Engaging China: understanding the challenge and seizing the opportunities.

• Author: Marchi, Sergio

ADDRESS TO THE SYMPOSIUM ON RESPONSES OF THE UNITED STATES AND CANADA TO THE ECONOMIC CHALLENGES POSED BY CHINA

WASHINGTON D.C.

December 8, 2006

Introduction

Good afternoon ladies and gentleman.

Thank you for your thoughtful invite. It is a pleasure to be here today and to share some thoughts on how the U.S. and Canada can best engage China.

The histories of the United States and Canada have been closely tied to one another. Our politics and economies have influenced each other greatly, and our peoples have been good neighbours and friends. Of course, while there have been disagreements along the way, the relationship has been strong and mutually beneficial.

For many years, Canadians have been proud to underline that Canada and the United States are each other's largest trade partners--and we felt slighted when Japan or Mexico were cited as the U.S.'s largest partner! (1) So when it was announced in 2005 that for at least one month, China had surpassed Canada as the United States' largest trade partner, it was an economic signal for Canadians. (2) It reflected a fundamental paradigm shift in the global economy, namely, that of an economically vibrant and influential China, which is forcing Canadians to rethink their position in the North American and global economies. And we are certainly not alone.

In 1972, Richard Nixon surprised the world with his visit to China. While Nixon and Kissinger were euphoric with the overall success of their trip, Nixon also noted the following words in his personal diary:

"Not only we, but all the people of the world, will have to make our very best effort if we are going to match the enormous ability, drive and discipline of the Chinese people." (3)

Almost 25 years later, this observation is particularly true and captures very accurately, the core of the so-called "China Challenge."

How do we, in North America, then respond to the challenge of a focused and ambitious China? How do our companies meet the challenge of the realities of a changing global economic order with China being a major engine? How do Canadian companies, which are export-oriented, incorporate a focus on the Pacific, when for so long, they have been so continentally focused? How can Canadian companies remain globally competitive and relevant?

These are all good questions, looking for equally good answers. In addressing the Canadian challenge, in the context of our relationship with the United States, let me touch on four areas:

1. Some bilateral trends and developments.

2. How Canada has responded to date.

3. The need to change mindsets.

4. And finally, China, the opportunity.

1. Some Bilateral Trends and Developments

   Canada-China trade has grown dramatically. Today, China is Canada's second largest trade partner. (4) However, a central concern is the growing disparity. While Canadian exports to China have grown, Chinese imports have grown even faster. (5) Between 2001-2005, our exports to China grew 65%. (6) During the same time period, our imports grew an astonishing 115%! (7)

   As well, Canada has traditionally been an exporter of resources and commodities, and it's no different with China--about 80% of our exports to China consist of resources. (8) We have benefited significantly from their rapid industrialization, which has put upward pressure on commodity and energy prices. (9) Our exports have reflected China's development needs and have also shifted, as China adds value to their production and manufacturing. (10)

   Historically, Canada's major export to China was wheat. (11) But once China started producing its own crop, and also decreased their consumption of wheat, Canada's wheat exports fell sharply. (12) As a consequence in part, our exports of fertilizers, meat and seafood grew. (13) Exports of industrial material such as nickel, iron, steel, copper, and aluminum also grew rapidly in the 1990s to feed China's manufacturing boom. (14) Paper was once a major export of Canada to China--but as China established its own mills, paper exports have dropped, while pulp exports have grown. (15)

   As you can note from some of these examples, developments in China's economy impact the kinds and volumes of Canadian exports. In some instances, Canada has moved down the value chain, while in others, we created and added value. However, when China acquires and develops its own fertilizer production, for instance, will Canada still be able to add value? Or will Canada move down the value chain and just supply the raw material? And with China's increasing exports to the U.S., Canadians are becoming aware that this comes at the expense of our own.

   While our exports to China continue to be resource heavy, our imports have shifted dramatically in the last few years. In the 1990s, imports from China were largely made up of consumer goods, shoes, toys and textiles. (16) However, in recent years, there has been a dramatic shift toward productivity-enhancing goods, that is, electronic products including laptop computers, telecommunications equipment, industrial machinery, measuring equipment, and automotive parts. (17)

   China is now a major source...