For decades, Canada has sought stronger trade and investment links with countries beyond traditional markets in North America and Europe. And in recent years, slowly, surely — but quietly — Canada has been diversifying its links into other regions (see here).
India, a fast-growth country with great promise, is a natural candidate to consider. In a new IRPP study, co-author Someshwar Rao and I take a detailed look at Canada’s economic relationship with India — particularly the potential to strengthen this relationship through a trade deal.
Negotiations on a comprehensive economic partnership agreement (CEPA) have been underway for years, but progress has been slow. Recently, however, optimism has increased thanks to the election of a new majority government in India committed to economic reforms and Prime Minister Narendra Modi’s visit in April — the first to Canada by a sitting Indian PM in over 40 years. During this visit, new commercial agreements were announced, the Canada-India relationship was formally upgraded to a “strategic partnership”, and the two PMs said that they would push to conclude CEPA talks in 2015.
Where India fits into Canada’s broader trade objectives
This trade deal would be Canada’s second in the Asia-Pacific region (after South Korea) and its first with a ‘BRICS’ emerging market country. Taken together with the decades-old NAFTA (North American links), the recent Canada-EU deal (Atlantic links) and possibly the Trans-Pacific Partnership (Pacific links) — which appears to be nearing its final stages of negotiations — the CEPA with India would mean that much of Canada’s trade would benefit from explicit trade preferences.
India has significant potential
We find that economic links between Canada and India have grown quickly in recent decades but remain weak. But several factors suggest considerable untapped potential in India over the long term. The two countries can leverage strong social ties because of the large Indian diaspora in Canada; they share English as a common business language, have legal systems based on British common law, and democratic political institutions. Moreover, estimates from the Canadian government’s “gravity model” suggest that, among the high-growth trading partners with which Canada doesn’t have a trade deal, exports to India showed the largest underperformance (whereas we already “overtrade” with China, according to the model).
But realizing this potential requires action
India’s economic growth outlook is among the most favourable in the world, but many of India’s potential strengths could turn into weaknesses if they’re not properly managed. Actions are needed on several fronts, including to:
- develop the country’s infrastructure;
- combat corruption;
- improve government bureaucracy;
- encourage female labour force participation; and
- enhance education and health outcomes.
Finalizing the CEPA won’t be easy
This trade deal could open the door to a stronger economic relationship, but finalizing negotiations will be hard because the most promising areas are also the most politically sensitive.
While we’re not privy to the negotiations, three key areas are likely to be particularly contentious: (1) foreign direct investment, (2) temporary labour mobility, and (3) services — in each case, bilateral ties are not well developed, barriers to international commerce are high, but the potential gains are great from further developing each country’s comparative advantages.
If the CEPA is successfully implemented, then the Canadian sectors that would likely benefit the most are natural-resource-based industries (e.g., agriculture, energy, fertilizers and precious stones) and providers of high-value services (finance and education). Consumers and businesses in both countries could enjoy more product variety and lower prices. Nevertheless, Canadians would likely face adjustment challenges in some business services (computer, software, ICT, outsourcing, call centres) and in lower-wage, labour-intensive manufacturing (textiles, apparel, chemicals and steel).
But there are other options
If a Canada-India trade deal is concluded by the end of 2015 as hoped, we expect a deal that’s far less ambitious and more limited in scope than the recent Canada-EU deal. And if things aren’t finalized in 2015, we still see a compelling case for Canada to remain at the negotiating table to conclude a deal, even if it can’t be struck as quickly or as comprehensively as some would like.
However, if such a “comprehensive” deal isn’t feasible, then this relationship might still be jump-started with a less-ambitious trade deal that could later be scaled up or down as needed. Within this smaller deal, Canada might allow temporary migration of skilled Indian labour (subject to a cap) in exchange for better access to the Indian market for Canadian investment or services.
And even without a trade deal, existing personal and business networks could be better leveraged through, for instance, the India-Canada CEO Forum; Canadian universities’ alumni networks; and educational exchanges among students, professors and researchers.
Let’s be realistic
Our study concludes that India should be a high priority international market for Canada over the long term. But it’s important to set reasonable expectations for what can be accomplished in the near term. Improving Canada’s economic engagement with India will require sustained effort. The biggest economic opportunities will likely emerge gradually as the relationship becomes closer, more open and more competitive for businesses in each market. Engaging India commercially has already been a long process for Canada. There is still a long way to go. The potential rewards are large, but they shouldn’t be overlooked or oversold.
 A gravity model makes predictions for trade flows taking into account factors such as GDP, distance, the use of English or French, producer price differences, free trade agreements and WTO member status.
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