Proceedings of the Standing Senate Committee on 
Foreign Affairs and International Trade

OTTAWA, Tuesday, October 27, 2009

The Standing Senate Committee on Foreign Affairs and International Trade met this day at 5:33 p.m. to study on the rise of China, India and Russia in the global economy and the implications for Canadian policy.

Senator Consiglio Di Nino ( Chair ) in the chair.

[ English ]

The Chair: Welcome to this meeting of the Standing Senate Committee on Foreign Affairs and International Trade. The committee is continuing its special study on the rise of China, India and Russia in the global economy and the implications for Canadian policy.

Appearing before the committee today is David T. Fung, immediate past chair of CME, Canadian Manufacturers and Exporters, and chairman and CEO of ACDEG International Inc. I want to make sure that was said correctly, sir.

Senator Grafstein: What does that stand for?

The Chair: You can ask him later, when you ask a question.

David T. Fung, Immediate Past Chair of CME, Canadian Manufacturers and Exporters, and Chairman and CEO of ACDEG International Inc.: Yes, I will explain that later.

Senator Grafstein: I cannot wait.

The Chair: Mr. Fung is accompanied by Jean-Michel Laurin, vice-president, Global Business Policy, Canadian Manufacturers and Exporters. As chairman and CEO of the ACDEG group of companies, Mr. Fung has business partnerships in North America, Europe, and Asia. Amongst other things, Mr. Fung is currently co-chair of the members of the Canada Foundation for Innovation, vice-chair of the Canada China Business Council and senior fellow of the Asia Pacific Foundation. That is quite a mouthful.

We extend a warm welcome to both of you gentlemen. I believe that Mr. Fung will make some opening remarks. Please proceed, Mr. Fung.

Mr. Fung: Thank you for inviting me here tonight. I am glad to have this opportunity to discuss with you the issue of the rise of China.

You have a thick package in front of you. I think you all have a copy of it. I will go through the slides quickly because they are meant to be illustrations. I will not read any of them. As I flip through the deck, there is a slide number on the bottom right-hand corner. If we should start to move faster than normal, I will indicate the page number.

I came to this country 43 years ago from Hong Kong. To some degree, China has some meaning to me still. I go back there four to ten times a year. I just came back a week ago.

For the next 15 minutes or so, I would like to talk about the issue of manufacturing, about the rise of China, about the impact that it has on Canadian industries, and about some of the policy options that I believe the government should consider in helping us to maintain our future security and prosperity.

On page 3, you can see what manufacturing in Canada means. I emphasize those letters that are not white, the highlights. I thought that I might be showing this in multi-colours on a screen, but we will use it the best we can.

Page 4 shows how diversified manufacturing is. Often, people call manufacturing a vertical sector, comparing it to high-tech and to other sectoral industries. That is wrong. Manufacturing is a horizontal sector. It covers high-tech, smokestacks and filmmaking, if that is what you are doing.

The following page shows you how the financial crisis has impacted on Canada's manufacturing sector as measured by Statistics Canada.

Statistics Canada's definition of manufacturing is obsolete. Hopefully, you will understand what I mean by the end of this presentation.

Page 7 is manufacturing in Canada. Again, in one quick glance you will see that it is a significant sector within Canada.

Page 8 shows more how manufacturing, as defined by Statistics Canada, is impacting on our economy. When I finish showing how Statistics Canada is under-measuring manufacturing, I hope you will agree with me that manufacturing is fundamental to the future of this country.

Page 9 shows that manufacturing as a sector has been the one able to meet the Kyoto agreement.

We should ignore page 10 because it does not show up well at all, but we want to say that, despite the growth of manufacturing, greenhouse gas emissions from the manufacturing sector actually has declined.

In Canadian Manufacturers and Exporters, we believe that Canadian industries can no longer stay at home. Staying home is not an option. Our job is to help companies go global and become competitive.

Page 12 shows you that all prosperous nations in the world are trading nations. The largest exporter of them all is not China, the United States or Japan; it is Germany. It shows how important it is for us to understand how to create value. The issue very often is not a case of high wages. It is not a case of working harder, but of being able to provide value that the rest of the world is willing to pay for.

The next page shows how China has grown much better than we have, despite NAFTA, North American Free Trade Agreement.

The following page shows how China has grown. That is old hat, so I do not want to comment on it.

On page 15, I want to draw your attention to the fact that China produces more engineers than any other country in the world. These are statistics compiled by Duke University after two years of study. This is not a simple, flimsy study. It shows the Chinese are graduating 500,000 technical degrees a year. Very often, we say that the quality may not be that good. If you assume half of them are no good at all, you still look at the second line, and they are producing 250,000 of these engineers and technologists, when in Canada I am one of 180,000 professional engineers. China more than doubles our total engineering population every year.

The following page, on doctorate degrees, is even more scary. By 2002, China already graduated more doctorate degrees per year in science and technology than the United States. We have been accusing the Chinese of copying and stealing our intellectual property; we had better learn to steal from them soon.

The following page shows how Chinese students are occupying many spaces in our graduate schools in Canada. If you think of the number they are graduating in China and how they are dominating the student population in North America, not just in Canada, we have to have some concerns.

The following page shows how China's automobile industry has grown. People worry about China catching up on us; they are 12 years too late. China has just announced they have surpassed 10 million vehicles assembled by the end of September of this year. They are on target to assemble 12 to 13 million vehicles in China alone. That is the total of North America this year — Mexico, the United States and Canada. If you add on Japan and Korea, the biggest auto market is in North Asia. That is shown on page 19.

Page 20 shows how the U.S. import market has moved rapidly into the hands of the Chinese.

The following page shows that the Chinese actually are now surpassing Canada in their imports into the United States.

Page 22 shows exactly the same thing but in a more graphic fashion, to show that now China has taken the definitive lead as the exporter into the United States.

Why is this happening? On page 23, I want to draw to your attention that the scope of manufacturing has changed. Statistics Canada's definition of manufacturing is the middle portion, on production systems and so forth. However, the real values of manufacturing actually are the ones above and below it.

