In the diplomatic spat, a rising India shows Canada that money is power

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John Rapley is a political economist at the University of Cambridge and the managing director of Seaford Macro.

In its spat with India, Canada is finding the world a hard place.

It wasn’t always this way. Of the two countries, Canada has historically been dominant – one of the world’s biggest economies, a founding member of the world’s most powerful military alliance, a rich country whose aid programs gave it considerable leverage over developing countries. But as Ottawa squares off with New Delhi over the recent alleged assassination of a Canadian citizen on Canadian soil, it is being left largely to fight its own battle.

The geopolitics of this are well known. As tensions rise between China and the United States, India is emerging as an important prospective ally, something the U.S. has been pursuing via the so-called Quad with India, Australia and Japan. In contrast, not only does Canada now occupy a less significant geopolitical space, but the country is a notorious shirker as an ally, with a recently leaked Pentagon paper revealing that Canada’s NATO partners no longer regard it as a serious member of the alliance.

But the economics of the relationship are more revealing. India is arguably gaining the upper hand.

Canada is still a major global player, with an economy that ranks in the world’s top 10 by size – well below India though far ahead of it in per capita terms. And while Canada arguably punches below its weight in the number of embassies it maintains abroad, it still runs one of the world’s biggest foreign aid programs. Nevertheless, as an economic partner to the world, India is becoming more important than Canada.

Having recently overtaken its bitter rival China as the world’s most populous country, India also looms as the new Asian powerhouse, with an economy outpacing China’s in its rate of growth. Moreover, GDP figures understate the shifting balance between Canada and India. Canada’s recent growth has been embellished by both a buildup of debt and a population increase that, thanks to immigration, surpasses India’s. Take those out of the mix, though, and the Canadian economy would be going backward. By contrast, the IMF expects India’s economy to grow almost 6 per cent this year, making it one of the world’s hottest.

Even more telling is the profile of the two countries’ trade. The rule in development economics is that as a country develops, it shifts away from the production of primary goods to focus on high value-added industrial production. But India and China flip this script. Topping the list of India’s exports to Canada are pharmaceuticals and jewellery. Topping the list of Canada’s exports to India are coal, crops and crude oil. If to their trading partners Canada still looks like a 20th-century economy, India is very much positioned for the 21st.

This is then reinforced by a political-economic calculus that inflates India’s relative power. Put simply, India needs Canada less than Canada needs India. We depend more heavily on trade than India, whose internal market is big enough to sustain a considerable rise in demand. The same goes for countries such as Germany and Britain, which are keen to score trade deals with India. Their poorly hidden desire to gain access to India has enabled New Delhi to be a notoriously tough trade negotiator. It also means Ottawa’s allies won’t want to go to bat too vigorously for Canada, lest they jeopardize their relations with India.

This gives India a heft that Canada finds difficult to match. Unlike the U.S., which is very large, or the European Union, which can band together (although it often struggles to), midsize countries such as Britain and Canada are finding relations with the rising global powers of what had once been their periphery, such as China and India, increasingly challenging. In the same way that Canada has been delicate in the way it deals with, say, Chinese espionage, it won’t want to antagonize India.

India has begun flexing that muscle on the world stage, both by boosting its military presence in its neighbourhood and by playing an increasingly assertive role at meetings such as BRICS and Group of 20 summits. But its alleged foray into overseas hit jobs represents a new and worrying development.

Canada’s allies haven’t completely ignored its pleas, with Washington in particular making clear its discontent with New Delhi. But the calculation here seems to be about self-serving precedent: Other governments want India to know only that they won’t look kindly on covert activities on their own turf. Mind you, India might say in response that other countries have nothing to worry about, since New Delhi has a particular bone to pick with Canada over what it sees as Ottawa’s willingness to shelter and indulge Sikh separatists.

In due course, the two countries will probably work out their differences. But Canada will probably have to give more ground than it has been accustomed to doing. The world is changing, and that can be humbling to a country that for so long had an easy ride.