PM’s chance as power broker

Canada the ideal go-between for U.S.-China talks

Justin Trudeau promised to restore Canadian leadership in the world. He pledged that the “proud tradition” that saw Canada help create the United Nations and champion the international treaty to ban landmines would be revived on his watch.

The reality has been underwhelming.

Trudeau’s crusade to change the world has been more symbolic than substantive. Canada’s progressive trade agenda has been rebuffed by its trading partners; its peacekeeping mission to Mali — eight helicopters and 250 military members — has been welcomed by the United Nations but comes to an end next July.

Yet there is one area where Canada could become the “essential country” that Foreign Affairs Minister Chrystia Freeland said it would be in her major 2017 foreign policy speech — as an interlocutor on trade relations between the United States and China.

“We have to be quiet and not grandstand. But we’re about the only country in the world that both of them are listening to these days,” said one senior official.

The U.S. approach to China over the past quartercentury has been grounded in the belief that prosperity would usher in pluralism and a form of democracy.

That hope has died and under Donald Trump, the bugle has been sounded on a new Cold War.

The world trading system, and China’s membership in the World Trade Organization as a developing nation, has allowed it to distort markets by using government money to subsidize its state-owned companies.

Trump was elected on a promise to fix China’s “longtime abuse of the broken international system and unfair practices” such as theft of intellectual property. The U.S. claims China’s IP laws force companies to engage in joint ventures with Chinese companies that have allowed them to rip off foreign technology.

In an attempt to reduce America’s trade deficit, Trump has imposed tariffs worth $250 billion since July and threatened to increase the tariff rate on $200 billion worth of goods to 25 per cent from 10 per cent in January. The Chinese have retaliated with tariffs of their own on $110 billion of U.S. goods — but that accounts for 85 per cent of all American exports and they don’t have much more room to retaliate.

Trump, by contrast, has threatened to put tariffs on a further $267 billion worth of Chinese exports.

The obvious arbiter in this trade war is the World Trade Organization. But Washington has accused it of not doing enough to penalize unfair trade and is blocking nominations to the WTO’s appellate body, which could leave it unable to hear cases after 2019.

This is where Canada comes in. Even as the trade dispute system is on the brink, the necessity of saving it is becoming apparent — and Ottawa is central to that plan.

Robert Lighthizer, the U.S. Trade representative, would also like to remake the WTO rather than let it crumble.

That would require the Chinese to provide information to enable trading partners to gauge the scale of government-related trade distortions to the market, and it would require a clearer definition of what counts as a state-backed entity.

It seems counterintuitive — why would the Chinese give up such an advantage?

The answer is that Chinese trade is now 20 per cent of global totals and they have most to lose.

The Communist Party’s legitimacy is based on China’s citizens prospering and its seven-per-cent growth rates are built on global trade.

China is publicly opposed to the kind of trade protectionism being practised by Trump which, almost by default, puts it in the camp of those seeking an effective multilateral rules-based trading system.

This explains the delight Premier Li Keqiang expressed this week at Canada’s initiative to reform the WTO.

Late last month, 13 “likeminded” countries, including Japan and the European Union, convened in Ottawa to look at potential changes to the WTO. China and the U.S. were not included, quite deliberately, but trade minister Jim Carr said this week the idea was “warmly welcomed” by the Chinese and that the initiative received “considerable support” from Li.

“We are in a good position,” said one Canadian official, speaking from the Far East. “We are not the EU, we are not Japan, and we are close to, or at least inoffensive, to the U.S. and China. That puts us in a good spot to give it a real go.”

Roland Paris, a professor of international relations at the University of Ottawa and former adviser to the Trudeau government, said it is a “natural role for a middle power.”

The history of the WTO suggests that solutions to its problems often follow the “plurilateral” approach — an agreement by a group of influential countries, which is then forwarded to the broader 164-member club.

The ministerial meeting in October — also attended by Australia, Brazil, Chile, Kenya, South Korea, Mexico, Norway, Singapore and Switzerland — was criticized by the U.S. ambassador to the WTO, Denis Shea, as being a talking shop.

But the blueprint Canada put forward did address U.S. concerns on there being more substantive rules and even considered the idea of reducing the power of the appellate body — a proposal that would be popular with American Democrats and Republicans both.

Paris said officials have now been tasked with coming up with concrete ideas that will be put to a meeting of ministers on the fringe of the World Economic Forum meeting in Davos in January.

The success or failure of the initiative will ultimately rest on persuading the Chinese to make concessions. That does not appear an impossible feat, given China’s reaction to U.S. tariffs — an offer to “substantially reduce” America’s trade deficit by increasing the purchase of U.S. goods.

Brett House, deputy chief economist at Scotiabank, said the Chinese have offset much of the impact of the initial tariffs by allowing the Chinese renminbi to depreciate more than 10 per cent against the U.S. dollar since April. Trump’s threatened future tariffs would encompass many items like consumer electronic goods — meaning iPhones. House thinks the president is unlikely to hit his own voting base in the run-up to a general election.

Still, the trade war is already contributing to slower growth in China, projected to come in below six per cent in 2019. Some forecasts are even below five per cent, the first time real GDP growth has been that slow in nearly 30 years. Consumer confidence has peaked and business optimism is in negative terrain.

China needs to stabilize trading relations with the U.S. Expectations should be measured, but Canada may find itself pushing against an open door in its efforts to get China to change.