I would like you to remember this particular page because this is fundamental to the strategy we need to take in the future for the prosperity of Canada.

The next page shows, again, how manufacturing has moved from being solid products into more intangible products. Our future, on page 25, shows how we need to convert knowledge into value. I would like you to remember again, that is a fundamental step that we need to take in Canada if we are to maintain our prosperity.

The following page illustrates further how we need to move from the old definition of fabrication to the new definition of manufacturing and manufacturing services.

Page 27 shows that the old-style manufacturing, vertical-integrated manufacturing under one roof, is passé. Today, we manufacture products with components from all around the world. There are many jobs, except they are different jobs.

Page 28 shows you that the definition of manufacturing is creating and delivering value via tangible goods. You will notice that fabrication may or may not be part of that process.

Page 29 shows some of the driving forces in global value chains.

The following page shows the Apple iPod. This was a study done by Stanford University to show that the Chinese make $4 out of $150 in the export of an Apple iPod. That is not where we want to go. California makes 25 cents on the dollar by not touching it. Every container coming to North America contains 136,000 iPods. At $150 per iPod, you can see how California is making money while we are subsidizing them.

The next page shows the importance of understanding the value chain. Very often you hear people talking about going up the value chain. That has been proven to be invalid in terms of maintaining our jobs and prosperity. Professor Clayton Christensen of Harvard University demonstrated in his book in 1998 that what is important to understand now is this value curve. It is not the product; it is activity that we need to conduct. Hong Kong is said to be a 90 per cent service economy. I suggest to you that is a wrong understanding of the Hong Kong economy. Hong Kong also controls 110,000 factories in China. They employ 11 million workers in China. Without those factories and without those workers, half of Hong Kong would be unemployed. Hong Kong is not a service economy; it is the epitome of a manufacturing services component economy.

The following page shows one of our well-known economists saying that the world will become smaller because of high oil prices. Page 33 shows the book that is widely read. I want senators to understand that this book is misleading. This is a book based on someone who is sitting behind a desk and talking about manufacturing when he really has very little understanding of how manufacturing is done.

I am not mincing words because he is doing tremendous damage to this country by giving people the wrong idea that some of the old jobs will come back; they will not.

The following page, which he uses to justify his conclusion about the increasing production of steel in the United States in 2008, was based on the wrong understanding of how that came about. It came about because of the recession in the United States. There were fewer containers coming from Asia to North America.

As a result, we do not have as many empty containers going back. On those empty containers, the freight rate tripled during that period of time. That means wastepaper and scrap steel can no longer afford to go to Asia with that kind of freight rate. The market collapses in North America, so all the mini mills in North America using scrap steel increased their production dramatically.

I want to express to you why I spent time on this curve. Sometimes, we need to be careful in looking at evidence. Without understanding the background of the evidence, we can draw the wrong conclusions.

The following page shows the plasma flat-screen TV you have at home. It costs $700 and the freight component is $10. Do we really care if it becomes $20 or even $30? It is important. Old jobs will not come back.

The following page shows the driving forces — Asia, logistics and sustainability. On the following page, I want to draw your attention to the white line and the one right above it, which would have been blue if it were in colour. It shows China is no longer shipping only slippers, blouses and garments. It is shipping high-value and industrial goods.

The following page shows how important it is to understand bilateral trade. This is a major mechanical company and in this room I will tell you that it is Caterpillar. They are the third-largest industrial exporter out of China. The first is Toyota. The second is General Electric. Of the top 10, none of them are Chinese. That is important to understand. If the United States Senate puts a 27 per cent duty on Chinese imports into the United States, the first victim will not be the Chinese. The first victim will be all the Caterpillar assembly plants in the United States.

The first beneficiary of that measure would be Komatsu of Japan, which competes with Caterpillar around the world on heavy construction equipment. It is no longer that I buy something from you and you buy something from me. Without understanding some of these issues, wrong policies can have unintended consequences.

The following page shows how the Chinese achieve this by using containers. That is the top part of the curve, showing how containers are becoming dominant in terms of global trade, especially high-value trade.

The following page shows even more dramatically how Chinese containers are dominating the world. China is becoming the hub of a lot of manufacturing activities.

With all this, the Chinese have been working very quietly and dramatically going forward. The following page shows the top 10 container ports in the world. On the right-hand side, at the bottom corner, it is our British Columbia ports. That is our Asia-Pacific gateway and corridor. The Asians have left us behind while we have been sleeping.

Page 43 shows that many of the containers coming through the West Coast come to Ontario and Quebec. The following page shows the sad story that Ontario and Quebec have very little intention of shipping things back the other way.

In fact, page 45 shows CN statistics that we are shipping a lot of empty containers back with Canadian air. Canadian air is cleaner; the Chinese love it, except they do not pay for it.

Page 46 shows international air cargo. How did Hong Kong become the world's largest air cargo terminal? On the right-hand corner you will see that our largest air cargo terminal, Toronto's Pearson International Airport, also is not ranked in the world. Yet, the following page shows how important air cargo is. At 1.3 per cent of the volume, it commandeers 34.5 per cent of the value. This is the crux of the issue. It is value that is important; it is not volume.

The following page shows the Hong Kong International Airport. You see the circle on the right-hand side. I want to illustrate how Hong Kong becomes dominant is because, when they build an airport, they intend to also capture its value.

Page 49 shows the integrated economic zones that Hong Kong goes about doing their work. Then, in contrast with the following page, how we went about doing the Mirabel airport. We built an airport and we have nothing around it except fields.

On page 51, Transport Canada is proposing to sell off the land around the Mirabel airport, which is exactly the thing Hong Kong would never do. If we are going to use the airport as an economic engine, there has to be an integrated economic zone around the airport.

