Canada is unique because it shares the world’s longest land border with the United States and the economies of both countries are so deeply integrated. But for Canada to source new growth over the long term, it must look across the Pacific Ocean to Asia and the fast-growing economies of what has come to be called the Indo-Pacific region. David Abonyi of the Global Enterprise Initiative of the Schulich School of Business at York University and George Abonyi of the Sasin School of Management at Chulalongkorn University assess the economic component of the Canadian Indo-Pacific Strategy launched in November last year and consider Canada’s middle-power role as a catalyst and connector, proposing that Japan, Thailand and Bangladesh could be key regional partners going forward.
Maple leaf endeavor: Canada’s effective economic engagement with the Indo-Pacific takes on even greater importance in the uncertain US policy environment
Canada unveiled its Indo-Pacific Strategy (IPS) in November 2022. It provides a framework and directions for Canada’s relationship with the leading growth region in the global economy.
The IPS approaches the Indo-Pacific region as a strategic arena for comprehensive foreign policy. The economic/trade linkages are one essential component. The focus here is on the implementation of the economic dimension of the Strategy. This is in part because for the Indo-Pacific countries, particularly for the emerging economies of Southeast and South Asia, economic development has significant influence on political priorities. It is also in Canada’s interest to deepen and diversify economic linkages with the region.
Canada’s pursuit of effective economic engagement with the Indo-Pacific takes on even greater importance in the uncertain American policy environment, the implications of which go beyond the US’s northern neighbor. The administration of President Joe Biden is pursuing a geo-economic strategy that prioritizes “buy American”, applying sanctions as a key element of foreign policy, and is placing a strong emphasis on US-centered “friendshoring”. These have uncertain implications for the Canadian, as well as the global, economy, including for the Indo-Pacific region.
The IPS attempts a difficult balancing of China (described as an “increasingly disruptive global power”) as a threat and as an economic opportunity. Much of the discussion that followed therefore centered on China. This is understandable, given China’s global economic weight, more assertive international posture, and the implications of the intensifying US-China rivalry.
The late Japanese prime minister Abe Shinzo is credited with injecting the term “Indo-Pacific” into diplomatic discourse in 2016. He sought to broaden the Asia-Pacific construct by linking the Indian and Pacific Ocean regions, an idea he had proposed in a speech to the Indian parliament in August 2007 (entitled “Confluence of the Two Seas”) during his first stint as Japan’s leader. This geographic realignment placed Southeast Asia, along with India, in a central position.
The “free and open Indo-Pacific” (FOIP) concept is now a cornerstone of the American strategy for the region, largely as a response to China’s challenge. In this, Canada’s IPS generally aligns with that of the US. The security and political focus of FOIP is clear, as reflected in the Quadrilateral Security Dialogue (Quad), composed of the US, Australia, India and Japan. Its economic dimension, the Indo-Pacific Economic Framework (IPEF), seems a more ambiguous and uncertain afterthought. Although Canada is not yet in the IPEF, its evolution will influence Canada’s economic links with the region.
The focus of the IPEF, mostly on standards and rule setting (rather than on tariffs, tariff barriers or market-access issues), along with the promise of further consultations, offers little that is tangible to hard-pressed Southeast Asian economies, for example. The recent supply chain collaboration initiative is a useful if modest and uncertain step toward strengthening IPEF.
The limitations of the IPEF are particularly evident when contrasted with the Regional Comprehensive Economic Partnership (RCEP), implemented in January 2022. RCEP includes ASEAN, China, Japan, Korea, as well as Australia and New Zealand, creating the largest economic bloc in the world. (China essentially led the negotiations for the deal.) For example, the RCEP single rule of origin (ROO) for production in participating countries allows for deepening of regional supply chains and could significantly boost trade and investment. Intermediate inputs in industry value chains may now be transferred among RCEP members without being subject to cumbersome national regulations on domestic content or varying import duties. This is supported by trade facilitation measures that simplify the process and reduce costs and time for moving goods and some services across borders.
Japan, the world’s third largest economy, plays an essential role in the Indo-Pacific, particularly in Southeast Asia and increasingly in South Asia. Its key regional priorities are support for investment in high-quality infrastructure and for resilient supply chains. These are also key economic goals of Canada’s IPS, providing opportunities for a regional partnership with Japan that would complement their bilateral ties.
A regional partnership with Japan also complements gateway country initiatives for Thailand and Bangladesh. It is a leading economic player in both these economies and recently signed regionally focused strategic partnership agreements with each of them.
Japan’s regional priorities, meanwhile, reflect a strategy anchored in the transformation of its economy. This has involved the relocation or regionalization of industries and reinventing or repositioning Japanese firms as critical suppliers within global and regional value chains.
