Strategy

Outlook 2007: Canada and Asia

Six of Canada's foremost economists forecast the coming year

Video

Six of Canada's foremost economists forecast the coming year

Outlook 2007:ÂÂ The global picture Â|Â Canada, by province Â|Â Oil Â|Â Real estate Â|Â Productivity Â|Â Canada and Asia
Interviews
Video:
ÂÂ Roger Martin Â|Â John Shackleton Â|Â Bill Morris

Previous projections:ÂÂ Outlook 2006 Â|Â Outlook 2005 Â|Â Outlook 2004

There's a growing divide between North American and Asian economic growth. Real GDP in East Asia is forecast to expand by nearly 6% in 2007, compared to 2.5% for the NAFTA economies. Projections from the Pacific Economic Cooperation Council show China growing by more than 10% in 2007, led by strong fixed-asset investment and consumer spending. Japan's economy, which is more than twice as large as China's, is entering its fourth year of recovery. Real GDP growth there is expected to be about 2.2% in the coming year, also driven largely by domestic demand. Collectively, China and Japan account for more than 1/10 of world imports. Strong demand in these two Asian giants provides an alternative growth engine at a time when the U.S. economy is slowing.

If only Canada were poised to ride the Asian locomotive.

Our exports to China have stalled. In fact, the value of Canadian exports to that country in the first nine months of 2006 fell by 3.6% over the previous year. Canadian exports in 2005 accounted for only 1.1% of total Chinese imports, well below the high of 1.7% in 2000-01, and substantially out of line with our share of global trade. This comes at a time when China's imports from the rest of the world enjoy double-digit growth. Meanwhile, Canadian sales to Japan have not fared much better. In 1996, Japan received 4.1% of our exports. A decade later, that figure has fallen to 2.1%.

In general, Canada does not produce the kind of industrial machinery, plant and equipment and intermediate goods that China imports in large quantities from other countries. Some Canadians labour under a popular misapprehension that China's voracious demand for natural resources restored our position in the bilateral trade relationship. In fact, Canada's market share in China keeps slipping. Complacency brought on by the resource myth might simply exacerbate this problem.

The impact of China's economic rise extends well beyond bilateral trade. In the new year, China will likely surpass Canada as the United States' most important source of imports. Within five years, China could also become the top-ranked destination for U.S. exports, effectively displacing Canada as America's No. 1 trading partner. This change would amount to more than merely a blow to national vanity. To take just one example, China has already overtaken Canada as the second-most-important market for General Motors. This will have profound implications for investment, sourcing and research and development.

Canadian businesses are just beginning to respond to the challenges and opportunities of an ascendant China. According to a recent survey by the Asia Pacific Foundation of Canada and the Canadian Manufacturers & Exporters, 64% of companies believe China offers potential for reducing costs or increasing revenue. At present, however, only 36% of them are actually doing business with China, the majority having less than three years' experience.

The massive increase in Chinese exports to Canada over the past decade had relatively little impact on domestic production and jobs. In fact, incoming Chinese goods overwhelmingly benefited consumers and allowed many Canadian companies to lower costs and thus remain internationally competitive. However, Chinese exports are rapidly moving up the value chain and will increasingly compete with high-end goods made in industrialized countries. The good news is that sourcing from China continues to offer an important tool for Canadian companies looking to reduce costs, and that growing wealth in major Chinese cities creates vast new opportunities for Canadian firms, especially exporters of services. In addition, Chinese multinationals–including state-owned enterprises–increasingly shop for investment opportunities worldwide, going well beyond the resource sector. We perhaps crossed an important threshold in 2005, when the stock of Chinese investment in Canada exceeded Canada's stock of investment in China.

It has become commonplace to speak of the need for companies to develop “China strategies” whether or not they currently conduct business in that country. These strategies should consider not only traditional activities like exporting, outsourcing and low-cost imports, but also broader factors, such as the impact of Chinese market power on world prices, the role of production networks in sourcing decisions and the integration of investment and trade, as well as product design and development. Our survey suggests that only 17% of manufacturers and exporters have implemented such strategies. China is now clearly on the radar screen of Canadian business, but CEOs so far have done little about it.

Yuen Pau Woo is president and co-CEO of the Asia Pacific Foundation of Canada, and chair of the Pacific Economic Cooperation Council's forecasting panel