Asia Perspectives

We looked at the Canada-India trade relationship from three different angles:

• Merchandise Trade
• Trade in Services, and
• Inward and Outward Foreign Direct Investment

We reviewed the Canada-India trade data provided by Statistics Canada and UN Comtrade, as well as the plans of Canadian exporters regarding exports to India.[i]. As our efforts have been limited to secondary research, we concede that our information gathering related to the export plans of Canadian companies is limited. A more elaborate research project is recommended, but we also do not consider that our prediction and projection are without merit. We are of the view that such discussions are important for the goal of enhancing trade between Canada and India.  We stand to be corrected for our short-term predictions and would be extremely happy if the actual numbers were significantly higher than our prediction.

Canada-India – Trade in Merchandise, Service and Foreign Direct Investment

(US$ millions)

  Source: Statistics Canada and Global Affairs Canada

Merchandise Trade

In our assessment, the Canadian trade with India will most probably grow to about US$7.5 billion by 2020, and would not likely be more than US$9 billion, given the way merchandise trade is computed by Statistics Canada today. We chose the United States dollar (US$) for consistency and because it is the most commonly used currency for trade. These numbers are based upon extrapolation of the 2016 trade figures; the Canadian merchandise export to India is US$3.0 billion and the Canadian import from India US$3.0 billion. We also note that these numbers are lower than the 2015 figures when most predictions indicated that Canada-India trade would grow.

Taking an extremely optimistic outlook, the Canadian exports can double by 2020 if significant gains are made in the aircrafts, defence and nuclear sectors. However, we do not see much hope for Indian exports to Canada to grow by more than one billion dollars by 2020.  This is the reason why we are predicting US$7 to US$9 billion. The Canadian export to India could be higher if there is a major crop failure in India and it is forced to purchase wheat, cooking oil or lentils. This is clear when we look at the export value of 2015, when India purchased US$331 million of HS code 0713 –leguminous vegetables (mainly lentils and dried peas) more than in 2016. While such increases are a possibility, we do not see India purchasing more than one billion dollars extra of agricultural products in these coming years. Its purchasing metal ores and scraps in big numbers is also highly unlikely. On the other hand, as we have indicated in the past, there is a good possibility that more gold, diamond and silver will go from Canada to India, much of which does not get registered directly in the official trade statistics.

Trade in Services

Our assessment for service exports and imports can change drastically if Statistics Canada improves significantly the way it collects the service trade data. As for example, according to Statistics Canada, the total service trade between Canada and India is US$1.593 billion in 2016 – the latest available data.  This seems to be based upon the Extended Balance of Payments Services Classification (EBOPS2002) also used by the UN Comptrade. However, experts knowledgeable in BPO (business processing abroad) think that the actual service trade is higher and estimate that the service trade between Canada and India will be in the range of US$3 billion by 2020.

 Foreign Direct Investment

We are of the opinion that Brexit, present United States investment environment (H-1B visa issues) and India’s quest for oil and gas will increase the appetite of Indian investors to invest in Canada. The efforts of the Canadian Trade Commissioners based in India are also noteworthy. In fact, we may also see more investments from India in sectors other than oil and gas. We definitely noticed serious interest in mining, aerospace, defence and telecommunications. The outward investment scene is not encouraging. We do not think that without the Foreign Investment Promotion and Protection Agreement (FIPA) with India in place, Canadian direct investment to India will see any significant gains. Regarding FIPA with India, we sincerely do not have any prediction.

We estimate that the total two-way investment would rise to approximately US$7 billion range, with Indian investment to Canada – FDI (Stock) doubling by 2020. We do not predict Canadian investment (CDIA) to go beyond the US$1 billion mark. The measurement of FDI to India is difficult, and we base our estimation upon Statistics Canada’s present methodology.

Conclusion

While we would like to be more optimistic and loudly announce that the merchandise trade will triple in the next three years, the reality is that this is unlikely even with major export expansion in aircrafts, defence and nuclear sectors. The export of precious metals will likely grow due to the ever-increasing appetite of Indians for jewelry. The service trade area will show increases, but not for actual services increasing. It will be due more to improved means of data gathering. The area which, in our opinion, will see expansion will be Indian investment to Canada. We will not be surprised to see a doubling of FDIC by 2020, and we feel that the work of the Canadian trade commissioners in India will be rewarded.

