Why so obsessed with a China deal? Why not India?
Never mind whether we can strike a free trade deal with China: should we?
Ever since the text of the renegotiated NAFTA was released, attention has focused on its notorious Article 32.10, and whether it precludes Canada from entering into a free trade agreement with an unnamed “non-market country.” Critics claim Canada has been pressed into service in Donald Trump’s economic war against China, while the Trudeau government insists the clause changes nothing.
Indeed, the prime minister declared Monday that Canada was ready to restart stalled talks on a possible free trade agreement with the world’s second-largest economy, days after China’s foreign minister expressed renewed interest in “a China-Canada free-trade zone.” That’s reassuring from a national sovereignty point of view. But, er, is it a good idea?
There are bad reasons to oppose free trade with China: that China’s economy will never be as open as ours; that Canada could not hope to hold its own in one-onone negotiations with such a large economy; and so on. To the second point, Canada seems to have been able to negotiate well enough with the United States, albeit more so in the original enterprise of negotiating a free trade agreement, than in the rear-guard effort to preserve it. At any rate, if we’re not able to negotiate a deal to our liking, nothing says we have to sign it.
As to the first: that China maintains significant barriers to trade and investment, tariff and non-tariff, formal and informal, is undoubted. Presumably the point of the negotiations, in part, would be to persuade China to reduce them. The very sense that Trump is trying to isolate China may make it more willing to make concessions.
But even if it didn’t, so what? The biggest potential gain to Canada from free trade with China consists not in the barriers they remove to our exports, but the barriers we remove to theirs: not only for the resulting savings to consumers, but the competitive spur to business to raise productivity. The notion that trade must inevitably be imbalanced in such circumstances, or that China’s trade surplus with the U.S. is owing to the former’s “unfair” trade practices, misunderstands the nature both of trade and of trade barriers.
China would almost certainly have a trade surplus with the U.S. even if it maintained no barriers to trade of any kind: the surplus in the current account is merely the inverse of the deficit on the capital account, the product of massive U.S. borrowing, much of it to finance its federal deficits. Neither would it be likely to run up trade surpluses with Canada even if its trade barriers were near absolute: in the end, trade barriers affect the amount of trade, rather than the balance.
If nothing else, the exchange rate sees to that: a chronic imbalance in China’s favour would, other things being equal, lead to a fall in the dollar against the yuan, offsetting if not negating whatever protection its trade barriers provided. And if it didn’t? A trade surplus with Canada earns China … what, precisely? Lots of Canadian dollars, that’s what, good for use in only two ways: buying Canadian goods, or investing in Canadian assets.
If fear of trade is not a good argument against free trade with China, others might be. The regime is a documented threat to national security abroad, as it is to human rights at home. While free trade itself would not necessarily make either situation worse, too much eagerness on our part to strike a deal could. Any agreement would have to maintain Canada’s right to restrict Chinese investments in the face of legitimate national security concerns; likewise, any proposal to make an extradition treaty part of the talks should be forcibly rejected. Given these concerns, could a Liberal government be trusted to negotiate free trade with China? The track record is not encouraging. Trudeau’s people are strangely fixated on China, if not altogether too cozy, apparently in the belief that China is the next global hegemon, and that it is in Canada’s interests to snuggle up to it. The first is open to question, at the least; the second, frankly alarming. Certainly we should not allow ourselves to be stampeded into it, in the name of any alleged need to diversify our trade away from the U.S. That a madman happens to inhabit the Oval Office at present does not alter the long-term advantages to Canada of its relationship with the U.S. Neither is any diversification initiative likely to prove more successful than previous attempts: the pull of proximity is likely to prove as irresistible in the future as it has in the past. Nevertheless, Canada does have a strategic interest in negotiating as many free trade agreements with as many partners as it can — not for the sake of diverting trade away from the U.S., but of diverting investment towards us. As it is, having locked down free trade deals with the U.S., Europe and much of Asia via the Trans Pacific Partnership, Canada offers businesses looking to locate a factory the chance to export to several of the world’s richest markets at one go: one of the few countries on earth, and the only large one, that can make that claim. Adding to that portfolio can only further secure Canada’s place at the crossroads of international trade.
But if that’s the objective, why the single-minded obsession with China? Pop quiz: what is currently the world’s fastest-growing large economy? Not China, but India, now in its third decade of market-oriented reforms — second only to China in population, and arguably with stronger prospects in the long run, not least for having already managed the transition to democracy that plainly terrifies China’s rulers.
Yet free trade talks, begun under the Conservative government, appear stalled; worse, no one in the current government seems much interested in reviving them. As long as we’re looking to make new trade friends, why not pick a country that actually shares our values?