Domestic and International Challenges Facing Canada's Foreign Policy Objectives in Asia

Table of Contents

ABSTRACT

KEY TERMS

DEFINITIONS

INTRODUCTION
OBJECTIVES
THESIS STATEMENT

METHODOLOGY

LIMITATIONS

LITERATURE REVIEW
CANADA’S TRADE DEPENDENCE ON THE UNITED STATES
CANADA AND THE ASIA-PACIFIC POWER SHIFT
STATE IDENTITY AND PERCEPTIONS OF CANADA AS A PACIFIC NATION

NARRATIVE

THE TRANS-PACIFIC PARTNERSHIP
LEVEL I: TRANS-PACIFIC PARTNERSHIP MEMBER RESTRICTIONS ON CANADA
LEVEL II: CANADA’S SUPPLY MANAGEMENT SYSTEM AND INTELLECTUAL PROPERTY RIGHTS STANDARDS

ASIA-CANADA PERCEPTIONS AND RELATIONS
LEVEL I: ASIA-PACIFIC PERCEPTIONS OF CANADA
LEVEL II: CHINESE FOREIGN DIRECT INVESTMENT AND CANADIAN PERCEPTIONS OF ASIA

U.S. FOREIGN ENERGY DEPENDENCE AND THE DIVERSIFICATION OF CANADIAN OIL
LEVEL I: U.S. DEPENDENCE ON CANADIAN OIL AND THE KEYSTONE XL PIPELINE
LEVEL II: SHIPPING ALBERTA’S OIL SANDS RESOURCES TO NON-U.S. MARKETS

CONCLUSION

REFERENCES

ABSTRACT

This paper discusses Canadian foreign policy in the context of emerging Asian markets and the diversification of Canadian energy resources. Using Robert Putnam’s (1989) two-level game theory, it identifies why Canada has been prompted to shift its focus to Asia and what domestic and international factors challenge Canadian foreign policy goals. This paper discusses these issues in the context of Canada strengthening its relations in the Asia-Pacific in general as well as its ability to diversify its top export, oil and natural gas, to energy hungry Asian markets. It argues that Canada must play a series of two-level games to build trade and diplomatic relations in the Asia Pacific and finds that Canadian domestic policies largely hamper Canada’s ability to do so.

KEY TERMS

APEC: Asia-Pacific Economic Cooperation

ASEAN: Association of Southeast Asian Nations

CUSFTA: Canada-United States Free Trade Agreement

EIA: U.S. Energy Information Administration

GATT: General Agreement on Tariffs and Trade

GDP: Gross Domestic Product

NAFTA: North American Free Trade Agreement

OECD: Organisation for Economic Cooperation and Development

TPP: Trans-Pacific Partnership

DEFINITIONS

Asia: The use of the word “Asia” or “Asian” in this paper is limited to East

and Southeast Asian states. It does not include Central, East, South Asia or Russia unless specified otherwise

Asia-Pacific: The Asia-Pacific refers to all states that border the Pacific Ocean in

East and Southeast Asia. When specified, it may also include western North and South America, Australia, and New Zealand.

Condensate A mixture of hydrocarbon liquids created through a process that

produces an environment allowing raw natural gas to liquefy

Confederation In the context of this paper, Confederation refers to the signing of the

British North America Act of 1867 that consequently led to Canada’s transition from a colony of Great Britain to an independent dominion consisting of a confederacy of provinces

Diluted bitumen Highly viscous petroleum, such as that extracted from the Alberta Oil

Sands, that has been converted to a more solvent state for pipeline transportation purposes

Equalization Payments by wealthy Canadian provinces to the federal government,

transfer payments which subsequently redistributes these payments to poorer provinces

Win-set A term used in two-level game theory that describes the overlap of

agreement between international and domestic interest groups that governments must take into consideration when negotiating agreements and conducting foreign policy. A positive win-set occurs when a significant overlap exists that allows for the approval of an agreement while a negative win-set has the reverse outcome

INTRODUCTION

Since the earliest days of European settlers in the late 1400s, commerce and international trade have been central elements of present-day Canada’s foreign policy. Canada’s earliest years of trade, pre- and post-Confederation, were primarily centered on the export of resource-based goods such as fish, fur, and timber to American, British, and French markets. The importance of trade continued to grow for the remainder of the nineteenth and twentieth centuries to the present day. As former assistant under-secretary of state for external affairs Hugh Keenleyside declared in 1942, “trade and other economic factors are fundamental to 90 percent of all international relations and are thus worthy of, and in fact demand, consideration by the most competent and responsible officials available” (as quoted in Hilliker, 1990). This statement continues to carry significance today as Canada remains a heavily export-dependent country that requires robust world markets to satisfy its trading needs and maintain its economy.

