Every year I look forward to reading The Economist’s predictions for the following year. It focuses my thoughts on our own business here in Canada, and now Australia. In this year’s “World in 2013”, I was struck by the two articles on Canada and Australia, because they both had a common theme—China!
Both Canada and Australia have been spared the worst of the economic collapse since 2008. For Canada in particular, with so much of its trade depending on the U.S. economy, this has been a tremendous feat. Since 2008 our trade has diversified somewhat, but is still largely dependent on the U.S., so for our economy to perform as well as it has is quite extraordinary.
Australia, on the other hand, weaned its way off its traditional western partners long ago. Currently, China accounts for 27 per cent of Australia’s trade (versus 4 per cent of Canada’s) and is its largest investment partner. Canada wants to get in on the Asian opportunity, both to diversify trade and to grab some of those Asian dollars that have helped propel Australia to average growth rates of just below 4 per cent over the last three years. It is estimated that Canada needs $650 billion to fully develop its resource potential over the next ten years; much of that money will come from China. In many ways, Australia and Canada are competing with each other for Chinese investment, but the demand for our resources is so great that there are plenty of investment opportunities for both countries.
All that said, it’s clear from a presentation that I made in Australia a couple of weeks ago to a group of mining and finance executives that both Australiaand Canada continue to weigh the benefits of Chinese investment. This has certainly been a prominent feature in the debate over CNOOC Limited’s fifteen billion dollar acquisition of Nexen Inc., a Canadian oil and gas company.
Both commonwealth countries and both strong allies of the Unites States, Canada and Australia still weigh trade considerations through a sort of “cold war” lens. Very often, strategic security concerns are camouflaged in economic discourse. Critics talk about the cost of capital that gives unfair competitive advantages to state-run enterprises, and often raise the spectre of Chinese importation of cheap labour. Underlying these concerns is the thinly-cloaked suspicion that state-owned enterprises (SOEs) are really just fronts for Chinese government policy.
The economic concerns simply don’t add up. Since the 1990s, most Chinese SOEs have been operating on a commercial basis. But assuming for a moment that their cost of capital may be lower than western firms, these benefits obviously flow to the countries they invest in. And while any western politician would support policies to put local labour to work first, both Canada and Australia have difficulty supplying labour in their respective resource industries. Most critics probably get these points, but can’t shake off the suspicion that China has larger geopolitical aims.
Shaking off “cold war” suspicions will be critical to the Canadian and Australian economies. As our traditional trading partners in Europe and the U.S. go through structural realignment, our governments will have to increasingly court Asian trade and investment as a substitute. While there is no question of Canadian and Australian commitment to western collective security, our economic interests clearly favour diversity of trade and reciprocal investment with Asia.
The Economist editors obviously see this as well. Canada and Australia are trying to ready themselves for a new world order. As long as we can manage “cold war” paranoia, our future growth will be increasingly based in China.