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  • Geoff Donald

Diversifying Canada’s Trade – The case for Southeast Asia

The idea of international trade has always been a key to Canada and part of its history. From raw materials to manufactured goods to services, the importance of international trade has been strongly linked to the Canadian economy. With access to the British and French empires at time of colonization to geographic access to the United States in modern times, Canada has historically been able to access the largest most advanced markets in the world.

But this access came at a cost. Dependency

Of the 10 largest economies in the world, only Germany is more dependent on international trade than Canada. Especially concerning for Canada is that 76% of Canadian goods exports last year went to the United States. This large share of trade means that Canada is more dependent and way more exposed to events that happen in the US such as recession or trade disputes than is healthy for such a large country.

Now the best way to reduce such a large dependency is to find additional places to send Canadian goods too. And that is why for the past 20 years or so, various Canadian governments regardless of political leanings have focused on trade diversification initiatives such as the CETA (Canada-EU FTA) and the CPTPP (Canada and a bunch of Asia Pacific Countries) to help diversify Canada’s international trade.

The current government had set a now impossible target of increasing overseas exports by 50% by 2025 (Thanks COVID-19), nevertheless the underlying strategy of opening new markets for Canadian goods remains. As a country, Canada has been a supporter of using both bilateral and multilateral free trade agreements to gain access to new markets.

So, if the Canadian government wishes to continue to sign new free trade agreements to open new markets for Canadian companies then the key question for public policy makers is:

“Where does Canada go next?”

Canada’s Diversification Options

A simple look at Canada’s current top trade trading partners shows that Canada has free trade agreements with seven of their ten largest trading partners. Which countries are missing from this list?

China, India, and Hong Kong

Can Canada sign a free trade agreement with any of them?

The short answer is no. Let’s look at each one in turn to find out why.

Right now, a China – Canada FTA or even the discussion of one, is just not going to happen. In 2020, due to several factors including the arrest of two Canadians by the Chinese government in response to the detention of a Huawei executive in Canada and China barring certain Canadian imports, Canada and China officially cancelled their FTA discussion.

With 53% of Canadians trusting China and only 11% of Canadians saying that Canada should focus its trade efforts on China, it would take an extremely brave or foolish elected official to champion increasing free trade between the two countries. As well, an obscure section of US-Mexico-Canada agreement (Section 31.2.5 for those of you who want to look it up) means that if Canada does enter an FTA with China, then the US can terminate the US-Mexico-Canada agreement. Canada isn’t going to risk access to the US markets so we can safely assume that an FTA with China is not going to happen any time soon.

While Canada has strong trade and personal connections to Hong Kong, China’s recent steps to take full control of the Hong Kong Special Administrative Region means that it is unlikely that the Chinese government will allow Canada to sign a free trade agreement with Hong Kong while Canadians may be less than eager to support an FTA with Hong Kong with greater Chinese government involvement.

As Canada’s 9th largest trading partner, India should represent a strong case for a free trade agreement. In fact, Canada is in the process of negotiating an FTA with India but after 10 rounds of negotiations since 2010, there has been no agreement. Stepping back a bit, we also see that India has recently opted out of the negotiations regarding Regional Comprehensive Economic Partnership and has launched a review of its existing trade agreements with other countries to determine why India is not seeing the benefits of trade it was expecting. This lack of interest in a free trade from one side and ongoing political disputes between Canada and India means that make signing a Free Trade Agreement is unlikely.

With the top trade choices for Canadian public policy makers all being unlikely, what other options are available? Where should Canada be going next?

One answer is Southeast Asia.

Southeast Asia

East Indies. Nanyang. Indochina. The Land below the Winds.

Regardless of what it has been called, from the global city state of Singapore to the 17,508 islands of Indonesia, the streets of Bangkok to the rapidly growing Vietnam, the Southeast Asia region is one of the most dynamic and fascinating regions in the world with a wide variation of geography, culture, economies, risks, and opportunities.

With a combined total population over 670 million people and a combined Gross Domestic Product (GDP) of $2.8 trillion, the countries of Southeast Asia banded together to create the Association of Southeast Asian Nations or ASEAN, an intergovernmental organization that promotes economic, political, and security cooperation among its ten members: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.

To date, ASEAN greatest successes has been the promotion of peace of amongst its members and in regional economic integration. As a bloc, ASEAN has been very supportive to the ideas of free trade with the most recent example being the newly signed Regional Comprehensive Economic Partnership (RCEP) that further connects the ASEAN countries with China, Japan, South Korea, Australia, and New Zealand.

Demographically, while overall population growth is slowing due to increasing urbanization and lower birth-rates, the ASEAN region is still expected to grow to almost 800 million people by 2050.

While 2020 was a difficult year for the whole world, GDP growth in ASEAN is expected to rebound to more than 6% in 2021 with countries such as Vietnam and the Philippines expected to have even higher levels of growth.

And of this growth is actually expected to benefit people within the Southeast Asia region. A recent World Economic Foundation report shows that income levels in the ASEAN bloc will grow annually by six to eight percent, with the number of high- and upper-middle income households will nearly double from 30 million in 2019 to 57 million people by 2030.

More people, more jobs and higher incomes all mean more money in people’s pockets (that they will want to spend) And that is why the Southeast Asia represents a key market for any country looking to increase its export.

Say a country like Canada.

Canada and ASEAN

For Canada, ASEAN remains a strategic trading partner and a strong possibility for increased trade diversification. ASEAN was Canada’s sixth-largest trading partner with two-way trade with ASEAN countries totalling C$20.5 billion in 2019. Two-way direct investment stood at C$11 billion, 0.6% of Canada’s total.

In terms of trade agreements with countries in the region, Canada has free trade access with Vietnam, Malaysia, Singapore, and Brunei through the CPTPP, it has signed FIPAs with Thailand and the Philippines, but it has no trade agreements with Myanmar, Cambodia, Laos, or Indonesia. So, while Canada does have some trade access to the region, it is not very wide or very deep.

Now the good news, near the end of 2019, Canada and ASEAN announced exploratory free trade discussions for a possible Canada-ASEAN free trade agreement. In 2021, a Canada – ASEAN free trade agreement was announced as a major policy objective for ASEAN.

In addition to a multilateral agreement, in early 2021 Canada and Indonesia announced that they were conducting exploratory discussions regarding a bi-lateral free trade agreement. With a population of more than 270 million people, Indonesia is the largest market in Southeast Asia and represents an underdeveloped market for Canadian companies looking to export or invest in in Southeast Asia especially for Canadian agri-food products.

The bad news:

1.) Canada is not the only country that is interested in improving its trade relationship with Southeast Asia. The EU, the UK, the US are all interested in upgrading their trade relationships while countries such as Japan, South Korea, Australia, and China have all increased their access through the RCEP agreement. This means that Canada may soon find itself falling further behind in the region to other countries.

2.) Canada is really, really, really, far away from Southeast Asia. The long distance makes making personal connections harder, it means that Southeast Asia is not top of mind for most people and the long distance makes trade harder. While technology can help shorten the distance, if Canada wants to have a successful trade relationship with the region, it is going to have to figure out how to get more Canadian companies to Southeast Asia.

With Canada and the ASEAN region both sharing similar commitment to in an open and fair-trade system, a free trade agreement between the two regions should be within reach but Canada cannot wait too long, or it will find itself at the back of an awfully long line of other countries that are looking to strengthen their economic relationship with the region.

As Canadian public policy makers look to continue to increase Canada geographical trade diversification (and reducing their dependency on the US), I hope that Southeast Asia is their next choice.

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