How Canada could become the missing link between Europe and Asia

Finance Minister Bill Morneau’s Advisory Council on Economic Growth sees a future for Canada as a bridge between East and West. Here’s how it might work

Bill Morneau and Dominic Barton

Federal Finance Minister Bill Morneau and his advisory council chair, Dominic Barton, at a press conference in October 2016. (Adrian Wyld/CP)

Tens of millions of Americans and Britons have been overcome by a reflexive loathing of anyone with a fancy degree and a frequent-flyer card. So far, most Canadians appear to have avoided this affliction. We applauded Prime Minister Justin Trudeau for (mostly) stacking his cabinet with talent rather than party hacks. And we seem open to the suggestions of Finance Minister Bill Morneau’s Advisory Council on Economic Growth, an assembly that would face persecution in the two biggest Anglo-Saxon economies for its belief in expertise.

Morneau’s group of extraordinary men (six) and women (six), led by Dominic Barton, the head of global consultancy McKinsey & Co., appears destined to receive a certain amount of criticism. There is little talk of tax cuts and balanced budgets, items which form the economic lodestar of the Official Opposition; think tanks such as the Fraser Institute, the Macdonald-Laurier Institute, the Atlantic Provinces Economic Council; and almost everyone who writes a column for the Financial Post, including former finance minister Joe Oliver.

Instead, the growth council, which released its “second wave” of recommendations Council on February 6, so far has encountered few problems that it thinks can’t be fixed by a little dirigisme: a new agency, harder work by an existing one, or hundreds of millions of dollars in federal cash. In October, the group proposed an agency that would chase international investors; a month later, Morneau announced plans for the Invest in Canada Hub. The council now has some more hubs for the Trudeau government’s consideration. It says Canada should create a “FutureSkills Lab” to help pay for training programs. The latest batch of recommendations also includes a fund of about $100 million to help promising smaller companies expand, and a suggestion that the federal government use its $18-billion procurement budget to favour young companies that need an anchor client. In what might be its most ambitious idea, the Barton panel says Canada should organize its economic policy around becoming a global trading hub bridging Asia and Europe.

There is much to discuss, but let’s stick with this idea of creating a Singapore of the North. It is a timely recommendation because it comes as Ottawa and those who write about it devote considerable thought to trade in the age of Trump. This unfortunate period may last no longer than four years, but there still are those who would counsel Trudeau to dump Mexico and other allies if that is what is required to appease U.S. President Donald Trump. I have argued that this would be a terrible idea. So does the Advisory Council on Economic Growth, which, besides Barton, includes Elyse Allan, head of General Electric’s Canadian unit; investment banker Kenneth Courtis; and Cenovus Energy chief executive Brian Ferguson. The council is wary of the protectionist mood taking hold in major economies, and advises the Trudeau government to “nurture” the country’s trading relationships in North America.

But there is no talk of narrowing Canada’s world view to one country. The council urges the government to pursue more trade with Mexico, while at the same time pivoting to Asia, which is home to the world’s fastest-growing economies. Canada’s satisfaction with having easy access to the U.S. has caused it to miss out on at least of couple of decades of rapid growth in Asia and other parts of the developing world. According to the C.D. Howe Institute, Canada’s smattering of free-trade agreements give it preferential access to countries with a combined gross domestic product of about (US) $20 trillion. That’s good enough for only 18th in a table led by Chile, Peru and Costa Rica. (Rivals such as South Korea, Mexico, Singapore and Australia all rank higher.) Canada might be a trading nation, but we are mediocre traders: in its report on trade, the growth council said the majority of the country’s smaller enterprises don’t trade at all. Many such companies, “simply don’t know what they must do to take their business overseas,” the Barton panel said.

The notion of becoming a trading hub isn’t novel: Brexiteers talk about creating an Anglo-Saxon Singapore perched on the edge of the European Union. The growth council reckons Canada would be better placed to play such a role, given its nearly completed free-trade agreement with the EU; ports on both the Atlantic and Pacific oceans; a multi-ethnic entrepreneurial class; and preferential access to the world’s largest economy (Trump willing, of course). The growth council would build on these advantages by upgrading ports, border points and other transit links to improve connectivity. (Canada currently ranks only 12th on the World Bank’s Logistics Performance Index, lower than the U.S.) It also would take smaller companies by the hand and coach them on doing business in places where English isn’t the first language and the rule of law isn’t always paramount.

And the council would make Asia, not the U.S., the focus of the Trudeau government’s trade policy. To help explain why, I updated one of my favourite charts to reflect new export data released by Statistics Canada on February 7:

Chart showing an index of Canadian trade with selected countries

That’s an index of growth in merchandise exports to a set of key markets based on a complete set of figures for 2016. The growth council recommends sticking with the Trans-Pacific Partnership even though Trump’s America has dropped out. But given the weak odds of a broader regional arrangement working, Barton and his fellow advisers recommend targeting the three big Asian economies for preferential trade deals: China, Japan, and India. Reaching beneficial terms with any of those countries will be difficult. Trudeau already has said that he wants to do a deal with China, but Canada will be playing catch up; Australia, for example, completed a free-trade agreement with China in 2015. India is a stubborn negotiator (Canada and India have been talking about preferential access since 2010), while Canada and Japan produce many of the same goods and services.

Still, Trudeau must try. The election of Trump is a reminder of the dangers of relying on a small number of trade partners. Canada’s exports to Asia and other emerging markets are growing smartly, but the surge comes from a low base. A defensive trade strategy focused on Trump will at best preserve the mediocre growth we have now. Increased wealth will require going farther afield.