What Canada's row with India means for an already underperforming trade relationship

The diplomatic row between Canada and India could derail a trading relationship that already underperforms its potential, experts warn.

Relations between the two countries have hit a new low with Canada's decision to expel New Delhi's top envoy and five other diplomats on bombshell allegations Monday from the RCMP, who said that Indian government agents have been linked to murder, extortion and coercion in Canada.

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International Trade Minister Mary Ng tried to reassure Canadian businesses, issuing a statement Tuesday acknowledging the "uncertainty" the situation creates for exporters and investors. She said the federal government will continue to support commercial and economic ties between the countries.

But analysts say there is no way the trading relationship between Canada and the world's fastest-growing economy can escape unscathed from this latest escalation in tensions — at least not in the immediate future.

"This is an extremely significant development. We are seeing a diplomatic disruption, a rupture in the relationship, on a scale that is unprecedented," said Vina Nadjibulla, vice-president of research and strategy for the Asia Pacific Foundation of Canada.

"It's maybe too soon to say what the economic consequences will be, but it will definitely have an impact," she said.

"In the short term, I think certainly this will have a negative impact ... if you're a Canadian business who's trying to get a foothold into India or if you're an Indian business trying to do something in Canada," said Partha Mohanran, director of the India Innovation Institute at the University of Toronto.

"Or if you're talking about any kind of free trade agreements, whether it's at the provincial level or at the federal level. All that stuff is obviously going to be on the back burner, to say the least."

In particular, the latest developments suggest there won't be any imminent progress toward the India-Canada Comprehensive Economic Partnership Agreement (CEPA), a proposed bilateral trade deal that the two countries have been negotiating in fits and starts since 2010.

After a five-year hiatus, talks began again in earnest in 2022, but Canada paused the process last year — a move that was met with dismay by some business groups.

Mohanran said the deterioration of relations between India and Canada is problematic because the amount of trade currently being done between the two countries is already far smaller than it should be.

In 2022, Canada exported $5.3 billion worth of goods to that country, or just 0.7 per cent of global exports, according to Statistics Canada. Imports from India amounted to $8.3 billion, around 1.1 per cent of total global imports.

By comparison, Canadian exports to China in 2022 were $28.7 billion, even though India's population has grown so rapidly that it surpassed China's for the first time last year.

"(Canada-India) is a relationship which has woefully underperformed its potential," Mohanran said.

"If you look at bilateral trade, both countries barely register on each other's radar. India is much more focused on the U.S., for instance, and Canada is much more focused on China than it is on India. I think both countries have ignored each other in terms of potential."

Among the top products Canada exports to India are coal, potash fertilizers and lentils (pulses). India's exports to Canada include pharmaceutical products and electronic goods.

So far, neither country has imposed tariffs or taken any other form of economic retaliation even as the diplomatic situation becomes more heated.

"For decades, Canada's pulse industry has developed a strong relationship with businesses in India built on mutual respect and trust. We remain confident in the strength of this relationship," said Greg Cherewyk, president of Pulse Canada, the organization that represents the country's lentil farmers and exporters, in an emailed statement Tuesday.

"In a time of stubborn food price inflation and strong demand for pulse crops, we are confident that affordability and availability will continue to drive decision-making at a government level."

Nadjibulla said the chance of India moving to restrict imports of a Canadian product (such as lentils, for which India accounted for more than 35 per cent of Canadian exports in 2023) is unlikely, though not impossible.

"It would be a massive escalation and one that would also obviously hurt India's economic interests," she said, adding a more likely scenario would be for India to once again suspend visa services for Canadians, as it did last year as diplomatic relations soured between the two countries.

"I think that might be more the next step, rather than economic sanctions. But of course everything depends on what Canada does next, because we've seen India essentially engage in a tit-for-tat so far."

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In her statement Tuesday, Ng said Canada stands firmly by its businesses, and will work closely with all Canadian enterprises engaged with India.

But she added Canada will not tolerate any foreign government threatening, extorting or harming Canadian citizens on its soil.

"We must consider our economic interests with the need to protect Canadians and uphold the rule of law," she said.

One area where Canada has a heavy presence in India is through pension fund investment. As Canadian pension funds have diversified away from China in the last five years, India has moved into second place, accounting for 25 per cent of Canadian pension funds’ investment flows in the Asia-Pacific region from 2019 to 2023, according to Asia Pacific Foundation research.

Even as Canada-India tensions worsened in the fall of last year, Canadian pension fund investment flows into India continued to increase, rising from $28 million in the third quarter of 2023 to $111 million in the fourth quarter of 2023. The increase was driven by a large investment in Indian logistics firm Xpressbees by the Ontario Teachers' Pension Plan Board.

But Nadjibulla said the long-term impact of diplomatic strife on pension fund investment remains unclear.

"Pension funds operate on a much longer time frame. We have seen them take risks, including political risks into account, as they look at next investments, but I think we won't see the same kind of reassessment that we saw with China," she said.

"Things could change, but as they stand right now, the need to divest and diversify away from China has been a much more strategic imperative."

This report by The Canadian Press was first published Oct. 15, 2024.