TITLECHINA’S RISE AND THE IMPLICATIONS FOR QUEBEC

AuthorMartin Cauchon, Joseph P. Caron and Michael G. Woods

China’s growth and the rapid expansion of its middle class will have wide- ranging implications for all regions of Canada, including Quebec. Companies Summarythat hope to profi t from these trends should pay close attention to China’s 12th Five-Year Plan, a detailed outline of the country’s economic and social goals over the next half-decade. The federal and provincial governments should consider a number of initiatives that would help Quebec industries to succeed in the Chinese market.

La croissance de la Chine et le rapide essor de sa classe moyenne auront d’importantes répercussions sur toutes les régions du Canada, y compris au Québec. Les entreprises désireuses d’en profi ter devraient soigneusement étudier le 12e Plan quinquennal chinois, qui détaille les objectifs économiques et sociaux du pays pour les quelques années à venir. De leur côté, nos gouvernements fédéral et provinciaux devraient examiner quelles initiatives aideraient les industries québécoises à percer le marché chinois.

ver the past two decades, China’s rise in power and Prime Minister’s subsequent visit to China in February 2012 infl uence has reshaped global economics and pol- with some 40 Canadian private sector executives in tow pro- Oitics. There are now, as Paul Evans of the University of duced commercial deals with a potential value of more than British Columbia puts it, two suns in the sky, China and the $3 billion, as well as series of bilateral agreements in sectors United States. China is an unavoidable and necessary play- ranging from energy to education. er on matters ranging from global fi nancial markets to inter- From a commercial standpoint, arguably the most sig- national security and the environment. China has become our nifi cant result of Harper’s visit was the conclusion — af- second most important trading partner, and the most signifi - ter 18 years of on-and-off negotiations — of the landmark cant challenge to our ability to adapt to a changing world. Foreign Investment Promotion and Protection Agreement In Canada, attention has focused on Chinese invest- (FIPA) with China. Although the agreement still needs to be ments in natural resources, notably in the oil and gas sector reviewed and ratifi ed by both parties, the clear intent is to in Western Canada. It is important to note, however, that encourage greater investment fl ows between by establishing China’s emergence will have profound and wide-ranging minimum standards of treatment and rules governing trans- implications for all regions of the country. This article will parency, expropriation protection and dispute settlement. explore the economic implications for Quebec in particular, By shielding foreign investors from “discriminatory and and offer recommendations aimed at optimizing Quebec’s arbitrary” practices, the agreement is expected to provide a advantages and opportunities in the Chinese marketplace. further boost to bilateral trade, which has tripled in a decade At a national level, Prime Minister Stephen Harper’s to nearly $58 billion in 2010. government has progressively shifted its position on China Naturally, China is immune to neither global econom- from dramatically highlighting the differences in govern- ic trends nor the cyclical downturns common to market ance and values of our two countries, to a broader assess- economies. Its GDP growth of 8 percent in 2012 represents ment of Canada’s interests and the need to engage this a signifi cant decline from almost 12 percent two years ago. second sun. Last year’s appointment of John Baird, who is The pace of growth in energy demand is also slowing. Still, close to Harper, as Minister of Foreign Affairs, signalled as China has become Canada’s third-largest export market and strongly as possible the change in approach. During a visit our second most important source of imported goods. What to China in July 2011, Baird declared the start of a “new era” happens there increasingly matters here. in relations with China, “a country that is both a clear prior- Companies in Quebec and elsewhere that hope to take ity for our government and important to our economy.” The advantage of China’s growth would be well advised to pay

POLICY OPTIONS 1 SEPTEMBER 2012 Martin Cauchon, Joseph P. Caron and Michael G. Woods