[i] We did not use the trade statistics database provided by the Indian Directorate General of Commercial Intelligence and Statistics (DGCI&S), as it is not particularly user-friendly and has a number of restrictions

“India today is a market in full bloom. It offers excellent opportunities, particularly in construction, architecture, design, engineering and telecommunications.”

Canadian Trade Commissioner Service web site, February 8, 2016

Much attention has been given by Canada to enhance the trade relationship with India. In spite of this, the actual export numbers do not reflect any meaningful growth. Canadian merchandise exports to India have grown by 27% in the last five years. While this number may appear significant, we will show later that the growth is almost completely confined to agricultural products such as lentils and dried peas (generically called daal or dahl in India). Moreover, it is almost exclusively promoted by the Province of Saskatchewan[1]. Interestingly, exports have also grown by 27% to neighboring Bangladesh, despite almost no attention paid to that relationship by the Canadian government. The question remains why the merchandise trade with India has not seen increases in areas outside of lentils and certain unfinished products.

It is our opinion that the Government of India does not take its trade relationship with Canada seriously. Last year, the Indian High Commission in Canada finally appointed a diplomat of the rank of Counsellor for commercial services. To our knowledge, India only has 3 officers looking after commerce in its offices in Ottawa, Toronto and Vancouver. These officers also conduct other duties, including consular work. India has also not demonstrated any urgency in completing the Canada-India Foreign Investment Promotion and Protection Agreement (FIPA) or the Canada–India Comprehensive Economic Partnership Agreement (CEPA) – the free trade agreement.

In contrast, Canada has fully 29 commerce officers in eight cities: New Delhi, Mumbai, Chandigarh, Ahmedabad, Hyderabad, Bangalore, Chennai and Kolkata. It is our knowledge that these officers (one of the authors of this paper used to be one) are completely devoted to commercial services. That said, we would like to add a personal note that they all are extremely busy at work and highly proficient in trade promotion. Does this mean that merchandise trade is not the priority of the Canadian Trade Commissioner Service (TCS)?

Does the pronouncement above by the Canadian Government indicate that it is encouraging Canadian entrepreneurs mainly to look for business in the services sector of India, as well as perhaps encouraging investment? The sectors indicated above, such as construction, architecture, design, engineering and telecommunications, in our opinion, offer limited opportunity in merchandise trade. Has the Canadian Trade Commissioner Service concluded that whatever growth there might be in the merchandise trade would happen without their encouragement and assistance? The Province of Saskatchewan looks after its own affairs for almost half of the total export.

The Canadian government has indicated that service trade and investment are important priorities. However, it is not clear how they are they gauging progress in these areas. It is not at all straightforward to measure growth in services or investment, especially compared to merchandise trade. The statistics are unreliable and based on a large number of assumptions. The following table created by the Global Affairs Canada with data procured from the Statistics Canada, however, tries to shed some light:

Canada-India – Trade in Merchandise, Service and Foreign Direct Investment

(US$ millions)

Source: Statistics Canada and Global Affairs Canada

The data does indicate that there is some growth in the Canadian exports in services, but the Foreign Direct Investment (stock) has remained almost unchanged.

In an encouraging trend, the service trade has almost doubled in the past five years. On the other hand, the actual numbers are not very high (it has grown from US$1,038 million in 2011 to US$1,432 million in 2014, the latest year for which data is available). It is not fair to compare this number with the service trade with certain other countries such as the United States, to whom Canada exports more than US$100 billion. Similarly, the FDI with India (both ways) of approximately US$3 billion does not compare with that of the United States of US$626 billion.

It is our understanding that a number of Canadian investors are waiting for the FIPA to come into effect before they will seriously consider investing in India[2]. But, such is not the case with Indian investors investing in Canada. Therefore, it is disturbing to find that number declining from US$3 billion range to US$2 billion in recent years. We have not seen any analysis for this decline. Some interlocutors have indicated that some Indian investors have become cautious seeing the problems Indian investors are facing in the UK. However, the UK government is trying seriously to resolve problems. We would like to know if the Canadian Government has any serious plans to bolster the investment scene with India.