The following page shows how the world has changed. Five years ago, Via Systems had six plants in North America making printed circuit boards. They shut it down, moved two plants to Shenzhen, 12,000 workers, and today and every day all the production is being flown back to North America. Without these shipments, Celestica would have to shut down. This is now global manufacturing, not local manufacturing. If we are to participate in that, we need to get rid of some of our obsolescence, bilateral air agreements, and we need to open up the skies.

The following page shows the Ambassador Bridge. We talked about all the congestion. We are proud of $2 billion going through that bridge every day, but that is an enormous amount of risk for this country to put so much of our trade on one single bridge. Yet, when we built the St. Lawrence Seaway, we built 19 ports and most of them have been left unused. Fellow Canadians, we have invested in these ports and, yet, we have left them unused because this is the only continent in the world to use regulations to stop us from using water as a means of transport.

On the following page, again, it does not show up in a copy like this, in an animated slide. It shows that the world's movement of goods on long distance will be based on water and by rail. It is the short distance that will be by truck. When we talk about short-sea shipping in North America, we also move into the wrong concept as Massachusetts is illustrating. When we talk about roll-on/roll-off ships, you can only put one container per deck.

The following slide shows how China beat us to the punch. They would not use roll on and roll off but just stack the containers up. With a smaller barge, they can move a lot more goods. The cost of moving the same number of containers per unit would be one third of ours. The following page shows more on how they use simple cranes in order to achieve that, to turn the Pearl River Delta from an area of perpetual starvation to now the economic engine of China and of the world.

How can we participate in that? The following page shows how we use regulations to stop us from using water as an economic engine — the Canadian Coasting Trade Act, the U.S. harbour maintenance tax. General Motors is 150 metres from the port of Oshawa, but it puts auto parts onto a truck and drives 250 kilometres to Windsor to wait in line to go onto the Ambassador Bridge when there is a ferry between Detroit and Windsor. The General Motors truck cannot go onto the ferry despite the fact that they have space, because if it goes onto that ferry, it goes into the United States by water and will be subject to the U.S. harbour maintenance tax levy, which is based on the value of the cargo, not the volume of the cargo. Talk about shooting ourselves in the foot; this is how we make NAFTA uncompetitive, by using these kinds of outdated regulations.

Of course, Canada contributes to that with the Canada Customs cost recovery on new routings to make sure we cannot have any water routing develop across the Great Lakes.

The following page shows where our future lies — the thickening of the border. We have opportunities to provide products and services to make the border much more efficient and secure. Canada is participating in the third industrial revolution in terms of distributing and generating renewable power, buildings as power sources and energy storage mechanisms, and intelligent power grids.

On the following page, I show you how Hong Kong has developed an economy. They are not putting things under one roof. We need to copy that. We need to capture the advantages of the world and put them under our management no matter what the labels are.

The following page shows how our labour sector has changed. This is an illustration of the U.S. labour sector; Canada is not that different. We are moving away from agriculture and more towards production and services.

The next page shows how Hong Kong has advanced against all of us, even against the United States, in terms of capturing the value of services.

Page 67 shows that Canada is a leader in generating post-secondary graduates. Yet, the following page shows how, through the Canada Foundation for Innovation and other programs, Canada is ranking with the world in knowledge creation. We should be proud of our universities. We generate intellectual properties in terms of patents. This is described on the following page.

Page 70 shows that we do well in terms of the overall innovation score board, but the sad story is contained on page 71, which shows that we have not been able to convert that knowledge into value for the prosperity of our society.

Page 72 shows that we have no drivers to commercialize our products. The missing element for us, senators, is that we must become more ambitious. We have to understand the elements that will drive the economy. We have to copy the Chinese because, with the rise of China, if we sit back, we will not survive.

In summary, I have illustrated to you how the global value chain is dominating the manufacturing sector, how Asia is growing rapidly, and how infrastructure and logistics are dominant and fundamental to the competitiveness of NAFTA and manufacturing services. I emphasize the word "services" because the manufacturing services are the new frontier. Without manufacturing you do not need logistics, banking or transportation. All these elements that we call services are anchored through the fact that we have goods to move and goods to make.

We are not here to compete with China. China is a freight train coming down the tracks. If Canada stays home, we will be sitting on the tracks with a freight train coming at us. General Electric, Toyota and Caterpillar have shown us that the place to be is at the helm of the locomotive of that Chinese train. We are there to manage the Chinese. I cannot compete with 40 Chinese engineers, but I can manage 4,000 Chinese engineers. CME is ready and willing to be your partner in securing the future prosperity of Canada.

The Chair: Thank you, Mr. Fung. I will start with Senator Fortin-Duplessis.

[ Translation ]

Senator Fortin-Duplessis: What are your three main political priorities in terms of economy and international trade?

Jean-Michel Laurin, Vice-President, Global Business Policy, Canadian Manufacturers and Exporters: I can answer for the Association. You are asking about our three mains political priorities?

Senator Fortin-Duplessis: In terms of economy and international trade.

Mr Laurin: Our association wants a more competitive business environment in Canada; that is, a business environment that attracts and retains more investments in the manufacturing sector, in order for our companies to be more competitive non only in Canada but also on the world markets. We are talking about tax policies, for example, to encourage companies to invest in machinery and equipment, to encourage Canadian companies to invest more to train the workforce and to train on the job. We are talking about a system that promotes innovation for Canadian companies. Mr. Fung has explained this in a detailed fashion. I am thinking of innovation. We must take advantage of the great work and training done in our universities. We must work closely with the research sector, the academic community, and the business community.

In terms of trade, our priorities are to find new export markets for our Canadian companies and to sign free trade agreements that will also make it easier for Canadian companies to invest abroad. We must also make sure that the rules are enforced. Of course, it is not enough to negotiate agreements, you must make sure that these agreements are applied and that the Canadian companies have their fair share of the international markets.

These priorities, at the level of government policies, will increase the competitiveness of the Canadian manufacturing sector.

Senator Fortin-Duplessis: Mr. Fung might have something to add to this?

[ English ]

Mr. Fung: I missed the question. Can you repeat it, please?

Mr. Laurin: What are the policy priorities for manufacturing and trade policy in Canada?