Once an insignificant market for Canada, the past twelve years has seen China rapidly surpass Great Britain and Japan as Canada’s second and third-most dominant export markets. Likewise, in 2012, China surpassed Great Britain as Canada’s second largest import nation (Industry Canada, 2013). In addition to China, India and other East and Southeast Asian economies have grown rapidly in the same timeframe. However, the United States has long been Canada’s most significant trading partner, substantially surpassing all other trading partners combined (Industry Canada, 2013). While the United States is and will continue to remain Canada’s largest trading partner in the foreseeable future, a decline in Canadian dependence on the United States since the early 2000’s raises questions as to why this has occurred and what Canada is doing in the wake of emerging Asian economies. Furthermore, as Canada is no longer heavily reliant on such exports as fish and fur, but heavily reliant on other resources such as oil and natural gas, questions raise as to what obstacles the current government faces to see these resources reach both traditional and emerging markets abroad.

Objectives

Using two-level game theory, this paper seeks to identify what has prompted Canada to shift its foreign policy objectives to the Asia-Pacific and what domestic and international

variables hamper Canada’s ability to do so. As international trade and energy resource diversification are top priorities within Canadian foreign policy, this paper focuses heavily on the major opportunities and challenges that Canada faces in its ability to export its commodities to growing Asian markets. Firstly, with a particular but not exclusive focus on China, this paper seeks to identify what policies Canada has implemented to diversify its trade with China and other emerging markets in East and Southeast Asia. Secondly, this paper describes how international and domestic perceptions influence foreign policy objectives. Thirdly and finally, this paper analyses how the highly integrated nature of Canada and the United States and how sub-federal Canadian interest groups affect Canadian foreign policy objectives in the Asia- Pacific.

Thesis Statement

Although Canada has historically attempted to diversify its trade to new markets, it has been restricted by international and domestic factors that have largely prevented its ability to create new substantial economic and political partnerships in the Asia-Pacific. The interplay between Canada’s prior engagement with the Asia-Pacific region, international and domestic public perceptions, American political interests, and Canadian domestic realities have largely hampered the government’s ability to strengthen its influence in the Asia-Pacific and diversify its energy resources to such growing markets. Canada must therefore, as Robert Putnum (1988) describes, play a series of two-level games in order to build new trade and diplomatic relations in the Asia-Pacific.

METHODOLOGY

Using qualitative and quantitative data within Robert Putnum’s (1988) two-level game framework, this paper identifies key domestic and international factors pertaining to Canada’s challenges with establishing itself as an Asia-Pacific player. As these factors represent a series of two-level games versus a single negotiation, the paper is broken into several sections identifying each issue separately and furthermore subcategorizing these issues into their respective international or domestic levels. Putnam’s two-level game theory suggests that when negotiating international agreements, all involved stakeholders attempt to create a common structure where each party can mutually benefit from an agreement’s final ratification. Also known as a win-set, each party attempts to benefit as much as possible within their national interest while reducing any concessions that would proliferate domestic opposition.

On Level I, or the international level, decision makers are influenced by outside factors such as international governments and politics, foreign protectionist measures, foreign negotiators, and all other international influences. On Level II, or the domestic level, leaders and decision makers are influenced by intra-national pressures such as labor unions, domestic lobby groups, and local governments to ensure that the welfare and interests of domestic parties are being met. However, as Putnum argues, Level II often encumbers a democratically elected government’s ability to establish a positive win-set with international actors as Level II ultimately holds the government accountable. In turn, political actors attempt to create coalitions with supporters and bargain with opponents in an attempt to build support for Level I foreign policy ambitions.