Merchandise Trade

While the Government of Canada, in our opinion, seems to be ambivalent about the merchandise trade, we consider that this (particularly Canadian exports to India) is the area which requires immediate and serious attention from all concerned along with all the work Canadian Trade Commissioners are doing in education, S&T cooperation, and commercial services areas. The question is imminent. How can the Canadian Government assist Canadian exporters to expand the overall merchandise trade in terms of value and diversity of products exported?

According to Statistics Canada, Canada’s major export items (almost of 75% of total exports in 2015) are agricultural products such as lentils and dried peas, and unprocessed minerals and ores such as copper concentrates and iron and steel scraps (all these are well promoted by the provinces). Therefore, concentrated effort on the part of the Canadian Government is required to expand exports in the other 25% products exported. The areas include:

1. Paper, Paperboard and Articles Made From These Materials
2. Nuclear Reactors, Boilers, Machinery and Mechanical Appliances
3. Aircrafts and Space crafts
4. Electrical or Electronic Machinery and Equipment
5. Iron and Steel and articles of Iron and steel
6. Optical, Medical , Photographic, Scientific and Technical Instrumentation
7. Inorganic Chemicals and Compounds of Precious Metals and Radioactive Elements
8. Plastics and Articles Thereof
9. Aluminum and Articles Thereof
10. Miscellaneous Organic Chemical Products including Vitamins, Alkaloids
11. Motor Vehicles, Trailers, Bicycles, Motorcycles and Other Similar Vehicles
12. Pharmaceutical Products

While we would like to know what is the Government of Canada’s analysis on the subject and plans (if any) to expand the export of finished products. We have not found much information in the public domain. In our judgement, as Canada presently exports to India in all the twelve areas above, we should look into these areas first. We may look into new areas at a later time. Analyzing the above areas may not be easy, potential in new areas may be even more difficult. In our discussions with exporters presently exporting to India, a number of them mentioned that even expansion of their present operations will be difficult for a variety of reasons.

Looking at the reality and understanding what the roadblocks are, these exporters also say just exporting finished products are also slowly disappearing. Co-production, joint venture and manufacturing in India for third country markets are also becoming more and more important for retaining the export base.

Let us look carefully how the twelve areas can be strengthened for expanding export.

Paper, Paperboard and Articles Made From These Materials

Canada exported US$201 million of Newsprint (HS480100) to India in 2015. Sadly, the export value is decreasing consistently over the last six years. In our opinion, it is due to increasing competition in paper and paperboard (HS48) from China, Korea, Russia and the United States, declining consumption of newsprints, and most probably the transportation costs from Canada to India. While a detailed market research is definitely warranted, a recovery or enhancing exports in this area seem difficult. We have been advised that if there is any potential in paper manufacturing, it would be in joint venturing with Indians employing Canadian technology. However, Canadian paper exporters, particularly from the Province of Quebec, should endeavour to recover to their levels of 2011 and increase the levels of paper related exports to US$300 million mark by 2017. With Quebec officials already present in India, in our opinion, there should be a joint exercise of exporters, Quebec and the TCS.

Regarding the export of wood pulp (HS4801 to 4806), the main competitors are the USA and Indonesia. While the Canadian exports have remained in the range of US$150 million over the years out of the total exports to all countries of approximately US$7 billion. We consider that Canada definitely can penetrate further into the Indian import market of approximately US$2 billion, but would require joint concentrated effort (similar to paper export) of the pulp manufacturers, provinces (such as British Columbia) and the Canadian Government. While the penetration may not be as intensive as for daals (lentils and dried peas) by the Province of Saskatchewan, we feel that the export of wood pulp can rise particularly with joint venture projects with Indian investors.