attention to its 12th Five-Year Plan, assembly; the goal is to make the tran- ince, the Zhuhai Flight Training Cen- which covers the period from 2011 to sition from “made in China” to “de- tre, of which CAE owns 49 percent, the 2015. Every fi ve years since the signed in China.” In the priority areas provides aviation training services early 1950s, the central government of biotechnology, new materials, new for more than 12,000 pilots annually, has published a detailed outline of the information technologies and high- representing a variety of commercial country’s economic and social goals for end equipment manufacturing, China aircraft carriers, including Air China the next half-decade. Broadly speaking, needs to build research and develop- and China Eastern Airlines. the most recent plan (now offi cially ment (R&D) capacity. As the Five-Year A more recent arrival in the Chi- termed a “guideline”) seeks to estab- Plan acknowledges, this will necessitate nese market is Quebec City-based EXFO, lish China as a producer of high-value a stronger intellectual property protec- a provider of test and service assurance manufactured goods rather than of tion and management framework. solutions for wireless and wireline net- low-cost products, encourage domestic All of this creates a wide range of work operators and equipment manu- consumption, and reduce income dis- opportunities for foreign manufactur- facturers in the global telecommuni- parities. In the words of Premier Wen ers, service providers and investors. In cations industry. In 2008 EXFO built a Jiabao, the objective of economic ex- many respects, Quebec’s key industries manufacturing facility in Shenzhen, its pansion is “not only to make the cake — aerospace, ground transportation fi rst production base outside Canada. of social wealth as big as possible, but equipment, life sciences, agri-food, The experiences of PCC, Bombar- also distribute the cake in a fair way light metals, information technology dier, CAE and EXFO underscore the ex- and let everyone enjoy the fruits of re- and microelectronics — are particular- tent to which China’s growth has cre- form.” ly well positioned to take advantage of ated openings for Quebec-based enter- the reorientation of China’s priorities. prises. But those are only a few among he current Five-Year Plan sets out a many opportunities, most of which T7 percent annual GDP growth tar- handful of Quebec fi rms have remain untapped. get, but also acknowledges the less de- A already successfully penetrated As the Chinese middle-class ex- sirable consequences of rapid economic the massive Chinese market. Mont- pands, traditional consumption pat- expansion, including pollution, inten- real-based Power Corporation of Can- terns are evolving. China will become sive energy use and resource depletion. ada (PCC), for one, has been active in the world’s leading importer of food Hence, among the key initiatives of the China since 1978 and has invested in and agricultural products within the current plan are commitments to improve the lives of Chinese cit- izens and make a shift toward a Last year’s appointment of John Baird, who is close to more sustainable path to growth. Harper, as Minister of Foreign Affairs, signalled as strongly In pursuit of these goals, the Five-Year Plan establishes the fol- as possible the change in approach. During a visit to China lowing seven “strategic emerging in July 2011, Baird declared the start of a “new era” in industries”: new energy, energy relations with China, “a country that is both a clear priority conservation and environmental for our government and important to our economy.” protection, biotechnology, new materials, new information tech- nologies, high-end equipment manu- many different sectors of the Chinese next two decades. In 2010, the most facturing and clean-energy vehicles. economy, including real estate, trans- recent year for which fi gures are avail- With regard to new energy and en- portation, communications and power able, only 2 percent of Quebec agri- vironmental protection, the Five-Year generation. It was the fi rst Canadian food exports went to China. There is Plan encourages foreign businesses to enterprise to win the coveted status no reason why this number cannot establish green-energy R&D facilities of “qualifi ed foreign institutional in- grow considerably in the years ahead. and to apply for government-funded vestor,” which allows it to buy and sell Also growing is the demand for R&D projects in partnership with Chi- yuan-denominated shares on Chinese goods and services related to child-rais- nese fi rms. As well, the plan establishes stock exchanges. ing, education and children’s entertain- the goal of making China the world’s Bombardier has had links with ment. Montreal-based MEGA Brands, largest maker of electric vehicles, with China since 1954, and has a history of one of the world’s top 10 toy compan- an interim production goal of 1 million three joint ventures and seven wholly ies, began producing toys in China for electric vehicles annually by 2015. foreign-owned enterprises there. For its export to other international markets, In the same spirit, China no longer part, CAE has been involved in a joint and since 2010 it has been selling an wishes to be known mainly as a centre venture with China Southern Airlines increasing number of made-in-Quebec of low-value manufacturing and fi nal since 2002. Based in Guangdong prov- toys to Chinese consumers.