Mr. Fung: We need to understand that we can no longer pay a worker to put a car door on at 30 times the rate that a Chinese worker can do the same thing. It is no longer doing the same thing and protecting our market. Our market is too small to protect. Canada must go to the world. In that process, it is not chasing up the value chain but understanding that, in the value curve that I showed, it is activities that are important — for example, designing a new automobile. That is more important than assembling an automobile. We have auto parts manufacturers in southwestern Ontario who are world-class leaders. Yet, they will not look towards North Asia as their market. With the empty containers that we have, we can ship those goods from Dofasco, in Hamilton, to Shanghai cheaper than we can truck it to Milwaukee. Yet, our manufacturers will not get on a plane and look at the other markets. That is why CME signed an agreement with Hong Kong bringing the Hong Kong trading houses into Canada, namely, to realize how much Canada can contribute to the world. Someone said that if Mohammed will not go to the mountain, the mountain will have to go to Mohammed. Those are the elements that the Canadian government must consider, namely, how do we encourage the growth of manufacturing services? How do we encourage the growth of added-value activities?

[ Translation ]

Senator Dawson: With all due respect to our witnesses, I would like to underscore the fact that when a document is tabled in only one language, even if it is in French, we normally ask if the Committee is willing to accept it.

Now, I have had the pleasure to hear Mr. Fung and Mr. Laurin at the Senate Standing Committee on Transport and Communications, on the topic of containerization. These witnesses have laid out the situation very clearly. Canada is letting an opportunity go by. We decry the Buy American Act. But the Jones Act and the Shipping Cost Recovery, amongst others, have, in practical terms, much more impact on the economic growth of our exports than the constraining policies adopted by some cities and states, south of the border.

Our committee must table recommendations. Senator Fortin-Duplessis has asked you about your priorities. I will ask you a similar question. In our report, which recommendations should we make in order to guarantee the full development of trade between Canada and China, in particular?

[ English ]

Mr. Fung: Let me say first that I am the one who takes full responsibility for sending you this particular presentation in English. My children are all bilingual. If I used my French, they would say that I was really abusing the French language. I fully recognize that I should have done better. Senators, my apology to you for not having been able to do better than that.

The Chair: Mr. Fung, it is not your responsibility. More often than not, we get only one language and we have it translated before we bring it to the committee. That was not done this evening for a number of reasons, for which your apology is not necessary, but mine is. I do apologize to my francophone colleagues. If they wish to ask me privately as to why it was not done, I will be happy to tell them. It will not help our situation now. Let us ask Mr. Fung to answer the question.

Mr. Fung: The priority for us has to be what I said. Remember that the definition of manufacturing is the creating and delivering of value via tangible goods, and converting knowledge into value. Those are the critical elements. As we move forward in terms of our recommendations, right now we are in discussions with DFAIT, Department of Foreign Affairs and International Trade, the Department of Finance and Transport Canada on the current Canada Gazette announcement of removing all duties on production machinery being imported into Canada or manufacturing inputs being imported into Canada. In essence, we are moving toward turning Canada into a duty-free zone. That is exactly what Hong Kong has done. Hong Kong has surpassed our per-capita GDP, gross domestic product, on a purchasing- power parity basis. This is a place with just a few pieces of rock above water, with 7 million people. They even have to buy the water they shower with. Talk about lack of resources. However, it has driven them to understand what the critical elements are to create prosperity.

In Canada, we have all the ingredients to do better than that. I showed you the graph on our post-secondary education system. It is one of the best in the world, except we are not deploying them to generate value. There is a need for a commercialization strategy in Canada. I would suggest to you, senators, the current approach toward commercialization is a failure. We cannot accept that.

Part of the reason for that is the way that we treat venture capital. We make venture capital so unwelcome to come into Canada. We may have the best inventors in the world but they would not be able to commercialize their product without proper capital and incentives.

In terms of a comprehensive set of recommendations, if that is what senators would like, CME will make a submission on some of the key priorities in our view.

The Chair: That would be a welcomed opportunity for us to receive further comments. Please send them to us and we will distribute them to our colleagues and they will become part of the proceedings and commentary.

Senator Andreychuk: There are many questions I could put to you. I certainly underscore the need for research and development and for enabling legislation to make us competitive.

It seems you have made your full case on Hong Kong and I would like you to comment on the levers on Hong Kong being in China. They have some capabilities now because they are being given those discretions within the Chinese government. Of course, if you look at the governance, there is a tension as to whether they will be moving more towards Mainland China in the long run, and that is of some concern. That is one thing.

The second is that very much all of what you have said has been prefaced by the fact that they have very cheap labour costs. In fact, that is why our companies have moved into China, for many issues. You have to look closely now. Something may be designed in Italy or Canada but made in China, and it is always because of the labour cost.

I would like your guess as to how long China will be able to withstand raising their labour costs. As their population gets developed, as they have access to international understandings and standards, the pressure within their country will be to raise labour costs to some international norms.

A further question is a curiosity. I have been studying the Panama Canal. I thank you for pointing out our West Coast port facilities and the attention we have been paying to them. They are extremely important.

I have been told that more goods go through the Panama Canal from the West Coast of the United States to the East Coast, and they go through the Panama Canal not by trucking or by air cargo. If that is the case, should we also be looking to our East Coast, not just the Great Lakes, which you have pointed out, as an alternative for transport?

Mr. Fung: Thank you for the questions. I will want to come back to address each of them. Mr. Laurin can add to them as we go.

In 1997, everyone said that China took over Hong Kong. In reality, it is the other way around. Hong Kong has taken over China. Everyone in China wants to be Hong Kong. Shanghai wants to surpass Hong Kong. Dalian calls itself the "Hong Kong of the north."

I want to point out to senators here that Hong Kong's success was not developed under China. Hong Kong's success was developed under a colonial system, under the British. Sometimes when we want to lecture the Chinese on democratic values, we have to be careful to understand that Hong Kong never sought democracy. The British did not discover democracy until 10 years before they had to hand Hong Kong over to China.