Nuclear Reactors, Boilers, Machinery and Mechanical Appliances

Canada has exported in the last ten years, an average of US$144 million to India in this sector (HS84). It is, however, not significant as world export to India was more than US$30 billion. Canada originally provided India its CANDU technology and India continues to thrive in the same technology though improved and expanded upon it. The dynamics of expanding the nuclear trade between Canada and India is probably one of the most complex subjects for us to fathom. Canada started cooperating with India in nuclear technology from 1940s and in 1954 with CIRUS (Canadian-Indian Reactor, U.S.) – a research reactor with nuclear fuel being delivered by the United States. The two countries signed an export agreement to sell early CANDU reactors to India in 1963. The relationship fell apart when India detonated an atomic bomb in 1974. Things did not improve with India’s (as well as of Pakistan’s) nuclear tests in 1998. In 2008, however, an American led policy in which India agreed to separate its civil and military nuclear facilities and to place all its civil nuclear facilities under International Atomic Energy Authority (IAEA) safeguards was approved by the IAEA and the Nuclear Suppliers Group (NSG), a group of 45 countries that seeks to contribute to the non-proliferation of nuclear weapons by establishing guidelines for nuclear and nuclear-related exports. This led to Canada concluding its own bilateral nuclear cooperation agreement with India in 2010, and an appropriate arrangement in 2013, which stipulates that Canadian nuclear materials can go only to IAEA safeguarded facilities. Canadian uranium started flowing to India in December, 2015. At present, India is struggling to be a member of the NSG which would provide them access to nuclear technologies from 48 countries including Canada. Since 1974, India has developed CANDU technologies in a major way, whereas Canada has been reducing its efforts in nuclear technologies, particularly CANDU technologies since 1990s. We consider that it would be useful for both Canada and India to start cooperating. We have been told by experts that this can mean multi-billion third country exports.

Aircrafts and Space crafts

Canadian exports in aircrafts and space crafts (HS 88) averaged above US$100 million in the last ten years (2006-2015) with its peak in 2012 when it reached almost US$300million level. Most of the export has been in the sales of aircrafts. While the import-export data of India for aircrafts and space crafts (HS88) is somewhat unreliable as India has reported that it has imported US$11.2 billion in the last ten years compared to US$22.3 billion that has been exported to India (as reported by the UN Comptrade Database), it seems certain that the aerospace market is going to expand in India. In fact, some industry experts like S.P. Shukla of Mahindra Aerospace forecasts that it would be third largest aerospace market by 2020.

The competition from the major exporting countries to India in this sector like the USA, France, the United Kingdom and Germany will continue to be severe. However, we consider that the Canadian exports in this sector (HS88) can definitely increase to the level of US$1 billion by 2020 as the Indian market is expanding. The requirements of the India airlines companies and even the Indian defence sector may look towards the Canadian exporters. It is imperative that the Canadian Government has to put this sector as a priority. While the Canadian export controls regime is more lenient to India than a decade ago, it should take a lesson from the Americans who are promoting aircrafts and defence exports to India vigourously.

One way forward would be to sell Bombardier aircrafts to Indian airlines. In fact, it would be an interesting concept if Bombardier can assemble aircrafts in India with Canadian components and also get into the MRO business. We would also suggest that some of the old de Havilland aircrafts can be manufactured in India under license.

India is also becoming one of the largest defence equipment buyers in the world. While, to our knowledge, there is no military aircraft manufacturer in Canada, Bombardier’s Military Aviation Service (MAS) along with other Canadian aerospace companies should be encouraged to enter or increase participation in the Indian defence market. The Canadian Government should also ask the industry associations like Aerospace Industries Association of Canada (AIAC) and Canadian Association of Defence and Security Industries (CADSI) to encourage their members to move into the Indian market. It is our understanding that these organizations look into the traditional markets like the US and the UK more rather than the emerging markets. They should India to its priority market destinations.

Electrical or Electronic Machinery and Equipment

This is an area where we found great difficulty in analysing and charting a course for future trade promotion activity prioritization. It is a very mixed bag. While Canada’s total export of HS 85 – Electric and Electronic Equipment to India has been in the US$70 to US$ 90 range (not unsubstantial) in the last five years, though it is small compared to Canada’s total exports to all countries in this area which is in the range of US$15 billion and imports of US$45 billion in the same period (one of the largest for Canada). It is also difficult to devise a strategy for export promotion for HS85 as the components vary from electric motors to telephones to printed circuit boards in a multitude of industries. According to Statistics Canada, there are 377 commodities are exported to India  in HS 85. Canadian exports to India vary from a few dollars to US$8 million for some commodities. Not surprisingly, we also found a large number of Canadian trade associations dealing with HS85, but with little real activity in the export promotion to India. We recommend that the Government of Canada assist these associations in their export promotion activities and the Canadian Trade Commissioners abroad and in Canada to assist individual exporters and potential exporters whether they are export-ready or not. We are unable to suggest a concerted effort as we did for the aircrafts and space crafts sector.

