Remarks by: Eric Siegel
President and Chief Executive Officer
To the: Asia Pacific Foundation
Vancouver - May 31, 2010 

Good morning.  I’d like to thank the Asia Pacific Foundation for sponsoring today’s event. Your organization has been a leader in encouraging Canadian businesses and investors to seek out opportunities in Asian markets, and it’s my pleasure to be here today to lend my voice to that cause. 

The macroeconomic transition in Asia

When I started my career with EDC in 1979, I was first assigned to the Far East Department which covered the entire region, from Australia and India, through South-East Asia, to China and Japan.  It’s hard to imagine from today’s perspective, but back then, the entire Asia-Pacific Region was seen as one huge, largely secondary and impenetrable market.  Looking back, it’s astounding that we could not have foreseen the potential for these markets to become global centres of trade and commerce.

In 1983, when I made my first visit to China and India they were different economies. Back then, China and India’s economies combined represented less than 15 per cent of the United States’ GDP. By the end of next year, they will be almost half.  They were also far less involved in global trade – in fact, they were largely public sector, closed economies. In 1983, China represented less than two per cent of global trade. In 2009, that number had risen to 10 per cent. And while India’s share of global trade still lags that of China considerably, the trend is similar and unmistakable.

The result of this integration is that the theory that Asia is decoupling from the Western world – that its success would continue unabated despite tough times in Western economies – has been debunked.  During the downturn of 2009, Asia outperformed the West, but even in China, real GDP growth fell from 13 per cent in 2007 to 2.9 per cent in the last quarter of 2008.
 
But this was an anomaly in an otherwise strong upward trend.  In fact, right now, the rest of the world is looking to Asian markets to be the engines of growth to drive the recovery the world needs. Back in 1983, when I first visited, emerging Asia was about 8 per cent of the world economy. In 2009, it was 23 per cent. By 2030, it will be 36 per cent – more than one third.

This afternoon, I’ll be leaving on one of my last visits to the region as President of EDC.  I’ll be visiting Vietnam and China, connecting with Canadian companies doing business in Asia at the Canadian Chamber of Commerce in Shanghai and then visiting Beijing.   I look forward to seeing the kind of dynamism, energy and growth I have seen in all of my previous visits.

State of trade between Canada and Asia 

This is, in part, thanks to significant government stimulus – China, Malaysia and Thailand all put forward packages in excess of 10 per cent of GDP.  But it’s also due, in part, to the financial-sector reform and fiscal discipline that came as a result of the Asian crisis of the late 1990s. 

The fact is, Asia already learned the asset-bubble lesson that the Western world is now taking to heart.  Its financial institutions have been strengthened by better capitalization, greater lending discipline and improved regulatory oversight.  This, combined with fiscally stronger governments, flexible exchange-rate policies and a growing middle class, has set Asia back on the growth track.

I’m excited to see the survey results that were presented by the Asia Pacific Foundation this morning – Canadian investors are smart to be feeling bullish about investing in Asia.  But, unfortunately the level of trade between Canada and these burgeoning markets is nowhere near as robust as it needs to be.

It’s not all bad news – some sectors of Canada’s economy have embraced opportunities in Asia wholeheartedly.  For example, the forestry sector here in BC has seized on new opportunities in China. Almost 40 per cent of BC’s pulp exports now go to China, up from less than 10 per cent a decade ago.

But despite the efforts of some of Canada’s most ambitious exporters, Canada’s trade is still staggeringly skewed. In 2009, the US accounted for 75 per cent of merchandise exports. The next-largest destination, the UK, accounted for just 3.4 per cent of total exports. That it is actually an improvement – just seven years ago, the US accounted for 87 per cent of merchandise exports.

Despite the strong pace of growth in Canadian exports to Asia during the last three decades, Canada has not been able to maintain its import share, leaving other countries to fill demand from these rapidly growing economies. Canada’s share of Chinese imports has fallen from 2.5 per cent in the mid 1980s to 1.1 per cent over the last five years. In India and all of Southeast Asia except Vietnam, the story is the same. The bottom line is Canadian exports to Asia are not keeping up with the growth in imports.

Now, imagine what could happen if large industrialized markets accounted for just over half of Canada’s exports, and emerging markets took up the remaining space. In place of the 6.5 per cent average growth seen from 2004 to 2008, Canadian merchandise exports could easily have expanded by 10 per cent annually. Diversification would have partially cushioned the recessionary blow that exports suffered last year.