I can also tell you, senators, that Hong Kong will never fail. You are right. China will never allow Hong Kong to fail because they would never allow Hong Kong to do worse than under the British colonials.

Having said all of that, it is important to understand that Hong Kong is an extremely cosmopolitan place. Hong Kong is not cheap labour. It is more expensive to do business than in Canada.

Senator Grafstein: Taxes are lower.

Mr. Fung: For labour costs, the world progresses exactly the same way everywhere. Shanghai moved 10 million spindles to western China because they can no longer afford to operate the spindles. My friends in Hong Kong no longer want to make their shirts in China, and move the factories now to Cambodia and Bangladesh. Those are natural progressions, but the Chinese are not lamenting the loss of those jobs. They are saying that is the way it is; let us move on and go after higher-value jobs. This is the part that Canadians must understand. Let us not look in the rear-view mirror of the good old days. It will not help us at all. When I mentioned "let us manage China," your company has done exactly the thing we want every company in Canada to do.

If labour costs are cheaper in China, or in Peru, or in Mexico, it is where we should go. We are there to manage the world. We are not there to compete. If we stay home, then we are competing with the world.

Labour costs are immaterial, whether it is China, India or Bangladesh. Canada has to go global. We hope this is what your committee will recommend and formulate policy to encourage Canadian companies to go global.

On the Panama Canal, and the East Coast ports, if you had seen my presentation on the transportation side, you will notice I addressed both the West Coast and East Coast ports. I would suggest also that the current Atlantic Gateway policy will go nowhere because it is not based on the needs of the world. It is based on our own navel-gazing of thinking we should have an Atlantic Gateway but we do not know what it should do.

The Pacific Gateway corridor came with definitive objectives and reason. The Atlantic Gateway is a more political item that let us leverage the other coast to have something to talk about. However, that is not true either. I went to Halifax six times in 2006 to talk about the Atlantic Gateway. Unfortunately, Atlantic Canada took my Atlantic Gateway concept and turned it into an Atlantic Canada gateway concept, and dramatically scaled it down to become a regional and local issue. In fact, we have the opportunity to become a marine container hub for the whole of the East Coast of North America, as Busan, Korea, has done. This is not inventing new things. This is copying success of somewhere else.

Parliament can now have a major impact on the West Coast ports, especially in the United States, but with less impact on Canada because we are further north and we can get to Chicago faster than anyone can through the Panama Canal.

Senator Andreychuk: On the issue of competitiveness, we go to the rules on copyright and there is a lot of discussion. What would you say about all of the issues around protection of our patents, copyrights, and the issue of China, which is always the discussion in the World Trade Organization?

Mr. Fung: We also need to remember that there are companies that have operated successfully in China without losing their intellectual property: General Electric, Toyota, and LG of Korea. The horror stories we hear are often about people who have not taken the proper measures to protect themselves. Often, when we step on a plane, somehow we think that throughout the world the rules have changed. When I operate in North America, I need to protect my property rights. I ask for non-disclosure agreements. I put patents into the United States and into Canada.

My father took my hand when I was a little kid and, as a herbal doctor, he had 64 ingredients in his magic potion. He took me to one store and he gave them 30. They ground it together. He went to the next store and he gave them 20. He went to a third store, he gave them 10, and then he would buy the last one in the fourth store. That is how he would protect his intellectual property rights. Very often, it is our own fault for not understanding how the system works and not taking the necessary measures to deal with it.

As president of Chemetics, I built chemical plants on all six continents. When I went into China, I put my tanks in. For those of you who are not engineers, you may not know that in a tank, when we stir it up, the water without some baffles would just circulate and will not mix. We put baffles in there so when we stir it, it will mix. I put baffles above the water line. When the Chinese opened it up, they had to figure out why, or did they misunderstand?

The whole idea here is to frustrate, make it difficult for people to copy. It is a stolen-car theory. If somebody puts a steering lock on, it is not that the thief cannot open it but why bother? The next car does not have a steering lock.

If we want to protect our intellectual property, all we have to do is make it a bit more difficult. There are now more and more companies very able to protect their property rights, but not based on our North American system. It is understanding the Chinese system, putting patents in, having lawyers and people chasing after violators and understanding the local rules.

I fully agree with you. Currently, there are major abuses in terms of trademark and intellectual property rights, but the Chinese courts are very sensitive to international reputation and you have seen over and over again, given competent judges we will win in China. In order for the rule of law in China to take place, we better help them to train their judges.

Only 20 per cent of Chinese judges have any legal training. No matter how much we yell about rule of law, you cannot have rule of law when you have judges who have absolutely no understanding of the law. When I go to a court and it is an ex-army general who is a judge, it is pointless for me to talk about the law.

There are things that Canada can do to work with China, India, Vietnam and the developing world, where we can bring their standards and their value closer to ours, not by lecturing them but helping them to build infrastructure so they can function.

As I have already pointed out, China is now generating so much intellectual property, as you might have seen in one of my slides, they are leading Canada in terms of patent filing. Pretty soon, their internal requirement to protect their own patents will demand they put in an enforcement system that will be closer to our expectations.

Senator Grafstein: First of all, Mr. Fung and Mr. Laurin, welcome. I find this fascinating, enthusiastic and stimulating. If I have your position correct, you are asking us to reform the federal government, we should reform the departments of education, we should reform the departments of transportation federally, provincially and municipally because they are all involved, and we should reform our capital markets. Did I get it right?

Mr. Fung: Yes.

Senator Grafstein: First, China, I too have spent some time in China. I spent 450,000 kilometres traveling in China myself, and I do not speak Chinese except hello and goodbye.

Having said that, I discovered that everyone in China wants to speak English. You can go up to Xinjiang province, you can go to Chongqing, you can go to Hunan, you can talk to a guy on the street and he wants to practice his English. There is a thirst for English and knowledge.

Frankly, we have a thirst for education here but not as intense as I found in China. However, the Chinese do something different from us and they do administered acts, which we cannot do under our system — federal, provincial and municipal.