2 OPTIONS POLITIQUES SEPTEMBRE 2012 China’s rise and the implications for Quebec

TM4 Electro dynamic Systems, a with marine science institutes at the ut the fl ow of capital and ideas is subsidiary of Hydro-Québec, has de- Ocean University of China in Qingdao. Bnot all one-way. The modern Chi- veloped opportunities in new energy Clearly, China’s current Five-Year nese economy has been built on FDI, technologies. It has done pioneering Plan also complements the Quebec with inward fl ows currently exceeding work in the fi eld of electric propulsion government’s Plan Nord, the $80-bil- $120 billion per year. Quebec com- systems, and it recently announced it lion, 25-year development plan fo- panies interested in pursuing Chinese had formed a partnership with Presto- cused on sustainable mining, forestry investment opportunities should fi rst lite Electric Beijing Ltd. to develop and and energy. Realizing the Plan Nord consult the offi cial Catalogue for Guid- build electric-drive trains for buses and will require massive infusions of cap- ing Foreign Investment, which lists trucks, as well as commercial, off-road ital, from within Canada and abroad. areas in which foreign investment is and marine vehicles. The new joint Well-capitalized Chinese state- welcome, as well as those in which it is venture will target customers in China owned and private enterprises are wast- prohibited. New areas in which invest- and throughout Southeast Asia. ing no time as they search for depend- ment is encouraged include environ- able supplies of natural resources and mental technologies, new textiles, hese kinds of partnerships build partnerships. Last fall, one of China’s chemical or mechanical manufactur- Ton a long history of scientifi c re- largest nickel producers, Jilin Jien Nickel ing technologies and products, collec- search co-operation between Quebec Industry Co., confi rmed that it will in- tion and treatment of waste, electronic and China, spanning biotechnology, vest a total of $800 million to mine a products or equipment, energy-saving genomics, proteomics (the study of nickel deposit near the Inuit commun- and environmental protection indus- proteins), the environment tries, new-generation infor- and sustainable development, Montreal-based Power Corporation mation technology, and bio- health, information technol- of Canada (PCC), for one, has been technology. Moreover, many ogy, marine sciences, new ma- service-related industries have terials, and renewable energy. active in China since 1978 and has been added to the encouraged China’s fi rst high-level invested in many different sectors of list, including venture capital mission to Quebec took place the Chinese economy, including real enterprises, intellectual prop- in 1978. Since then, the two estate, transportation, communications erty rights services and motor governments have signed a vehicle charging stations. number of agreements to work and power generation. It was the fi rst China, Canada and the together in the areas of educa- Canadian enterprise to win the coveted world keep changing, and tion and training, health re- status of “qualifi ed foreign institutional the policy environment must search, and science and tech- investor,” which allows it to buy and keep up with the times. There nology. For example, the 2006 are a number of initiatives agreement between Quebec’s sell yuan-denominated shares on that could be undertaken by Minister of International Re- Chinese stock exchanges. government to assist Can- lations and China’s Ministry adian and Quebec businesses of Science and Technology sponsors ity of Kangiqsujuaq on the northern that wish to succeed in the Chinese scientifi c and technological collabor- tip of Quebec. Separately, Wuhan Iron marketplace. The following are some ation projects. Researchers at McGill and Steel Group Corporation recently examples of such initiatives. University are currently collaborating signed a joint venture agreement with A Canada-China free trade accord: At with scientists at Sichuan University Toronto-based Adriana Resources Inc. to the February 2012 signing of the dec- in Chengdu City on a project aimed at develop and operate an iron ore mining laration of intent to conclude a Can- uncovering the genetic factors behind complex in Nunavik, Quebec. Sched- ada-China agreement on foreign in- male infertility. uled to open in 2016, the $13-billion vestment, Premier Wen Jiabao said that Quebec has a particularly strong re- Lac Otelnuk project — potentially the China is interested in “stepping up” lationship with Shandong, the second largest mining project in Canadian hist- discussions of the feasibility of a full most populous province in China, with ory — is expected to produce 50 million bilateral free trade accord (FTA). Can- a GDP of $600 billion — twice that of tons of iron ore a year over a period of ada’s response was positive but muted. Quebec. In 2009, the province entered up to 100 years. The project includes a Some offi cials and trade policy experts a science and technology co-operation new 815-kilometre railway line and the have voiced skepticism, citing the sig- agreement with Shandong on marine expansion of the Sept-Îles port (at the nifi cant gap in the two countries’ trade sciences. The Institut des sciences de la mouth of the St. Lawrence River), to ac- regimes and the daunting resource re- mer (ISMER), part of the Université de commodate enormous Chinamax ships, quirements for such an exercise. Quebec à Rimouski together with the which can carry up to 400,000 tonnes The prevailing Canadian view Université de Laval, are collaborating of cargo. seems to be that FTA negotiations are

