China and Canada in an Era of Global Disruption

Observation 1: Disruptive global trends are reshaping our world.

One consequence: the status quo is not a strategy for future success, anywhere. Information technology — — digitization — — has enabled globalization 3.0 and helped drive a broader technology revolution. A second consequence: a large gap has emerged between a world of “tech 4.0” and “gov/pol 1.0”.

• Governance/Policy 1.0 — adapting slowly
• Energy 1.5 — a revolution in demand + supply
• Demographics 2.0 — aging is affecting everything
• Climate change 2.5 — is a game changer
• Globalization 3.0 — a hyper-connected world, led by global supply chains and ICT
• Technology revolution 4.0 — changing everything, everywhere

Observation 2: The new global normal is also characterized by a transformation of global risks

More systemic; more global; more geopolitical; more interconnected; and more insecurity-related. Countries, and companies, need to adjust their “risk management” approaches for these new “global macro risks”.

“Top 5” Global Risks in 2017*

1. Environment: climate change; extreme weather; natural disasters; mitigation failures

2. Involuntary migrations: MENA refugees; Iraq, others

3. Conflict: terrorist attacks; cyber attacks; interstate conflicts

4. Populism: unemployment; inequality; social stability

5. Failure of governance: national, international

*World Economic Forum, Jan, 2017

Observation 3: The global economy is finally showing signs of increased strength, matched with increased risks.

Over the medium term the challenge is mediocre trend (potential) growth, due to weak productivity growth trends and aging populations. The IMF’s updated forecast (April 2017) projects an improving global outlook, led by a pick-up in the US, Euro area and Japan, supported by continuing strong growth in China and India. There are three key global uncertainties: geopolitical, political and policy.

*Recent Canadian data have led the Bank of Canada to upgrade its forecast to 2½% growth in 2017 and 2018.

Risks to the Global Outlook

• Will protectionist forces in a number of economies impede global trade flows, and reduce growth?
• Does the new U.S. Administration implement the much anticipated tax cuts, infrastructure spending and deregulation?
• Will rising geopolitical tensions, and increasing populist pressures in a number of countries, increase uncertainty and reduce confidence?
• Will elections in U.K., Europe and the Brexit negotiations affect business confidence and borrowing costs through higher yield differentials?
• Will China find the right balance between debtfuelled stimulus and structural reforms?

Observation 4: Growing distrust

Less than 50% of the general population expresses trust in the core institutions of government, business, and the media in 20 of the 28 countries surveyed by the Edelman Trust Barometer. Trade displacing jobs, technology displacing workers and jobs, short-termism displacing long term investing — — are all elements of this loss in trust. Loss of trust nurtures populist and protectionist movements.

(Dis)trust Factoids

• Only 37% of the general population globally trusts corporate CEOs
• Trust in government globally has fallen to 41%
• 67% of the general population believes CEOs/firms focus too much on short term results
• 59% of the general population in Western countries trusts a search engine more than traditional media

Observation 5: Disruptive technology

Its driving transformation and it is at an inflexion point, with disruptive innovations imminent in many fields. What is most disruptive is the combination of scale and scope of these technologies, and their speed of adaptation. It leads to the gap between “tech 4.0” — “gov/pol 1.0”; it also leads to a gap between “innovation frontier firms” — — those that can adopt at the pace of tech 4.0, and the rest — — the “innovation laggards”.

The consequence of this scale, scope and speed: to be a disruptor or be the disrupted?

•Do we have the technology and entrepreneurial capacity to be at the leading edge of disruptive innovations, which will drive growth and productivity and, at the same time, have we developed the innovative education systems and business education-government partnerships to reskill and retrain the workforce of this future?

•McKinsey estimates that 40+% of current jobs can be automated through these disruptive technologies.

The “Scope and Scale” of Disruptive Technologies

Source: McKinsey

• Virtual & augmented realities
• New computing technologies (quantum, neural, …)
• Nano materials
• Space technologies
• Energy storage
• 3D printing
• Internet of things (linked sensors)
• Blockchain, distributed ledgers
• Neurotechnologies, geo-engineering
• Artificial intelligence (AI) and advanced robots

Observation 6: The Canadian government, and the business sector, understand the need to re-orientate policies for these turbulent times.

Canada has strong macro-economic foundations, a necessary but not sufficient condition for sustainable strong growth. Building on this foundation, Canada needs to better target talent, trade, innovation, foreign investment, infrastructure and skills to strengthen long term growth and diversify the economy.