Two-level game theory furthermore shares the neoliberal argument (Nye, 1988) that an outcome to international and trade negotiations can produce an equally beneficial result for negotiating states. This is in contrast to the realist argument that one state’s gain is another state’s loss. Hence, Nye (1988) argues that an increase in trade interdependence allows for cooperation among states and furthermore strengthens the influence of sub-federal actors such as multinational corporations.

LIMITATIONS

This paper is limited to the domestic and international factors that influence Canada’s foreign policymakers and leaders’ ability to reach their economic and energy diversification goals through long-term partnerships in the Asia-Pacific. Furthermore, this paper is limited to the two-level game theoretical framework and does not focus on various other lenses of analysis. Although some outlying factors are briefly mentioned, this paper does not argue beyond the scope of two-level game theory in the context of the central theme of this paper. For example, no consideration is given to the debate over continued North American economic integration,

whether the abolition of Canada’s supply management system would be sound economic policy, the morality of economic partnerships with states of poor human rights records, or the debate on global climate change and whether the development of Alberta’s Oil Sands is ethical.

LITERATURE REVIEW

Due to the nature of this paper’s central themes, it is necessary to approach prior literature using three categories. The first section outlines an historical account of Canada’s need to diversify from its heavily reliant trading partner, the United States. The second category outlines the variety of policy choices Canada faces in the wake of a global power shift to the Asia-Pacific. Lastly, the third category discusses how public perception influences Canada’s foreign policy goals.

Canada’s Trade Dependence on the United States

As of present, Canada’s trade dependence on the United States is greater than all other markets combined. Diversifying Canada’s exports away from the United States in favor of new markets is a contentious issue among economic and political scholars. Whether Canada’s large trade dependence on the United States is economically sound or not is beyond the scope of this paper. However, an analysis of scholarly thinking prior to the Asia-Pacific’s noticeable rise in dominance among Canadian policymakers demonstrates a contrast to that of scholars today.

Danielle Goldfarb’s (2006) Too many eggs in one basket? convincingly argues against the politically popular notion that Canada must diversify its trade away from the United States. While analyzing whether the Canadian government should and could geographically diversify, Goldfarb maintains that a concentration on the United States does not result in greater export volatility. Likewise, Canada-U.S. trade is relatively stable and since the United States is closely linked with Canada’s other major trading partners, a more diversified Canadian trade portfolio would not likely result in greater protection from an American economic downturn. Beaulieu & Emery (2008) also support this claim; however, the researchers also demonstrate that Canada’s heavy reliance on the United States for its exports is subject to American border and marketplace disruptions. However, Hoddad et al. (2013) discredits this claim as the researchers successfully demonstrate through an international study that a majority of countries were more likely to be shielded from volatility from outside markets with more diversified trade portfolios. A number of arguments exist that oppose the further integration of the American and Canadian economies. Economist Brian Copeland (1989) and John McLaren (1997) argue that an increased Canadian reliance on the American market for its exports, specifically by Canada’s need to restructure industry to accommodate the Canada-U.S. Free trade Agreement and the subsequent North American Free Trade Agreement, seriously weaken Canada’s ability to negotiate with the U.S. on trade issues. Furthermore, continued economic integration of the Canadian-U.S. economies has generated fear among groups over the loss of national sovereignty (Fry, 1994).

Geoffrey Hale (as cited in Hawes & Kirkey, 2013) sought to explain what international factors influence Canadian trade policy. As Canada is a trading nation overwhelmingly invested in the American market, Hale argues that Canada’s trade relations with the United States is particularly based on geographic proximity, closely shared customs and values, and common industries. Consequently, this has resulted in greater continental economic integration through such agreements as NAFTA. While this seems to verify Goldfarb’s argument that Canada should continue to economically integrate with the United States, as diversifying to unfamiliar markets is risky, Hale also argues that a fundamental shift in world economics as a result of rapidly emerging markets has contributed to an increasingly globalized world. This, consequently, has created a new environment in which Canada must readjust its traditional trade policies.

This research indicates a strong argument for the continued integration of the American and Canadian economies. However, it does not adequately provide a framework for Canadian policymakers in light of the more recently documented shift in the world’s economic and political center of gravity to the Asia-Pacific region. It furthermore questions the government’s ability to control the direction of trade flows as sub-federal governments and businesses increasingly determine the destination for their goods and services.

