Canada's Commercial Relationship with Asia

Abstract

Since the heyday of consciousness in Canada during the of the Asia in 1997, when Canada served as chair of Asia- Pacific Economic Cooperation, there has been a sense that Canada's economic relationship with Asia has languished, or at least has not lived up to its potential. This perspective has taken root even as the people-to-people linkages between Canada and Asia have widened and deepened through immigration, academic and student exchanges, tourism, and most recently through all manner of internet networks. The question of the strength of Canada's presence in Asia, and an examination of the causes of under-performance, if such is demonstrated, takes on added significance and urgency as we contemplate the global economy that will emerge from the current period of turbulence.Since the onset of the global economic crisis in 2008, both exports and imports have plummeted worldwide at rates not seen since the disasters of the first half of the 20th century. For the most part, protectionism is not playing a significant role (although the buy American provision in the Obama administration's stimulus package has opened that door at least a crack and, in fact, the World Bank has reported that 17 of the G20 countries have engaged in protectionist measures, after making a commitment not to do so in their meeting in Washington in November 2008). The problem is the extent to which global trade and investment had previously succeeded in integrating production systems worldwide. Plunging demand for exports translated automatically into plunging demand for imported inputs. For example, in the case of China, which has been the linchpin of global integrative trade because of the exaggerated skew in its comparative advantage (size of workforce with basic skills at extremely low relative wages), both imports and exports in February 2009 plunged by around 25 percent year over year - even though China's domestic investment rose by about the same amount. What has happened to trade in the course of the crisis is in some sense the equivalent of the massive deleveraging process and the unwinding of carry trades that has shrunk financial balance sheets worldwide and rocked global financial systems.As the global economy recovers and international financial and industrial linkages are restitched, the overarching strategic issue posed for Canada concerns the pattern of global demand that will take shape in the ensuing recovery. If it involves, as it seems it must, a substantially greater amount of Asian demand and greater savings in the industrialized west, a solid foothold in Asian markets will be of vital importance.ASSESSING CANADA'S TRADE RELATIONSHIP WITH ASIA: A COMPARATIVE APPROACHThe general perception in Canada of the economic relationship with Asia prior to the onset of the global economic crisis is shaped heavily by Canada's trade statistics, which show imports from the major Asian economies rising steeply (up 170 percent in 2008 in Canadian dollar terms from their level in 1995), but exports lagging with a comparable cumulative growth of only 44 percent. Indeed, the ground lost during the Asian economic and financial crisis of 1997-98, when Canada's exports to these economies slumped by 28 percent, has only recently been recovered.However, a number of considerations suggest that a closer look is required before passing judgement on the strength and vitality of Canada's commercial relationship with Asia on this basis. First, the difference between export and import flows is amplified by the use of Canada's export statistics. Export statistics are less reliable than import statistics, in general, and often understate particular flows because of transhipment through third countries. More importantly, the size and intensity of bilateral trade flows are determined by a wide range of factors, including the supply capacities of the economies in question, which shape their comparative advantage in the international division of labour; the size of their markets, which determines overall demand levels; the relative prices and qualities of their factors of production; firm-level specific advantages (e. …