And the impact on Canadian economic growth would be dramatic. All by itself, the increase in export growth could add one per cent annually to GDP growth.

But exports are not the sole means to benefit from high-growth Asian markets.  Canadian direct investment gives us a means to gain access to markets in which our exports would not be competitive.  Investing abroad lets companies improve productivity by establishing a presence, to ensure the integrity and efficiency of their business value chain.

For many, particularly small and medium-sized enterprises, it is a pre-requisite to gaining access to – or becoming part of – global supply chains.  Finally, direct investments provide an opportunity to achieve investment returns by tying directly into the growth and wealth generation of foreign economies.

Canadian direct investment abroad has undergone tremendous growth in the past 30 years, as the world’s economies have become more integrated. As a percentage of GDP, the total stock of Canadian investment abroad is well above the G-8 average.  

However, Canada’s investments in the global economy are still heavily weighted towards the U.S.   Since 2004, more than half of Canada’s direct investment abroad has gone to the U.S., while trade penetration – the ratio of total trade to the size of the economy – has been slipping.  Meanwhile, the opposite is happening for our G-8 competitors and in emerging markets. 

Canada cannot afford to waste one minute in turning those numbers around.

Why Asia matters to Canada 

The key to doing better is this:  we can make Asia’s success our success, if we focus on matching Canadian strengths with the needs of growing Asian markets.

A quick comparison of projected growth rates for the next two years makes it obvious that we can no longer depend on our traditional markets. The U.S. economy is expected to grow at 2.7 percent in 2010 and 3.2 per cent in 2011.  The U.K. and the E.U. are looking at growth rates in the one to two per cent range for this year and next. 

Compare that to China’s projected growth rates of 8.8 per cent this year and 9.5 per cent in 2011.   Or India’s, which are expected to be between seven and eight per cent in this timeframe.  The emerging markets of Southeast Asia also present opportunities, with growth rates expected to be in the four to seven per cent range.

What these projections tell us is that if Canada is to exceed expectations – which currently put us in line with U.S. growth rates – we have to put our energy and resources into the areas that will give us the biggest return.  I am convinced that means Asia. 

Asian markets are currently undergoing a rebalancing of economic power unlike any seen since the U.S. and Canada established themselves as industrialized markets.

For example, China’s economy has been completely transformed by urbanization and industrialization – since the 1980s, its urban population has increased more than 150 per cent.  It has gone from agrarian society to global manufacturing hub.  Since 1980, 235 million people in China have been lifted out of poverty.  China has invested in education and is now producing 75,000 people a year with higher degrees in computer science and engineering.  

This has led to China moving up the value chain: it is no longer the world’s source of cheap labour, manufacturing consumer goods using Western technology, for sale in Western markets.  Instead, it is establishing its own brands, doing its own research and development, growing its own multinational corporations that are an innovative force to be reckoned with – for example, telecom giant Huawei, which applied for more international patents that any other firm in 2008.  And it is starting to outsource jobs to lower-cost centres like Vietnam and its own interior provinces. 

China’s economy is changing rapidly, and while its growth has been strong it will bring challenges.  China’s population is aging, and is expected to peak around 2030.  This will have an effect on the economy, with growth expected to slow to around six percent by 2030.  In the meantime, China faces growing health care costs, the environmental degradation that has traditionally accompanied industrial growth, and scarce resources. 

And it’s not just China – every Asian market will confront its own challenges in the coming years.  For example, India’s workforce is growing rapidly, but it will need to confront inadequacies in the country’s infrastructure and educational systems to be able to deploy this growing workforce to its greatest benefit. 

As part of the rebalancing of economic power, Asian markets also face challenges in creating domestic demand. 

These economies were built by making the products Western consumers wanted, but the future demand for these products is now threatened by high levels of personal and government debt in industrialized nations. In fact, growth in intra-Asian trade is seen by regional experts as the key to economic stability. 

Furthermore, while the Asian middle class is growing, savings rates are high, and a mix of government policy and technological innovation is needed to establish a consumer culture.

But Canada has solutions to many of Asia’s problems – we have medical technology and equipment, infrastructure, and environmental companies that are second to none.  And that means that there are huge opportunities, not only for Canadian resources but also Canadian know how.