POLICY OPTIONS 3 SEPTEMBER 2012 Martin Cauchon, Joseph P. Caron and Michael G. Woods

something for the long term. Certainly of the Canada-China Foreign Invest- launch a three-year investment pro- there are questions around timing and ment Promotion and Protection Agree- motion project aimed at Chinese capacity and how much negotiating ment (FIPA) was an important stepping multinational fi rms that have already leverage Canada could muster. Not up stone toward a free trade deal and a sig- invested elsewhere in Canada or the for question, however, are the poten- nifi cant tool in its own right. For Can- United States. The project would entail tial benefi ts of an FTA as a driver of bi- adians investing in China, the FIPA can studying the business plans of specifi c lateral trade and investment, one that be considered as an insurance policy. Chinese companies and determining would leverage comparative advantage The same holds true for Chinese in- where Quebec can offer investment in a way that would boost domestic vestors into Canada. But the agreement opportunities that are as great as, or production, economic growth, employ- must not be seen as an end in itself. The greater than, those offered by other ment and innovation while reducing business community must work close- jurisdictions. The goal would be to de- costs for consumers. Our view is that ly with government to ensure that the velop “the case for Quebec,” individu- alized for each fi rm. A Quebec/ As the Chinese middle-class expands, traditional consumption China investment promotion representative, reporting to the patterns are evolving. China will become the world’s leading Quebec Premier, would then be importer of food and agricultural products within the next two tasked with selling the opportu- decades. nity to the target company. Universities: The Quebec launching FTA negotiations would rep- FIPA is implemented without delay, and government should review its immi- resent a bold and even transformational that it is understood and promoted as a gration policies so as to facilitate the step for Quebec and the rest of Canada. vehicle that encourages and protects in- granting of a greater number of uni- The size and the importance of the Chi- vestment in both directions. The signing versity student visas and draw more nese economy, our own dependence of the FIPA should be the catalyst for the highly skilled immigrants from China. on trade and investment, and also the creation of a long-term, business-driven The Canadian Experience Class already many complementarities between our investment promotion strategy. allows temporary foreign workers and two economies are factors that argue Mentorships: To assist Canadian en- international students who have grad- for putting China at the top of Can- trepreneurs in penetrating the Chinese uated from Canadian institutions to ada’s FTA list. As of 2012, Canada is no market, the Quebec and other provincial apply for permanent residence. The im- longer looking from the outside in with governments should establish a low-cost pact of this program on Quebec should respect to the Trans-Pacifi c Partnership mentorship program, drawing on the be reviewed to determine if it can be (TPP) negotiations. On June 19, 2012, at substantial number of successful Chi- enhanced to increase student fl ows. the G20 Summit in Los Cabos, Mexico, nese-Canadian entrepreneurs. The pro- Prime Minister Harper announced that vincial government, in partnership with t is relatively easy to assemble ideas Canada would be joining ongoing TPP a suitable business group, could organize Ifor improving the Quebec/China trade negotiations to become part of the and monitor the program; annual evalu- business environment. It is another 11-member partnership. Japan has ex- ations would ensure that it is fi ne-tuned matter to agree on the best of these, pressed an interest in joining the talks to the needs of the business community. and to assemble the political and fi - but has not offi cially joined as of yet. The program would cover the expenses nancial capital to put them into effect. They are currently in discussion. China of mentors, while the Canadian embas- What is indisputable is that China’s has also not offi cially joined. sy in Beijing and the consulates general signifi cance will only increase, and not In any event, China is busy estab- would provide back-up support. only in terms of economics. The good lishing its own network of FTAs, and Investment promotion: To attract news is that there is room for everyone Canada’s business community should foreign direct investment, Quebec with vision and ambition. be pushing to make sure that we take up should organize a targeted fi ve-year the challenge. We do not want to fall to program to inform young Chinese Martin Cauchon is a former federal min- the bottom of China’s list. Negotiating business people of the investment cli- ister of justice and of national revenue. an FTA with China would be a long and mate and business potential in Que- Now he is a partner at Heenan Blaikie challenging process, but we can make bec. The program should include de- LLP, where he directs the China group. Jo- friends and do business during the tailed information on how to qualify seph P. Caron was Canadian ambassador journey. As an ancient Chinese proverb as an immigrant to Quebec under the to China and to Japan, and he was also states: “Be not afraid of growing slowly. Provincial Nominee Program, and high commissioner to India. He is now Be afraid only of standing still.” should inform interested entrepre- special adviser to the Asia-Pacifi c group at Foreign Investment Promotion and Pro- neurs of specifi c business opportuni- Heenan Blaikie LLP. Michael G. Woods is tection Agreement: The recent conclusion ties. At the same time, Quebec should a partner at Heenan Blaikie LLP.

4 OPTIONS POLITIQUES SEPTEMBRE 2012