Introduction

Background

The world's economies are increasingly integrated. Drastic reductions in transportation and communication costs worldwide, rapid technological changes in production processes, an increasingly fierce competition among companies in reducing costs and increasing their global market share, and the proliferation of various bilateral and multilateral trade and investment agreements have created a virtuous cycle of economic integration and interdependence among world economies.

The rising global economic integration has increased the fragmentation of production and innovation worldwide, resulting in increased rationalization and specialization of production and innovation activities, stimulating innovation and productivity and raising real incomes in all countries. At the same time, however, the increased economic integration and interdependence among countries have also resulted in greater economic inequalities and economic uncertainties, creating economic anxiety and social tensions in many countries.

Transnational corporations (TNCs) have been the dominant force behind the globalization of production, physical and human capital, and innovation, resulting in a dramatic increase in two-way investment and trade flows in almost all countries in the past 30 years.

Global foreign direct investment (FDI) flows increased from just US$205 billion in 1990 to US$1.8 trillion in 2015. As a result, global FDI stock increased from US$2.2 trillion in 1990 to about US$25.0 trillion in 2015, more than an 11-fold increase in the past 25 years. Both Canada and China have actively participated in the globalization process.

Canada is a medium- sized open economy. Trade flows sum to more than 60 percent of its gross domestic product, and one in every five jobs is directly linked to international trade. Trade and FDI are strong complements because much of the trade is carried out by TNCs. Canada is a major exporter and importer of FDI. Canada's inward FDI stock increased from US$113 billion in 1990 to US$756 billion in 2015. Moreover, Canada's outward FDI stock increased at a faster pace than the inward stock in the past 25 years. It increased from about US$85 billion in 1990 to US$1,080 billion in 2015, a nearly a 13-fold increase!

All of the available empirical research strongly suggests that the increased two-way direct investment flows and stocks are playing an important role in sustaining Canada's economic vitality and dynamism by having a positive impact on capital formation, human capital development, innovation, and productivity.

Like Canada, China's economy is also heavily dependent on international business and TNCs. China is one of the largest trading nations in the world, and it is a major trading partner of many countries including Canada. Like Canada, China too is a major source and recipient of FDI. Both inward and outward FDI stocks have increased dramatically since 1990. Its inward stock increased from a mere US$21 billion to US$1.2 trillion in 2015, almost a 50-fold increase. Its outward stock increased at an even faster pace—from a meagre US$4.5 billion to US$1.0 trillion—a more than 220-fold increase.

Canada has strong and growing economic linkages with China. China is Canada's second largest trading partner after the United States. The economic linkages between the two nations are expected to deepen a great deal in the next 25 years because of the continuation of strong economic growth in China and the strong complementary trade, investment, and people-to-people relations between the two countries.

Strong people-to-people relations exist between the two countries: More than 1.3 million Canadian residents are of Chinese origin. In 2014, there were more than 110 thousand Chinese students at Canadian universities. Chinese is the third most spoken language in Canada, after English and French.

Although Canada is not one of China's most important trade partners, it is still the 13th largest. In 2016, the bilateral trade between the two countries was more than $75 billion. The trade and investment relationship between the two countries is highly complementary and mutually beneficial to both countries: Canada exports primarily resource-related goods to China, whereas Canada imports mostly manufactured goods from China. Bilateral services trade between the...