The foreign subsidiaries of Japanese firms, reflecting the relocation of production particularly to ASEAN and China, are key drivers of Japan’s industrial performance. This relocation has been on-going since the 1985 Plaza Accord revaluation of the yen. Foreign subsidiaries share in total sales has grown from 5 percent in 1990, to around 25 percent in 2021. Most of their output, around 75 percent in 2021, is sold in Asia outside of Japan, often within the framework of regional supply chains, such as automaker Toyota’s.
Japan has also reinvented its economy. Japanese firms are focusing on higher value-added and higher technology materials such as fine chemicals, instead of more visible lower value-added consumer end products such as LCD panels which use such chemicals as critical inputs. According to a 2018 study by Japan’s Ministry of Economy, Trade and Industry (METI), they captured 50 percent to 100 percent market share in more than half of the 931 high tech input products such as carbon fibers and capacitors, which are key inputs for example in electronics/IT, autos and aircraft.
Japan is by far the largest source of infrastructure finance in Southeast Asia, worth around US$330 billion in 2022, compared with Chinese financing of around US$100 billion. The Partnership for Quality Infrastructure was initiated in 2015, followed in 2020 by the Japan-ASEAN Connectivity Initiative. Infrastructure for regional connectivity involves support for a variety of cross-border land, sea and air corridors integrating ASEAN countries and increasingly linking to South Asia.
Examples include cross-border infrastructure projects in the Greater Mekong Subregion’s East-West and Southern Economic Corridors and improvement of ports and transportation networks throughout the region. Japan is now also financing soft infrastructure such as health services, digital economy, as well as green investments through the Asia Energy Transition Initiative.
Financing of quality infrastructure supports regional supply chains, particularly where Japanese firms are key participants. For example, building on these projects, companies such as Marunix, Yazaki, Koyorad and Nidec – all key suppliers in automotive and electronics/IT value chains – have established sophisticated cross-border supply chains along the GMS Southern Economic Corridor, integrating operations in Vietnam, Laos, Cambodia, Thailand and Myanmar, and linking these to activities in Indonesia, Malaysia and Japan. The recent Connected Industries: New Vision for the Future of Japanese Industries program aims at deploying advanced technology to connect enterprises across industries and borders.
Japan’s priorities align well with Canada’s IPS, particularly the focus on Southeast Asia, sustainable infrastructure and resilient supply chains. This provides significant opportunities for new types of regional partnerships for Canadian enterprises. A Canada-Japan regional cooperation agreement could provide a framework for focused collaboration of Canadian and Japanese firms in the Indo-Pacific. It could also strengthen government cooperation in trade, investment and development finance aimed at third markets.
ASEAN occupies a central role in the Indo-Pacific – and indeed in Canada’s IPS. It is one of the fastest growing economic regions in the world, with a sizeable (700 million people), young market, projected to become the world’s fourth largest economy by 2030.
The IPS’s proposed “Canadian Trade Gateway in Southeast Asia” and the Canada-ASEAN Free Trade Agreement currently in negotiation are important steps toward more extensive regional engagement. But ultimately it is national economies that provide practical entry points for firms to a region. Thailand is well positioned in a number of ways to fill that role. It is the second largest economy in Southeast Asia, with a diversified business sector, regionally leading enterprises, and generally efficient and well-regarded institutions. Thailand is also part of RCEP.
The kingdom also plays a central role in key sub-regional economic cooperation programs such as the Greater Mekong Subregion (GMS), which includes Cambodia, Southern China, Laos, Myanmar and Vietnam, and the Indonesia-Malaysia-Thailand Growth Triangle. Complementarities among these economies allow for Thailand to serve as a regional base for subregional cross-border supply chains serving regional and global markets. Thailand also links to South Asia as part of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), that also includes Bangladesh, Bhutan, India, Myanmar, Nepal and Sri Lanka.
Thailand’s priority multi-sectoral Eastern Economic Corridor (EEC) program is intended to strengthen its role as a base for regional business operations. The EEC is targeting for the period 2023–2027 around US$62 billion investment through public-private partnerships (PPP). It is also aiming to attract international investment and collaboration in areas such as advanced and digital infrastructure, medical technology and smart cities.
There is a new generation of young Thai innovative technology entrepreneurs with strong support for international partnerships and regional positioning. They offer ready potential collaborators for foreign enterprises and investors.
Thailand thus provides considerable opportunities for Canada in its domestic economy and as a gateway country to ASEAN and beyond. Building on its position as the second largest trading partner of Canada in ASEAN, a Canada-Thailand economic cooperation agreement would provide a framework for a regional partnership. Its implementation would require focused, well-structured initiatives aimed at building and maintaining longer-term business collaboration for the domestic markets of the two economies and for Thailand as a regional base.