Optical, Medical, Photographic, Scientific and Technical Instrumentation

While Canadian exports of products in HS 90 – Optical, Medical, Photographic, Scientific and Technical Instrumentation is somewhat as diverse as HS 85 – Electric and Electronic Equipment, it has 180 commodities (less than 377 for HS 85). They range from optical fibres to microscopes to survey equipment. India imports from all countries approximately US$4 billion every year and exports US$1.5 billion in this sector. The major competition for Canada is from the USA, China, Germany and Japan. In 2015, Canada’s ranking was 21^st for the Indian importers list. To put it mildly, it would be a hard battle to reach the levels of Korea, Singapore or the UK.

Canada exports to India in almost all the HS 90 commodities (approximately US$50 million per year in the last ten years) with an exception of a few items. As it is difficult to deal with all the items, we consider that it will be a good idea to spend energy and resources for a selection of these. We suggest that concerted effort is given to the following product groups:

HS 9001 – Optical fibres, lenses, mirrors, prisms, etc.

HS 9006 – Photographic cameras (except cine), accessories

HS 9013 – Liquid crystal devices, lasers, optical appliances

HS 9015 – Survey, oceanographic, meteorological instruments etc.

HS 9018 – Instruments etc for medical, surgical, dental, etc.

HS 9025 – Hydrometers, thermometers, barometers, etc.

HS 9026 – Equipment to measure fluid flow, level, pressure, etc.

HS 9030 – oscilloscopes, spectrum analyzers etc.

HS 9031 – Measuring or checking instruments

We encountered difficulty in identifying Canadian trade associations with the capability of promoting exports in the above areas. It is also not recommended to go to the mainly American associations with members in Canada to launch such Canadian promotional drives. On this basis, we recommend that the Canadian Trade Commissioners abroad and in Canada assist individual exporters and potential exporters whether they are export-ready or not. In fact, the government departments should join together to organize trade missions for promoting exports. Canada should aim to reach an export level of US$300 million by 2020 – an optimistic goal, but in our opinion, with adequate drive is attainable.

Chemicals including Inorganic and Organic Chemicals and Chemical Products, Compounds of Precious Metals, Radioactive Elements, Vitamins and Alkaloids

This area comprises of HS 28 – Inorganic Chemicals and Compounds of Precious Metals and Radioactive Elements; HS 29 – Organic Chemicals (Including Vitamins, Alkaloids and Antibiotics); and HS 38 – Miscellaneous Chemical Products. This, in our opinion, is a major trading area of Canada with approximately US$11 billion per year in exports and US$15 billion in imports. Canada exported to India around US$300 million per year over the last ten years. While this is not insignificant, we feel that this number can definitely go above the US$1.5 billion by 2020 for helping India with its “Make in India” goals. In our estimate, the areas to concentrate would be in the following areas:

HS 2844 – Compounds of precious metals, of rare-earth metals, of radioactive elements or of isotopes

HS 2818 – Artificial corundum, whether or not chemically defined; aluminium oxide; aluminium hydroxide.

HS 2803 – Carbon (carbon blacks and other forms of carbon not elsewhere specified or included).

HS 2852 – Compounds of mercury, whether or not chemically defined, excluding amalgams.

HS 2903 – Halogenated derivatives of hydrocarbons.

HS 2937 – Hormones, prostaglandins, thromboxanes and leukotrienes

HS 2924 – Carboxyamide-function compounds; amide-function compounds of carbonic acid.

HS 2934 – Nucleic acids and their salts.

Plastics

This area comprises of HS 39 – Plastics and articles thereof. While this is a major trading area of Canada with approximately US$12.5 billion per year in exports and US$15 billion in imports. The major country where Canada exports is the USA (89% of total) and 86% of Canadian imports come from the USA and China. Canada exported US$29 million to India in 2015 in HS39 – a mere 0.2% of total Canadian exports. Canadian exports have been mainly in the following products:

HS 3901 – Polymers of ethylene, in primary forms.

HS 3915 – Waste, parings and scrap, of plastics.

