Time for a new trade framework

Relations with China, U.S. set to change

In the haze of uncertainty enveloping the globe, one thing is clear: the world’s relationship with China is set to change.

U.S. President Donald Trump has accused China of fumbling its early response to the outbreak, endangering the world in the process, and the U.S. will be fast-tracking plans to remove global industrial supply chains from China. Japan, the world’s third-largest economy, is setting aside billions to help its companies move production out of China. And Beijing is threatening a trade war with Australia, after the government in Canberra called for an inquiry into where COVID-19 originated.

Even before the COVID crisis, Trump was battling a trade war with China and the two countries have been fighting for supremacy over intellectual property and high-tech dominance, which the White House has called “a new era of great power competition.”

So where does this leave Canada among the turmoil?

“That is the question that I think probably needs a royal commission,” said Colin

Robertson, a former Canadian diplomat and current vice-president and fellow at the Canadian Global Affairs Institute.

“Or at least, premiers and provinces getting together with the kind of effort that we put into the last great seismic change in how we manage ourselves, which was free trade with the United States.”

With the COVID-19 outbreak magnifying and accelerating issues with China, the political arena has begun to reflect the new world.

Public opinion polls show people in the U.S. and Canada are more skeptical of China and, with the United States looking ahead to a fall election, Democratic candidate Joe Biden has been pillorying Trump for not being tough enough on Chinese missteps. Biden even released an attack ad last month that accused Trump of “rolling over for the Chinese” and “going soft on China” over the COVID crisis.

The campaign tough talk will surely heat up as the election approaches, meaning whoever wins the White House in November will be dealing with a new level of rhetorical hostility between the world’s top powers.

“We were one of the great beneficiaries of globalization. Trade has made our prosperity, but how do we manage now?” said Robertson.

“I do think that it’s going to be different now. And I also think China is changing. They always feel that the West and the rest of the world will take advantage of them. Which is ironic because, of course, that’s exactly what Trump is saying.”

In Canada, the Liberal government has largely held its tongue on China, in part due to delicate diplomatic situations like the imprisonment of Canadians Michael Spavor and Michael Kovrig, which was widely seen as a response to Canada’s detention of Huawei executive Meng Wanzhou who is wanted in the U.S.

Such is Canada’s diplomatic dance with China that this week Foreign Affairs Minister François-Philippe Champagne refused to thank Taiwan by name for donating 500,000 masks to Canada. Taiwan maintains it is an independent nation despite China’s claim that it is a Chinese province.

Canada also needs billions of dollars worth of vital personal protective equipment for frontline health workers battling COVID-19, most of which is manufactured in China.

Conservative leader Andrew Scheer and candidates vying to replace him in the party’s leadership race have been loudly criticizing the Chinese regime, though. Peter MacKay this week called for an inquiry into whether information about the virus was falsified or deliberately withheld in China.

Another leadership candidate Erin O’Toole wrote in the National Post that “the world (is) on the brink of a new Cold War with another repressive communist regime, this time in China.”

The changing diplomatic and economic world has some policy experts pushing drastic measures.

“We’re stuck between our first and third-largest trading partner. Obviously for geographical reasons and because our economy is so integrated with the U.S., we’re going to side with the United States in any geopolitical conflict with China,” said Sean Speer, a policy researcher and former economic adviser to Stephen Harper, in an interview. “But it’s pretty obvious that the United States is moving in the direction of more managed trade and a much more nationalistic agenda.”

Both Robertson and Speer argue that although Canadians may prefer the old consensus around free trade, the country will have to adapt to the new world. It seemed unthinkable, for example, that the U.S. would slap tariffs on Canadian steel exports until Trump did just that two years ago.

Speer teamed up with Robert Asselin, a former Trudeau adviser, and economist Royce Mendes to argue that Canada has to find a new way to compete in the global economy in a new report released by the Public Policy

Forum, an Ottawa-based non-profit think tank.

The report calls for an unapologetic effort from government to help Canadian industries compete on a global scale.

The best way to do this, the report argues, is to identify challenges and set about helping Canadians businesses conquer them. For example, the report argues that a wide-scale effort around building up the country’s public health system to deal with an aging population or tackling climate change could be the focus of a new industrial strategy.

Rather than use direct subsidies to specific firms, which can encourage waste and corruption, Speer argues that government support should come in more indirect ways. For example, to support Canada’s burgeoning industry around security systems for autonomous vehicles.

“I think we have an idealistic view about the global marketplace. I think that needs to change. We need to prepare to be much more unapologetically pro-Canadian,” said Speer.

Although the report from the Public Policy Forum has a bipartisan flavour to it, there are also historical objections from both the right and left to this kind of policy, with the left worrying about handouts to corporations and the right worrying about meddling in the free market.

Economist Trevor Tombe said he can see a lot of upside to a coherent industrial strategy, especially compared to an incoherent patchwork of subsidies and grants, but also pointed out some potential downsides.

First, like with any government spending, policymakers have to consider the opportunity cost. Any money spent on this strategy could potentially be used for other services or tax reductions that Canadians may prefer.

“The second downside is that you may pick incorrectly and support a sector that actually does not have a competitive advantage in Canada and that exists solely because of the support,” said Tombe.

That makes it vital that any advantage bestowed by the government is temporary and is used solely to get an industry past some difficult stage of its development, Tombe said.

“But if we’re talking about permanent support to a sector that is uncompetitive in Canada, then that can actually hurt productivity by shifting resources away from things where we do actually have a comparative advantage,” he said.

In the interview with the Post, Speer pointed out that advantages in the new economy are increasingly manmade.

In the resource economy, a comparative advantage comes from a massive forest or large oil reserves. In the new economy, countries tend to create these advantages, either intentionally or by happenstance. Silicon Valley, for example, was born from computer technology that came out of the United States space program.

“We should be unapologetic about trying to cultivate certain competitive advantages in the Canadian economy, recognizing the importance of bigness and scale,” said Speer.

National Post sxthomson@postmedia.com Twitter.com/stuartxthomson