Diplomatic rows between Canada and India could derail trade relations that are already below potential, experts have warned.
Canada’s decision to expel the New Delhi envoy and five other diplomats on Monday over bombshell statements by the RCMP alleging that Indian government officials are involved in murder, extortion and coercion in Canada has reached a new low.
International Trade Minister Mary Ng issued a statement on Tuesday, acknowledging that the situation was creating “uncertainty” for exporters and investors. He said the federal government will continue to support commercial and economic relations between the two countries.
But analysts say there is no way Canada’s trade relationship with the world’s fastest-growing economy will escape unscathed from the latest round of tensions, at least for the time being.
“This is an extremely important development,” said Bina Najibulla, vice-president of research and strategy at the Canada Asia-Pacific Foundation.
“It may be too early to say what the economic impact will be, but there is definitely an impact,” she said.
“In the short term, I think this will certainly have a negative impact…if you’re a Canadian company that’s trying to establish a foothold in India, or an Indian company that’s trying to do something in Canada,” he said. said. Partha Mohanran, director of the Indian Innovation Institute at the University of Toronto, said:
“Or if you’re talking about free trade agreements of any kind, whether it’s at the state level or the federal level. It’s clear that all of that is on the backburner, to say the least.”
In particular, recent developments suggest that there is no imminent progress towards the India-Canada Comprehensive Economic Partnership Agreement (CEPA). CEPA is a proposed bilateral trade agreement that the two countries have been negotiating successively since 2010.
After a five-year hiatus, negotiations began in earnest again in 2022, but Canada suspended the process last year, a move that disappointed some business groups.
Mohanran said the deterioration in relations between India and Canada is problematic because the amount of trade between the two countries is already much lower than it should be.
According to Statistics Canada, Canada exported $5.3 billion worth of goods to the country in 2022, just 0.7 per cent of global exports. Imports from India amounted to $8.3 billion, accounting for approximately 1.1% of the world’s total imports.
By comparison, Canada’s exports to China in 2022 were $28.7 billion, even though India’s population grew faster than China’s for the first time last year.
“The[Canada-India]relationship is significantly below its potential,” Mohanran said.
“If you look at bilateral trade, they are barely on each other’s radar. For example, India is much more focused on the United States, and Canada is much more focused on China than India. It’s different in terms of possibility. ”
The main products that Canada exports to India include coal, potash fertilizer, and lentils (pulses). India’s exports to Canada include pharmaceuticals and electronic products.
So far, neither country has imposed tariffs or engaged in any other economic retaliation despite the heated diplomatic situation.
“For decades, Canada’s pulses industry has had strong relationships with Indian companies based on mutual respect and trust. We remain confident in the strength of this relationship.” said Greg Cherewik, president of Pulse Canada, the country’s leading lentil organization. The farmers and exporters issued an emailed statement on Tuesday.
“In this era of rising food prices and strong demand for pulse crops, we are confident that affordability and availability will continue to drive decision-making at the government level.”
Najibullah said it was unlikely, but not impossible, that India would move to restrict imports of Canadian products, such as lentils, which will account for more than 35% of Canada’s exports in 2023.
“It would be a major escalation and would clearly harm India’s economic interests,” she said, adding that India would not be able to issue visas to Canadians as it did last year when diplomatic relations between India and Canada soured. He added that the more likely scenario was that the company would shut down again. Ryogoku.
“Rather than economic sanctions, I think that would be the next step. But of course, it all depends on what Canada does next, because India has essentially retaliated and Because I’ve seen it happen.”
In a statement on Tuesday, Ng said Canada firmly supports its businesses and will work closely with all Canadian companies that engage with India.
But he added that Canada will not tolerate intimidation, extortion or harm to Canadians by any foreign government.
“We need to consider economic interests alongside the need to protect Canadians and uphold the rule of law,” she said.
One area where Canada has a significant presence in India is investing in pension funds. As Canadian pension funds have diversified away from China over the past five years, India has emerged as number two, leading to Canadian pension fund investment flows in Asia-Pacific from 2019 to 2023, according to the Asia Pacific Foundation. This accounted for 25% of the total. the study.
Despite worsening Canada-India tensions last fall, Canadian pension fund investment inflows to India continued to rise, from $28 million in Q3 2023 to $100 million in Q4 2023. This increased to $11 million. Major investment by the Ontario Teachers’ Pension Plan Board in Indian logistics company Xpressbees.
However, Najibullah said the long-term impact of the diplomatic dispute on pension fund investments remained uncertain.
“Pension funds operate on much longer time frames. We have seen them consider risks, including political risk, when considering their next investment, but as we have seen in China, “I don’t think we’ll see a reassessment,” she said.
“Things could change, but the need to divest from China and diversify is far more of a strategic imperative right now.”
This report by The Canadian Press was first published Oct. 15, 2024.