HS 3905 – Polymers of vinyl acetate or of other vinyl esters, in primary forms

HS 3902 – Polymers of propylene or of other olefins, in primary forms.

HS 3926 – Other articles of plastics

HS 3909 – Amino-resins, phenolic resins and polyurethanes, in primary forms.

Our initial response would have been not to focus on this sector, but we have been informed that India has a tremendous appetite for plastic and the consumption would double by 2020, according to Kamal Nanvaty of Reliance Industries Ltd. of India. We suggest that Canada actively pursue investors for manufacturing in the plastics industries. Such an investment would not only enhance plastics exports to India, but would also enhance exports to other countries in Asia and Africa. It should, however, be remembered that competition for enticing investments in this area is high, particularly from the USA, UK and Mexico. Without such an investment procurement drive, we estimate that the plastics export to India cannot reach the US$50 million per year by 2020.

Aluminum

This area comprises of HS 76- Aluminum and articles thereof. This is an important trading area of Canada with approximately US$10 billion per year in exports for all countries and US$4 billion in imports. The major country where Canada exports is the USA (89% of total) and 87% of Canadian imports come from the USA and China.

India imports significant amount of aluminium and articles thereof. In 2015, it imported US$3.6 billion from 139 countries with the leading exporting country being China. Canadian exports to India has varied from US$54 million in 2011 to just US$8 million in 2013. In 2015, Canada exported US$16 million of aluminium and aluminium products (less than 0.2% of Canadian total exports and 0.4% of Indian imports). Canada earlier used to export a major quantity of unwrought aluminium and aluminium bars. In fact, ALCAN used to have a major subsidiary in India called INDAL. It is very difficult to say whether the drop in export has anything to do with the change of ownership from ALCAN to Rio Tinto. It is our opinion that a major export drive for India may not result in big gains. We have also not seen any appetite among Indian investors in aluminium plants in Canada.

Motor Vehicles, Trailers, Bicycles, Motorcycles and Other Similar Vehicles

The HS 87 – Motor Vehicles, Trailers, Bicycles, Motorcycles and Other Similar Vehicles is probably the largest trading sector of Canada. However, of the average US$118 billion trade in the last ten years (US$55.5 in export and US$62.9 in import), more than 90% was with the two NAFTA countries, the USA and Mexico. Almost 97% of Canadian exports in this sector goes to the USA. This is a legacy of the Canada-US Auto Pact, signed in 1965.

Unfortunately, outside of NAFTA the trade is limited. It is even worse with India. In 2015, Canada exported approximately US$9 million and imported about US$105 million. India successfully exports auto-parts to Canada, but Canada has not found any niche in the Indian automotive market. It is our opinion that a major export drive for India may not result in big gains as in the aluminium sector. We have also not seen any appetite among Indian automakers such as Tata or Mahindra to invest in Canada. We know that the General Motors and Ford have major operations in India, but we are not aware that the General Motors Canada or Ford Canada has any direct linkages with their counterparts in India.

Pharmaceutical Products

This area comprises of HS 30 – Pharmaceutical Products. While Canada exported on the average approximately US$5.9 billion per year in the last ten year, it imported significantly more – US$11.4 billion. The major country where Canada exports is the USA (71% of total). Contrary to a number of other products, Canada imported only 38% from the USA. Switzerland and Germany are other large import sources.  Canada imported US$169 from India in 2015. It seems that India’s export to Canada has increased almost ten times in the last ten years. Most of the imports are in generic drugs with a few Indian companies also manufacturing them in Canada.

Our initial response would have been not to focus on this sector, but pharmaceuticals are intriguing products for trade. The India pharmaceutical companies manufacturing in Canada may not be exporting much to India, but they are exporting to other countries. As any profitable export is always beneficial to Canada, we would like to support their operations in Canada and encourage them to invest more. We, however, have to ascertain that these companies maintain the reputation of Canadian pharmaceutical products in the export trade by following all Health Canada testing protocols and uphold standards.

[1] While Saskatchewan is in size 6% of Canada and 3% in terms of population, in 2015 it exported 44% in value of all Canadian exports to India.

[2] Negotiations of Canada-India FIPA started in 2004. It was signed in 2007, but the ratification of the treaty is still pending with no final date in sight.