You must be familiar with the Three Gorges project. The mayor of Chongqing, a good friend of mine, told me what he had to do, which was first become the mayor of Chongqing, and then head of the Communist Party of Chongqing, and then become the head of the Communist Party of Szechuan province and, in the last three capacities, he was on the central committee. Therefore, he was able to ram through the Three Gorges to modernize that.

In Canada, we cannot quite do that. In China, a lot of the reformation led by Hong Kong was led by state corporations, where they had the capital and the manpower. The rule of law did not mean much, quite frankly. The commercial rule of law did not mean a lot because they could bulldoze through that.

Our problem is that we have a democratic system, which is different from China. They can force decisions and expropriate decisions, but we cannot expropriate an electrical line to put two lines between two provinces.

Let us stand back a little bit and ask what we can do.

Let us talk about transportation for a moment. I agree with you that we have not properly set it up, although there was great vision in this country back in 1957. I am a Liberal, but I admire Mr. Diefenbaker's Roads to Resources program and the transportation grids that he built. This country was built essentially on a transportation model, and we have not done that in the last 20 or 30 years, or 40 years, quite frankly.

The question is: Where do we get the willpower, the capital and the approach to do just one thing under your model, and that is to modernize our inland waterways? The system is there, but why can we not do that? You have analyzed the problem. We know the problem. Tell us how we do that.

Mr. Fung: Do you want me to answer this question before the other one?

Senator Grafstein: Sure.

Mr. Fung: I think you are curious about the name of my company. It is called ACDEG. I do not spell it out, A-C-D- E-G. A is for Amanda; C is for Celeste; D is for David, me; E is for Eric, my son; G is for Grace, my wife. That is the family. David and Grace have three children, and that is the "ACE." That is where the name came from. It is a family company.

Talking about how we compete with China, what you described, senator, is perfectly correct. However, every year, 40,000 Chinese vote with their feet to come to Canada because we have a better civil society. I am a Canadian because I admire Canadian civil society. I could have lived anywhere else. With my business today, with technology, I do not need to live in Canada at all. This is Canada. This is the model for the world. Of course, along with democracy comes a certain price to pay, and that includes consultation concerning the rule of law.

China is moving on to a model that Europe had. We have to remember that the Magna Carta did not transfer the power of the King to the common people; it only transferred to the nobles and landowners. That was in the year 1200. It took 600 years for Europe to get to the second French Revolution. It was 1848 before Europe achieved democracy as we know it today. China will need a transformation.

Senator Grafstein: I know China, and I am not worried about China's evolution from the special responsibility households in Szechuan province to major agricultural economic marketing boards. I know that growth and I understand it. Frankly, I am disinterested in China. What I am interested in is Canada. In other words, how do we modernize Canada in a democratic way to fulfill your particular objectives, which we all share?

I say water, yes. There is no question that water is more efficient and that rail is more efficient than trucking, from many standpoints, including carbon footprints. We have not talked about China's carbon footprints yet. We are paying for that cost. However, that is another question.

Let us just focus on water. You have made a good point. The Standing Senate Committee on Transport and Communications has studied your work. I have seen some of that work. I followed some of your work, as a matter of fact.

Having said all that, just focus on water for me. The natural transportation system that we have been blessed with in this country, which is the Great Lakes and now the Seaway, how do we make that more efficient, effective, productive and competitive for the shipment of goods?

Mr. Fung: Thank you for refocusing my answer. First, I would like to say that I described China partly because China did that using a model that perhaps we should copy. In China, every highway you go through, you pay tolls, until your arms get tired. Public-private partnership. Of all places, here in Canada, we resist that model, for all kinds of social engineering reasons, and yet it is a Communist, socialist country that has the world's largest public-private partnership program.

Senator Grafstein: Good point.

Mr. Fung: If we want to modernize our highways, railways and waterways, where would the capital come from? It would have to come from the public-private partnership.

I hope this Senate committee will take away the bipartisan concept and the ideology issues and ask what would work for Canada best, and let us put it together and make it work.

Senator Grafstein: Mr. Fung, I accept that.

The Chair: I will have to move on. I have three other colleagues who wish to ask questions.

Senator Grafstein: Let me conclude with another idea. Maybe you can look at our questions and give us a written response.

I have been working on a project for a decade that you might be interested in. In Toronto, in Canada, we have the smartest chunnel technology in the world. We know how to chunnel, except we do not use it in Canada. There is an opportunity to chunnel Bering Strait. If, in fact, we chunnel Bering Strait, which is narrower and shallower than the English Channel, we could get on a train, ultimately, in London, England and get off a train in Halifax. However, it requires ingenuity and the will to do that, and to then provide the outlet of a train, a pipeline, and a road link from Alaska, through the Yukon, into Canada.

The problem with that, however, is that it is a great idea and it would change the world, but there are not people in the private sector who take up these great ideas. They want the government to do it, but government does not do anything. Government reacts to great ideas by men like you. That is how we do things.

How do we bring these ideas forward, and why does the private sector not come forward and batter government with these issues? We do not feel the pressure from the private sector on any of these points, and I have been here 25 years.

Mr. Fung: I think that maybe things will start to change. As you have summarized, it is important for us to change the U.S. harbor maintenance tax so that we can start using water.

I would also subscribe to you that 10 or 15 years ago I moved capital from North America into China to build a power plant in Shanghai, which is still running very well, started up by Minister Goodale in the year 2000. Ottawa is still receiving a benefit from that program in Shanghai through my taxes.

What is important that we need to understand as we move forward, is that China now has so much money that they do not know what to do with it. My business is always to help people who are in need. China is in need of someone to help them to use the money. When you have a trillion dollars in a currency that is depreciating, that pays only 2 per cent to 3 per cent a year, is it not time for us to propose to the Chinese that they can do better than that?