Strong macro foundations

1. Best total government fiscal position in G-7: Canada, by a considerable margin.
2. Low inflation
3. Low interest rates
4. Corporate taxes: lowest in NAFTA; 2nd lowest in G-7

Productivity-enhancing levers

1. Focussing on innovation: building innovation superclusters; creating world class technology hubs; focus on entrepreneurship; financing for scaling-up start-ups.
2. Attracting top global talent: increasing immigration and fast-track global talent visas.
3. Establishing new trade links: CETA (Canada-Europe Trade Agreement) ratified; re-negotiation of NAFTA; pursuing trade agreements in Asia (China, India, Japan).
4. Building strategic infrastructure: new National Infrastructure Development Bank with $200 billion balance sheet to enhance productivity and support trade. Further $100 billion for social and municipal infrastructure.
5. Attracting global investment: more welcoming approach to FDI, new Investment Promotion Agency.
6. Expanding “equality of opportunity”, with focus on skills.

Observation 7: Competitiveness today is defined by world class technology and innovation ecosystems

It is not defined by cheap inputs. The building blocks, in addition to strong research anchors, are: talent, capital, infrastructure, customers, trade/investment and brand plus leadership in selected transformative technologies and depth in key transforming sectors.

Sustainably competitive economies in a “Tech 4.0 world” must aspire to build global top tier innovation ecosystems

Innovation Ecosystem Blueprint

Talent — Develop, recruit, retain

Capital — Start-up, scale-up, grow-up

Infrastructure — Connecting the corridor, densifying the corridor

Customers: Procurement — Strategic procurement (start-ups), DARPA-type tech support

Trade and Investment — Start-ups going global, global tech anchor firms going local

Branding — Strengthen brand: attracts talent, capital, investments

Possible Transformative Technologies. Examples:

• Quantum
• Artificial intelligence
• Internet of Things
• Big data

Possible Transformative Sectors. Examples:

• Advanced mfg.
• Fintech
• Healthtech
• CleanTech
• E-commerce (retail)

Perspective 8: The common challenge of rebalancing, with different characteristics

Both Canada and China are in the process of “rebalancing” key aspects of their economies to respond to lower long term (potential) growth and economic imbalances. An efficient, innovative and trusted financial sector is crucial to successful rebalancing.

China rebalancing…

External rebalancing

• to domestic demand led-growth

Domestic rebalancing

• from industry to services
• from gov’t production to private
• from low productivity to more innovative production
• from high leverage to sustainable debt ratios

Environmental rebalancing

• to pollution mitigation in cities; water mitigation; stricter regulations
• to COP21 commitment

Income distribution rebalancing

• to greater income equality

Canada rebalancing….

External rebalancing

• to trade diversification with Asia and Europe

Domestic rebalancing

• from start-ups to scale-ups to global tech firms
• from average innovation intensity to high innovation production
• from declining labour force growth to increased immigration, top global talent

Environmental rebalancing

• to carbon tax, cap-and-trade, stricter regulations
• to COP21 commitment

Opportunity rebalancing

• to improved lifetime skills, retraining

Perspective 9: Branding matters — — to attract global customers, global investors, global talent and global connectivity.

We can better leverage the “Canada brand” in China, and Asia more broadly. In these turbulent times, when political stability, social cohesion, diversity, open trade and a solid economic base are in short supply globally, our brand should underscore that — — the world needs more Canadas.

Our global brand — Nice Canadians

… or …

Our future global brand — Nice+

• Talent: pool of diverse, well educated, tech-savvy, entrepreneurial graduates
• Knowledge economy:4 research universities in global top 100; leader in AI, quantum, cleantech
• Strong values:welcoming immigrants, diversity, rule of law
• Innovation clusters: 4 in global top 25
• Strong financial system:world-class institutions, fintech innovators Natural resources: energy, agri-foods, minerals & metals

Canada, and the “Canada brand”, have under-realized potential in China and Asia

Concluding observation — — It’s all about stronger and more inclusive growth in the new global normal.

In this changing world — — an era of disruption and uncertainty — — China and Canada have strong economic complementarities, as well as shared histories. It is time to turn the potential of our relationship into a shared reality.

We need a Canadian “smart growth strategy”

• with weak growth and exclusion both real and present problems in many countries, including Canada, rebuilding our potential growth through more inclusiveness and more innovation/productivity driven business is the essence of a “smart growth” strategy

We need a Canadian “global diversification strategy”. With China:

• establish sectoral and comprehensive trade agreements
• enhance tourism and education links
• increase clean tech, agri-food, logistics, engineering services and e-commerce links
• develop cooperation on global trade liberalization and international governance reform