Canada and the Asia-Pacific Power Shift

A strong consensus exists among politicians and scholars that the world’s political and economic center of gravity is shifting toward the Asia-Pacific region with China being the leading driving force for this rebalancing. This has created debates among scholars as to why and how Canada should engage China going forward. This section reviews previous research conducted on the arguments for restructuring Canada’s foreign policy in the wake of Asia’s rise.

A study conducted by Silverstein et al. (2012) concluded that Chinese and Indian consumer markets will triple over the current decade and will be worth nearly $10 trillion by 2020. As argued, labor wages in these countries are expected to increase, consequently leading to an increase of the middle class and consumerism. As discussed, these countries would provide the world with an unprecedentedly large consumer demand for goods and services from abroad. Furthermore, as outlined by Angevine & Oviedo (2012), oil consumption in China, India and all other non-OECD countries in the Asia-Pacific region is continuing to grow in demand and is expected to be consuming approximately 34 million barrels of crude oil per day by 2035. Likewise, South Korea and Japan are heavily dependent on crude oil imports and are expected to be consuming a combined amount of 7 million barrels per day by the same timeframe. As argued, this presents an enormous opportunity for Canada to diversify its oil and gas exports to these markets.

In Jeremey Patiel’s (2012) Canada’s China re-set, the author argues that although a recent and substantial shift in Canadian policy toward China has resulted in a renewed strategic partnership, the relationship lacks a strategic focus. Similarly, a policy strategy argued by a number of scholars (Manicom, 2012; Palamar & Jardine, 2012; Paltiel, 2012) calls for Canada’s engagement with emerging Asian states to not only be concentrated on economic trade policy but also to engage using soft power. James Manicom’s (2012) Canadian debates about China’s rise: Whither the “China threat?” reviews the principle economic and political arguments for and against Canadian engagement with China and the greater Asia-Pacific. However, the research concludes that Canadian policymakers have failed to host a policy debate on security within the context of China’s rise. Beckley (2011) and Palamar & Jardine (2012) likewise argue that clear adjustments to Canada’s foreign policy must be taken in order to successfully diversify its trade to the rapidly emerging region. Meanwhile, and as most scholars have argued, Canadian trade will continue to be largely based in the United States for the foreseeable future. As Chin (2009) argues, Canada’s Asia policies during the 2000’s were largely preoccupied with the global war on terror in Afghanistan and containing the spread of religious extremism. In the meantime, as argued, Canada’s Asian policies remained focused on international aid consequently putting a stronger emphasis on such traditional policies as poverty reduction and human rights. Chin’s conclusion illustrates that these policies are now largely outdated due to the shift in global order and a new strategic economic and political framework is needed.

What some researchers have failed to address is that while Canadian trade remained heavily dependent on the United States throughout the 2000’s and 2010’s, an increase of trade with emerging Asian economies - particularly China - has produced a lower total trade share with the United States. A number of factors have contributed to this within the United States itself, such as increased competition from other countries in the US marketplace, new border security restrictions along the Canada-US border following the 2001 terrorist attacks, a rise in the Canadian dollar’s value against the US dollar, and the relative decline of the US economy in comparison to that of such emerging economies as China (Sawchuck & Yerger, 2006).

This research largely demonstrates that Canada has been slow to respond to the rise of China and the greater Asia-Pacific. Furthermore, it demonstrates that while Canada has made a substantial shift in its Asia policies, the renewed engagement and reorientation to the Pacific has not resulted in meaningful agreements. In reference to the previous section of this paper, this research also provides a clear distinction from the economic and political research during the early 2000’s. However, perhaps due to its infancy, little attention is given to Canada as a negotiating member of the Trans-Pacific Partnership which could represent an enormous economic and political foothold in the region. Furthermore, as the research is primarily based on economic, political, and security policy options; it does not provide a comprehensive overview of how domestic Canadian attitudes have shaped Canada’s reorientation to Asia.

State Identity and Perceptions of Canada as a Pacific Nation

Scholars appear to be in complete agreement that Canadians’ historical orientation toward the Atlantic region and the United States has produced missed opportunities by governments to orient domestic attitudes toward the Pacific region. Examining previous works done on state identity and Canada’s historical engagement with Pacific states outlines a number of challenges that the Canadian government faces in rebranding its identity as a Pacific nation.