Are we politically ready for that? I subscribe to you that Canadians are not ready for that, partly because we do not have enough Canadians who will jump on the plane, like you, and go to China and see that the Chinese are just like you and me. They are no threat to us. They want their families and their children. They have the same aspirations as we do. If we can achieve that kind of understanding, we can invite the Chinese to become partners with us, and not just the Chinese but also the Koreans and the Japanese.

Canadians have one major advantage: we are cosmopolitan. We should be a receptor of cash from any country, without discrimination.

Senator Jaffer: I found your presentation very interesting. Could I please ask you to turn to your slides 43, 44 and 45 on containers. I come from British Columbia, and I want you to expand on those slides. I was interested in your setting out in slide 44 that by 2015, hopefully British Columbia will be doing much better, but we have a challenge. With the ports in Portland, Seattle, Prince Rupert and Vancouver, we do have a challenge. You have these slides. Obviously, you do not have them for Seattle and Portland. I wanted you to talk about our competition there and expand on these slides, please.

Mr. Fung: Canada is fortunate that we have two major railways in CN and CP. There are times they are not perfect, so it is right to criticize them, but sometimes we are abusing that. They are, especially CN, the most efficient railways in North America and probably in the world. We need to set up a system where Canadians can participate in these port and corridor developments.

On average, I can move a loaded container from Montreal or Toronto to Shanghai for $1,150. When I move it this way, I pay $4,500 for that. Yet, our Prairie provinces, in Winnipeg, Regina and Saskatoon, they would have to pay $2,000 to $2,200 for the same container to go back to Shanghai. They are asking how it is fair for this container coming from Montreal and Toronto, zipping right by them, and someone else pays half the price that they pay and they demand a railway service review because of this perceived unfairness.

However, to make use of this perceived unfairness and use these returning empty containers, we need to change the way we run some of these trains. I am in the process of developing a pilot program with CN to allow us to have trains that can stop in the Prairies and pick up the products without charging that kind of premium. CN can stop in Prince George, and CP can stop in Kamloops, so they can pick up the goods and go right into the port.

Today, 50,000 trucks come into Vancouver every day from Kamloops to load into the empty containers. We have trucks chasing the empty container on rail into Vancouver. When the empty containers get into Vancouver, another truck has to be called to pull the empty container to a storage yard. The goods from Kamloops go into a warehouse and have to be off-loaded. Someone calls the empty storage yard, and another tractor will pick up the empty container to move it to the warehouse where it is loaded, and another tractor has to move it to the port.

This is how we become uncompetitive. We do not go about developing the systems. If we load those containers right in Kamloops, the highway that we need to build in Vancouver would be minimized. We are investing billions of dollars in solving the congestion in Vancouver when the issue should have been solved before it gets to Vancouver.

We need to work out mechanisms for us to make the best use of the corridor and gateway that we are investing in so we can put more value into these goods. Instead of shipping scrap steel and wastepaper into China, let us put something more valuable to gain some more benefit for the prosperity of Canada.

Senator Wallin: This is one of the best presentations we have had, so I appreciate your time on this issue.

We are supposed to be talking about the rise of China and not really the decline or the missed opportunity of Canada, but here you are as a person who embraces this country. You talk about your love for it, that you choose to live here when you do not have to, and your appreciation for the democracy and the civil society. You have shown us statistics on education that indicate we are creating this brain trust in this country but we cannot seem to harness it. Why do we not get it? What is wrong with us? We are a smart people.

Mr. Fung: There is a saying: A needle cannot be sharp on both ends. In Canada, we have the blessing of the United States to ourselves. Of course, it also becomes the poison for our future. Our complacency of dependency on the U.S. market is stopping us from looking further.

I talk to auto parts manufacturers in southwestern Ontario who are suffering. I tell them to look at the statistics and why do we not go to North Asia together. They say that it is too far away. I tell them that they are undercapacity now but they say they will wait for the cycle to come back.

It is easier to wait for the cycle to come back than to jump on a plane, learn a new language and understand a new culture. Senators talk about Chinese wanting to learn English. How many Canadians think that Chinese will be important in the future?

China has moved so much into the commercial world, like the Europeans. China has just announced that they have moved the introduction of English from grade 4 to grade 3. As of this year, they believe more Chinese are learning English than the rest of the world combined. We should see that both as a blessing and as a threat.

In Canada, we need to get away from the complacency of the U.S. market. We need to understand the cosmopolitan nature of Canada, and we need to integrate the immigrants into our midst.

When we look at the boards of directors of the banks, it is difficult to see a minority's face. I am the first chair of the CME who is not Caucasian in 140 years. One can say we are making progress, but we need to move even faster. We need to get the glass ceilings to fall off. We tried to do it for women and minorities, but it is important for us to do it not because we have to by law, but because it is the right thing to do; it is the thing for us to enhance our capability in order to compete on a global basis.

The Chair: I would add to Senator Wallin's comment at the beginning that our mandate is the rise of China and of some other countries and the implications for Canadian policy, which I think fits very well with the witness's response, so I thank you for that.

Senator Stollery: My question is similar to Senator Wallin's. I want to thank you for an outstanding presentation. One starts to get a little depressed when looking at the trade figures for Canada. I am sure you are as aware as I am that our trade with the U.S. is basically collapsing, but the penny does not seem to have dropped in some elements of the business community. When you have 40 per cent and 50 per cent drops in exports to the U.S., you would think they might start to get the picture.

I first was in Hong Kong in the late 1950s, when it was much smaller, and most of it had just moved down from Shanghai. Then two or three years ago I was there with our chair, and I was surprised. I know Hong Kong a little bit, and I was surprised to meet a DO, district officer. They still have a British DO from the colonial service, and he says he is the district officer from Kowloon.

Also, the transit system in Hong Kong is outstanding.

Your testimony is self-explanatory, but I keep being astounded by how lazy we are in Canada. I put it down to the fact that we have a big country. Everything has been relatively easy compared to a very populated country where there is not as much room. In Canada, our tradition has been after you have ruined this particular few square kilometres, you go on and ruin the next.