The South Asia focus of the Canadian IPS is understandably on India, given its central role in the Indo-Pacific, and its economy’s size and global importance. It may, however, be useful and productive to take a wider “India-plus” approach to South Asia and positioning enterprises with respect to the region’s deepening connectivity with Southeast Asia.
Bangladesh, with a population around 170 million, is located on the Bay of Bengal in the center of the Indo-Pacific region. With India to its west, China to the north, and Southeast Asia to the east, Bangladesh can serve as a gateway to South Asia, a region with significant growth potential that is only just beginning to follow the development path of the East Asian economies.
Bangladesh has transformed itself from being one of the world’s poorest countries when it gained its independence in 1971 to becoming one of the fastest growing economies in recent years. It graduated from low-income to lower middle-income status in 2015, achieving extraordinary progress in poverty reduction along the way. In 2021-22, per capita GDP greatly exceeded the South Asian average, including that of India.
Beyond its globally competitive garment industry, as well as agriculture, fisheries and food-processing sectors, the economy’s future potential includes a young population, providing a “demographic dividend”, and enormous natural-gas reserves. Dhaka is also focusing on expanding its information technology industry through its “Digital Bangladesh” strategy.
Bangladesh is particularly well positioned as a regional gateway to South Asia and beyond. In May 2023, it hosted the 6th Indian Ocean Conference, a key platform that brings together representatives of countries bordering the Indian Ocean to discuss a range of regional issues. At the same time, Bangladesh launched an “Indo-Pacific Outlook” to define its role in the region. It outlined regional priorities, carefully balancing relationships with the US and China. Bangladesh is also strengthening its connectivity with neighboring India.
Bangladesh is in a key position to help deepen economic linkages between South Asia and Southeast Asia, as reflected in a recent World Bank study on the significant potential for such economic integration. Membership in the BIMSTEC, which, as noted, also includes Thailand, further strengthens the potential the role of Bangladesh.
As a gateway country, Bangladesh also aligns well with a regional partnership with Japan, its leading bilateral lender. Japan provides financial and technical support is aimed at strengthening the economy’s regional role through the construction of highways, airports and seaports that have regional importance. Examples include the Matarbari Deep Sea Port, Dhaka Airport and the Bay of Bengal Industrial Growth Belt (BIG-B) aimed at positioning Bangladesh as an economic gateway between South Asia and Southeast Asia.
Bangladesh therefore offers significant economic opportunities for Canada, domestically and regionally, complementing the IPS’s bilateral focus on India. A Canada-Bangladesh economic cooperation agreement could provide a framework for regional collaboration in South Asia and beyond, accompanying a gateway initiative with Thailand and aligning with a regional partnership with Japan.
Canada’s Indo-Pacific Strategy suggests important directions for effective economic engagement with the region. If implemented successfully, it could be considered a model for middle-power engagement in the region – with Canada playing a catalytic connecting role with key partners. Given the uncertainty of US-led IPEF and, more generally, the ambiguity of the Indo-Pacific region as an “economic” construct, such a strategy requires translation into effective practical initiatives.
Japan can be a particularly valuable regionwide multidimensional partner in implementing key Canadian priorities. The concept of regional “gateway countries” for such markets as Thailand and Bangladesh, supported by focused, pragmatic initiatives aimed at deeper, longer-term regional linkages, can help position enterprises in the Indo-Pacific. Together, they provide complementary mechanisms for implementing the IPS.
This can be combined with a more granular and nuanced approach to Indo-Pacific economies, creating new types of business opportunities. For example, the concept of “appropriate innovation” provides a novel basis for enterprises, including SMEs, to expand and deepen their presence, particularly in the emerging economies of the Indo-Pacific. This idea recognizes that much of the growth in spending will be driven by lower-middle income and lower-income households that constitute a huge, underserved second-tier market, mostly outside of megacities. Appropriate innovation focuses on their particular needs, while also reflecting the realities of specific local conditions and constraints such as more limited access to financing and services.
Economic performance is a fundamental priority of Indo-Pacific countries, especially the emerging economies of Southeast and South Asia. Effective economic engagement, therefore, serves not only Canada’s and the region’s interests but it also is an essential element of a more comprehensive foreign policy, supporting Canada’s wider strategic goals in the region.
Further reading:
David Abonyi
Global Enterprise Initiative, Schulich School of Business, York University; Fiscal Policy Research Institute (FPRI)
George Abonyi
Sasin School of Management, Chulalongkorn University; Fiscal Policy Research Institute (FPRI)
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