Canada's Commercial Relationship with Asia
| Author | Dan Ciuriak,John M. Curtis |
| Date | 01 December 2009 |
| Published date | 01 December 2009 |
| DOI | 10.1177/002070200906400408 |
| Subject Matter | Canada and Asia |
Canada’s commercial
relationship with Asia
How solid is it?
Since the heyday of “Asia consciousness” in Canada during the “year of the
Asia Pacific” 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.
Dan Ciuriak is senior associate at the Centre for Trade Policy and Law, Carleton University.
Formerly he was deputy chief economist at Foreign Affairs and International Trade Canada.
John Curtis is a distinguished fellow at the Centre for International Governance Innovation
(CIGI) and a visiting adjunct professor in the school of policy studies at Queen’s University.
He is also the chair of Statistics Canada’s advisory committee on international trade.
| International Journal | Autumn 2009 | 973 |
| Dan Ciuriak & John M. Curtis |
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 APPROACH
The 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
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| Canada’s commercial relationship with Asia |
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.g., Bombardier in Canada, Nokia
in Finland); and, importantly, the cost of doing business in the bilateral
relationship in question relative to the cost of trade with the rest of the world.
Exchange rate movements can also influence trends over the medium term,
given tendencies for extended periods of exchange rate misalignment, and
trade in goods is, of course, only one dimension.
METHODOLOGICAL ISSUES
The gravity model provides a useful framework for analyzing the intensities
of bilateral commercial relationships (and a wide range of other phenomena
in other social sciences). In trade applications, this model posits that a
bilateral flow will tend to be larger the greater the size of the respective
economies, and will tend to be smaller the greater the distance between them
and the higher the costs of transacting business, as reflected in such matters
as differences in language and cultural/historical backgrounds, absence of a
common border, absence of a free trade agreement, use of different
currencies, and so forth. In goods trade applications, gravity models with
standard specifications routinely explain as much as 80 percent of the
variation in bilateral flows. The gravity model also has been proven to work
well for services trade.
One way to assess the strength of a trade relationship is to compare the
actual level of commercial flows to the level predicted by an estimated gravity
model. However, there remain significant controversies among economists
concerning appropriate specifications of the equations and statistical
techniques. Such differences can have an important bearing on predicted
levels. Moreover, any specific difference between estimated and actual
outcomes might reflect the failure to account for a pertinent factor, such as,
for example,...
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