What EDC has been doing to support trade and investment in Asia

EDC is helping Canadian companies to take advantage of these opportunities.  Our business volume in Asia is now about $11.5 billion. The vast majority of that volume – about $10.5 billion was in insurance on the receivables of companies doing business in the region. The remaining billion was shared between financing to foreign buyers or Canadian companies looking to expand their operations in Asia, contract insurance and bonding, and political risk insurance.

Our overall volume in Asia last year was down about a billion dollars from 2008, but we believe we’ll be back on track in 2010.  And compared to five years ago, when we were supporting about $7.5 billion in business in the region, we’re on the right track.

But it’s not just about dollar values, it’s about building relationships, and our customer counts in Asia have increased dramatically.  Last year we served:

• 759 customers doing business in China, more than double the 346 we had five years ago;
• 259 active in India, up from 134 in 2004; and
• 732 in the ASEAN region, up from 281 five years ago.

But how are we changing our business to help your business succeed in Asia?

Well, I’ll start by telling you that EDC now has more employees abroad than we did in the Far East department back in the 1980s.  In Asia, we have representations in Beijing, Shanghai, Mumbai, Delhi and Singapore.  These EDC staffers are there as part of permanent representations.  We know we can’t rely on trips any longer, we need to have an established presence, and that’s why we’re working to build a multi-cultural, mobile workforce.  Our employees are on the ground to get to know local business leaders and government officials, building a network that can ease the transition for Canadian exporters. 

And here in Canada, EDC’s business teams are aligned by industry sectors, which allows us to develop critical knowledge of the players.  This has become particularly important given the development of global supply chains; we have to have this knowledge to be a credible participant and to be able to build relationships that allow us to help Canadian companies access these chains.  We have to work both ends of the chain, knowing the capabilities of Canadian exporters and the needs of their buyers.

But the reality of integrative trade means we need to look differently at exports:  gone are the days when companies located abroad only as a means to access foreign markets without having to pay tariffs. Companies are positioning their operations wherever it makes the most business sense, and as individual components are sourced from a greater number of suppliers, and cross borders several times before final export, the resulting increase in trade has been significant - to the point where trade is rising twice as fast as global GDP, and foreign investment, which is critical in establishing the supply chain, is rising faster than trade. 

To adapt to this new reality, EDC is broadening our definition of what constitutes Canadian benefits, looking for new areas where Canada can participate in the growth of emerging markets. 

The private sector is doing this – look at ScotiaBank’s recent expansion of its operations in Thailand.  And the academic sector has also got the message – from Simon Fraser’s Asia-Canada Program, to the Schulich School of Business’s new MBA program in India, Canadian academics are building knowledge relationships in Asia.

For EDC, it means looking beyond exports, to investment opportunities that open doors for us to develop investment partnerships and facilitate the entry of Canadian companies into these markets, and improve the competitiveness of our exporter base. 

What that means in real terms is that we’re putting more of our efforts into match-making – bringing foreign buyers to Canada to see our capabilities, and taking Canadian business leaders abroad to familiarize themselves with the needs of new markets.  Match-making trips are often conducted as part of “pull transactions,” where we provide financing to a foreign buyer, with the understanding that they will increase their procurement from Canadian companies.  We currently have 45 active pulls in Asia. 

We’re also making strategic investments in international equity funds to assist Canadian companies in connecting with international opportunities.  For example, we’ve invested up in the China Environment Fund III, which seeks to invest in Chinese companies involved across a number of clean technology sectors including renewable energy, carbon reduction, waste water treatment, and sustainable agriculture – areas where Canadian companies have expertise to share.

But expanding our definition of Canadian benefits also means expanding our definition of exports to include helping companies to become part of the exporting chain without even leaving home. One way that happens is when foreign multi-nationals invest in operations in Canada, which creates new opportunities for Canadian companies to enter their global supply chains and increases the overall competitiveness of Canadian exporters.  Making Canada a destination of choice for foreign investment is a priority for the Government of Canada, and EDC is helping to accomplish this goal through the provision of our insurance and financing solutions.   

Conclusion 

A few years ago it was popular to talk about Asia decoupling from the rest of the world, particularly the US.   But rather, what we are seeing is a rebalancing of Asia’s relationships with the western world.  Far from “decoupling” from the developed world – Asia is becoming more integrated.

This progression is in all our interests: we must encourage Asian countries to pursue sustainable growth, which will also rebalance their own internal and external markets – to grow more consumers, not only producers. 

In other words, our common future lies in Asia’s emerging economies moving beyond exporting to embrace trade.