see how we can isolate ourselves by closing our borders and still maintain our prosperity.

[Marc-André Morin, NDP, Laurentides—Labelle, QC]

When my colleagues across the way hear what I am about to say, their hair will stand on end.

There are situations in which doing business with less advanced economies can prove very beneficial. You're an expert on China. As you know, after the collapse of the USSR, Russia was able to maintain its economy and recover from the collapse. It did so by taking advantage of products that China manufactured very cheaply, products that Russian factories could not make because the infrastructure had crumbled. So, in the context of certain strategies, it can be very beneficial.

In your opinion, can we expect the final outcome of a free trade agreement to be—

[The Vice-Chair, NDP, Don Davies]

Monsieur Morin, you're out of time.

[Marc-André Morin, NDP, Laurentides—Labelle, QC]

Does the outcome of such an agreement have more to do with the economic conditions in which the agreement is signed or the strategy adopted by the government?

[The Vice-Chair, NDP, Don Davies]

Professor Su, a short answer, please.

[Zhan Su]

As far as our relationship with India goes, I would point out that the country has undergone a major transformation in a short period of time, 20 years at the most. The time has come to seriously consider making India a major partner. Beyond that agreement, we must not lose sight of the tremendous efforts we will still have to make. We can't expect to create wealth without any competition.

Taking into account how Canada's economy is structured, I don't necessarily anticipate confrontation in all of the major industries. In the manufacturing sector, for instance, India's activities are still quite modest and won't affect our economy as negatively as China's sector does.

But we do have resources they are extremely interested in. Despite its relatively low level of manufacturing activity, India still imports 80% of its oil. And that is an opportunity for us. Agri-food is another sector where strong—

[The Vice-Chair, NDP, Don Davies]

Professor Su, I'm sorry, I must interrupt you. We're out of time for this.

[Dr. Zhan Su]

I'm sorry.

[The Vice-Chair, NDP, Don Davies]

That's okay.

I'm going to go to Monsieur Holder

for seven minutes.

[Ed Holder, Conservative, London West, ON]

Thank you, Chair.

In the spirit of equalization, I might ask Ms. Campbell a couple of questions, if that's all right. I appreciate both of our guests' testimony thus far. It will help to enlighten us on Canada's intention to proceed with a CEPA with India.

Mr. Campbell, before I speak specifically about the CEPA, you spoke about the FIPA as being important. I certainly get that.

I thought I heard in your testimony that it's ready to go but it's not quite done yet. What are the impediments to getting a FIPA signed? Why is that so critical to be done, either in conjunction with a CEPA or just before it? Can I have your thoughts, please?

[Ailish Campbell]

Thank you.

The issue of foreign direct investment is something that can be looked at from two perspectives. One is that where there is value and mutual business interests, significant investments will occur. So I would echo the testimony of Professor Zhan about the relatively low level of business investment right now between our two economies. There is much more potential, particularly in the infrastructure sector for Canada and in the energy sector here in Canada for Indian investors. Significant investments are of course preceding the FIPA. We have some very dynamic joint ventures happening between Canadian and Indian financial services firms, and very dynamic exchanges of benefits in the ICT sector. Again, I thought the testimony of Professor Zhan was spot on about the mutual benefits around various aspects of the value chain in manufacturing.

With that being said, the FIPA is something that gives investors and businesses a level of confidence that their governments are also fully aligned with their private sector investments. In this case, there are international courts that can help settle disputes and there are of course domestic courts. But the FIPA would bring weight to it. The Canadian government is a huge aspect of our competitive value-added in the world. The government in and of itself, its regulations, activities, dynamism, openness, and the rule of law, brings huge value-added to Canada as a destination, as a location, and as a global platform for business.

If I could speak briefly to the FIPA in India, it's my understanding that negotiations have been concluded for some time. But example if one were to compare the current draft FIPA with other FIPAs, there may be some interest in ensuring that the FIPA is at the same level of a comprehensive package as previous FIPAs. Each one does respond to the market dynamics in each country. I believe that India is taking a very close look at its regime in light of some specific cases that it has seen to ensure that the FIPA meets its domestic interests.

[Ed Holder, Conservative, London West, ON]

It's interesting because India's investment in Canada over the last couple of years has seen exceptionally modest growth, under 1%. Canada's foreign direct investment in India has actually gone down by about 13% over the last couple of years—

[Ailish Campbell]

It's a very negative situation.