Thérien & Mace’s (2013) discourse on the relation between a state’s identity and its foreign policy demonstrates that Canada’s European cultural heritage creates a gap between domestic public opinion and the government’s projection of state identity. Through an analysis of Canada’s attempt to rebrand itself as a member of the Americas, the researchers found that public attitudes toward Latin America and weak Latin American diasporas in Canada continued to support the domestic opinion that Canada had little in common with those states. The authors furthermore conclude that while a government has the ability to quickly craft a state identity, national identity among the public is slow to evolve - consequently influencing the state’s ability to remain engaged in non-traditional regions. The researchers’ arguments are validated by McMillan’s (1995) argument that Canada has a reputation for pledging grandiose plans while business and political elites remain oriented toward the Atlantic and regional players in North America. This research demonstrates that businesses and sub-federal governments are increasingly the driving force behind international trade, regardless of the federal government’s attempt to diversify to new markets. However, like other scholars, McMillan does not account for Canada’s growing energy sector of today in an increasingly multipolar world.

James Manicom’s (2013) Canada’s return to East Asia further documents Canada’s perception within the Asia-Pacific that Canada is a ‘fair-weather’ Pacific state. As argued, by only seeking to establish trade and investment. Likewise, Manicom argues that Canada’s credibility among such organizations as ASEAN will remain weak until strong diplomatic and security partnerships are established. While Manicom focuses squarely on maritime diplomacy as an effective policy option, the researcher rejects the multidimensional approach argued by the Asia Pacific Foundation of Canada (2012). This multidimensional approach appears to be largely based on not only engaging Asian markets commercially, but to engage in multiple domains including economics, politics, security, military, cultural, and people-to-people relations. While there is no consensus among scholars with how Canada should continue to pursue its interests in Asia, consensus prevails among scholars that Canada should engage Asia in one way or another. While this presents a challenge for governments and policymakers to successfully build meaningful relations in Asia, questions remain as to how domestic public perception influences Canadian foreign policymaking. It also raises questions as to what governments have done to bring public opinion closer in line with foreign policy goals.

NARRATIVE

Canada’s [see MAP A] ability to successfully shift its international influence and energy resource exports to the Asia-Pacific is confounded by a series of two-level games, each with a set of international and domestic factors. While Canada has not been absent from the Asia-Pacific region in terms of its ongoing involvement in international aid efforts and its participation in APEC, Canada’s current trade networks with Asia are relatively weak. This is in comparison to its trade networks with historical partners in Europe and with the United States. Therefore, while Canada has an established presence in the Asia-Pacific, current agreements have not led to a noticeable increase in Canadian energy resource exports to Asia. In line with Putnum’s (1989) argument that the domestic level often clashes with the international level, producing a negative win-set for governments, the case of Canada’s attempt to diversify to the Asia-Pacific - particularly its energy resources - demonstrates that international, but more importantly domestic, opposition plays a significant factor in either slowing or halting the foreign policy goals of democratic states. The following section outlines this series of two-level games and explains what has both prompted Canada to establish a foothold in the Asia-Pacific and the challenges that the Canadian government continues to face when attempting to establish long- lasting agreements. Each section is divided into Level I and Level II, or the international and domestic levels respectively. The following series of two-level games are as follows: 1) How Canada’s membership to Trans-Pacific Partnership negotiations acts as an example of why Canadian policymakers are attempting to pivot toward Asia and what concessions Canada faces

when negotiating such agreements; 2) Government and public attitudes in Asia and in Canada that demonstrate how a lack of trust among organizations and the general public influence Canada’s ability to create a meaningful foothold in the region; and 3) How Canada has been further prompted to diversify its energy resources to Asian markets using the Keystone XL pipeline and domestic political and infrastructure issues as a framework for how governments manage competing interests. In summation, this section argues that while international factors play a role in hampering Canada’s ability to establish meaningful agreements and diversify its energy resources to the Asia-Pacific, Canadian domestic interest groups and public opinion heavily restrict Canada’s ability to reach these foreign policy goals.

MAP A: Political Map of Canada

illustration not visible in this excerpt

Source: Nations Online Project, http://www.nationsonline.org/oneworld/map/canada-administrative-map.htm

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