I am old enough to remember some of the ruination because I was born before the war. I am from Toronto. We had a ferry for transport on the Great Lakes that crossed to Rochester, New York. It was funded by the City of Rochester. It went broke. All they did in Toronto was laugh at it. A columnist wrote a series of articles about who would want to go to Rochester. As you know, if you have to go to New York, you have to drive west around Lake Ontario before you can head south. The ferry made a lot of sense to me. Neither Ontario nor the City of Toronto helped to fund this project. Yet, there were so many tractor-trailers and transports that would use it, it would pay for itself because of the revenues of the ferry. The boat was made in Australia, if I am not mistaken.

Why is there such a huge lack of imagination, lack of discipline and a general laziness?

Mr. Fung: Thank you for the question, senator. The answer is on page 61. It is the U.S. harbour maintenance tax that stops any truck from crossing the Great Lakes. You cannot afford to ship high-value goods by water to the U.S.. It is the Canada Customs cost recovery on new routings that kills the idea of a ferry. We insist that they have to pay for the total cost of operating the Customs. We shoot ourselves in the foot.

Mr. Laurin: I will add to Mr. Fung's comments. Your remark on lack of imagination compelled me to intervene. Mr. Fung's main point is clear to all of us in this room. We cannot take things for granted, and business as usual is not an option for anyone, whether you are in Canada or in China. Things are changing pretty quickly. From the corporate side, companies need to have a strategy to keep pace with the changes going on around them. As policy-makers, we need to ensure that our policies are aligned with the way that the world is changing.

On the issue of our lack of imagination, we do many wonderful things in Canada. We develop many new products and solutions that help us to tackle some of the world's problems. To build on what Mr. Fung said, it will be more important that industry and government work together in the future. The job of business is to develop products and services for which there is a need and a market. Government's job is to put the right conditions in place so that businesses can do their job. There are many challenges to be faced globally, from environmental changes to skills development, to ensure that we are able to maintain our standard of living. Much can be done. We are already developing many creative solutions in Canada. The future of manufacturing is trying to foster the development of those new products and technologies that will help us to solve some of the challenges that we will face. The study of this committee on the rise of developing markets and the impact on Canada presents tremendous challenges. Mr. Fung spoke to that in the first part of his presentation. However, there are also tremendous new business opportunities that did not exist before. We are trying to grow our economy and capture much of that knowledge in businesses and universities. I do not want to leave you with the impression that we do not want to tackle some of the challenges that we face. We have to take stock of the fact that the challenges ahead of us are not insurmountable. We have a greater possibility of addressing those challenges today than we had in the past.

Senator Stollery: It is a big problem for the country because we have about 9 per cent unemployment. We have heard evidence before the committee on our problems of quality production in Canada. German products are not cheap but they are the best, and that is why people buy those products. In my view, that is what Canada should be doing.

The Chair: When this committee did a review of the FTA, Canada-U.S. Free Trade Agreement, and the NAFTA, similar issues arose, and we have dealt with them. It is interesting how they have come back.

Senator Downe: We have been discussing tonight the rise of China, where 25 years ago, we were talking about the rise of Japan. People were rushing to say that we had to adopt the Japanese management techniques of just-in-time delivery because Japan was set to economically dominate the world, and we know how that turned out.

In your opinion, if things go off the rails in China, what would be the cause? Would it be their political system; their central control, or their large peasant class who cannot find employment? What would be the main cause if there were a problem in China?

Mr. Fung: Senator, you are extremely wise in identifying those factors. In China, there are 20 dynasties, only a few of which were overthrown by foreign invasions. Most of the dynasties were changed because of the peasants. In China today, the biggest concern we have heard over and over again when we talk about democratic values and human rights, is that China always comes back with one word: stability. Stability dominates the Chinese mindset, because in the 20th century, 100 million Chinese died trying to figure out how to govern themselves, most of them not by bullets or the sword but by dislocation.

For us to understand the Chinese mentality, we need to understand where they come from. For them, stability means survival. Everything else is secondary. We can talk about democratic values and about anything else but for 20 million people in Shanghai, one week without food supply into Shanghai, one can imagine the consequences.

You are 100 per cent right but, today, with the globalized world, the problem is no longer just China's problem. If China becomes unstable and its economy collapses, there will be major consequences for all of us around the world. At the same time, China is adopting a model very different from that of Japan. I was building chemical plants out of Vancouver, Canada, for the rest of the world but neither the Japanese nor the Koreans would allow me to go into their markets. Today, you cannot ship vehicles into Japan and Korea. China has put a duty on those imports. China knows well that they cannot follow the Japanese and Korean examples and build an economy based on exports alone. They need to get their domestic market going. This financial crisis has given them that opportunity to push forward with the growth of the domestic economy. They cannot have the domestic economy growing unless the population feels safe and willing to spend. They need to put a social safety net in place before people will stop saving 50 per cent of their income. That is why, if we help the Chinese to build their pension plan and their national health plan, they will become another United States because they have the domestic power to become a driver of the world economy.

I subscribe 100 per cent to our Canadian values on human rights, but human rights is a privilege, not a right. My father was not treated in a hospital in Hong Kong because we did not have the money. The doctor said: What do you want me to do? I have one bed. Should I give it to your father who is 70 years old or should I give it to a young man who is 30 years old? What could I say? Any rational person would know that the 30-year-old has a whole life ahead of him.

As we interface with China, let us develop some understanding of where the Chinese are coming from, so that we can deal with them effectively, and so that our input will be constructive and will not be seen as critical and abusive.

Senators, the rise of China has implications for Canada, and Canadians have the ability to develop suitable policy responses that would help the private sector to come together to manage China, not compete with China.

The Chair: Gentlemen, you have heard our appreciation of your participation this evening. I agree with you that the future of China lies in its domestic market.

I am in total accord with your remarks, Mr. Fung, except the one about human rights being a privilege. That will be a discussion for another time. It would be a pleasure to have you back when we can challenge you on that issue. Your wisdom has stimulated us and added great value to our discourse.

(The committee adjourned.)