Ed­ward Green­spon and Kevin Lynch

The Canada-China Trade Puz­zle: A Sec­toral Ap­proach

Policy - - In This Issue - Ed­ward Green­spon and Kevin Lynch

Geopol­i­tics has been turned on its head in the three short years since the Lib­eral gov­ern­ment of Justin Trudeau came to power. China, the 21st cen­tury’s new Great Power, has con­tin­ued its im­pres­sive eco­nomic growth while fur­ther cen­tral­iz­ing po­lit­i­cal con­trol in the hands of the Com­mu­nist Party and its leader, Xi Jin­ping, and ex­pand­ing its global pres­ence through in­fra­struc­ture, trade,

in­sti­tu­tion build­ing and mil­i­tary and in­tel­li­gence ef­forts.

It is busily shift­ing its econ­omy from an ex­port to con­sumer base and has opened more sec­tors to im­ports and in­vest­ment as it be­comes in­creas­ingly re­spon­sive to the de­mands of its grow­ing mid­dle class for a clean en­vi­ron­ment and safe prod­ucts. Eco­nom­i­cally, it is in­vest­ing heav­ily in ed­u­ca­tion and ad­vanced in­dus­tries such as ro­bot­ics, ar­ti­fi­cial in­tel­li­gence and data an­a­lyt­ics, aero­space and elec­tric ve­hi­cles. “China is at an his­toric junc­ture. Af­ter decades of high-speed growth, the gov­ern­ment is now fo­cus­ing on high-qual­ity growth,” the In­ter­na­tional Mon­e­tary Fund (IMF) re­cently stated.

In 2000, China was re­spon­si­ble for a mere four per cent of the global econ­omy and the U.S. a dom­i­nant 31 per cent. To­day, China ac­counts for 15 per cent and the U.S. 24 per cent. Those num­bers are fore­cast to con­verge in a decade or so, af­ter which China will sur­pass the U.S. as the world’s largest econ­omy.

As this plays out across the Pa­cific, a rel­a­tively new ad­min­is­tra­tion in the United States is also re­defin­ing its re­la­tion­ship with the global, rules­based trad­ing sys­tem it con­ceived. It has with­drawn from the Paris Cli­mate Agree­ment and the Com­pre­hen­sive and Pro­gres­sive Agree­ment for Trans-Pa­cific Part­ner­ship (CPTPP) and is sow­ing un­cer­tainty with at­tacks on stal­wart in­sti­tu­tions such as the World Trade Or­ga­ni­za­tion (WTO), the IMF and the North At­lantic Treaty Or­ga­ni­za­tion (NATO). It is push­ing hard to con­trol trade ar­range­ments—more man­aged trade than free trade—through a hub-and­spoke sys­tem with Amer­ica at the cen­tre. To those who re­sist, in­clud­ing long-time al­lies, it is ready and able to im­pose ar­bi­trary penal­ties.

Yet even amidst its iso­la­tion­ism, the U.S. has made it clear it does not coun­te­nance China’s rise, view­ing the Asian power as a strate­gic ri­val rather than a mere com­peti­tor or po­ten­tial part­ner. Up­set by a trade im­bal­ance heav­ily in China’s favour, Pres­i­dent Don­ald Trump has ini­ti­ated a tar­iff war. In the re­cently ne­go­ti­ated United States-Canada-Mex­ico Agree­ment, the ad­min­is­tra­tion used its eco­nomic weight to im­pose a con­di­tion mak­ing it vir­tu­ally im­pos­si­ble for the two sov­er­eign na­tions on its doorstep to ne­go­ti­ate free trade agree­ments with China. By dint of ge­og­ra­phy, his­tory, se­cu­rity, cul­ture and eco­nomics, Canada’s re­la­tion­ship with the U.S. will re­main its most im­por­tant. But it is a re­la­tion­ship in flux—and where it is headed over time is un­cer­tain at best.

It is within this en­vi­ron­ment that the Pub­lic Pol­icy Fo­rum con­vened a group of busi­ness ex­ec­u­tives, aca­demics, for­mer pub­lic ser­vants and elected politi­cians and NGOs over the past 18 months to wres­tle with what an eco­nom­i­cally ben­e­fi­cial and po­lit­i­cally ac­cept­able Canada-China strat­egy should look like. Mind­ful of the need to mit­i­gate the risks to Canada of “Make Amer­ica Great Again,” PPF’s Con­sul­ta­tive Fo­rum on China de­cided—well be­fore the USMCA—that the best way for­ward was not a com­pre­hen­sive free trade agree­ment, but rather a more fo­cused sec­toral ap­proach cou­pled with fresh poli­cies in such ar­eas as in­ter­na­tional co­op­er­a­tion, in­vest­ment re­views and Cana­dian sovereignty. We noted that one of the most suc­cess­ful trade ar­range­ments in the coun­try’s his­tory was the 1965 sec­toral ar­range­ment known as the Canada-U.S. Auto Pact.

We felt that by grow­ing trade in key sec­tors, through the re­moval of non-tar­iff bar­ri­ers and the pro­mo­tion of mech­a­nisms to fa­cil­i­tate the move­ment of goods and peo­ple and ward off or me­di­ate dis­putes, Canada could record early wins and ad­vance the cause of a rules-based trad­ing sys­tem. This stood in con­trast to a likely five-to-10-year free trade ne­go­ti­a­tion that would stretch over sev­eral gov­ern­ments and eco­nomic cy­cles, and seemed tilted more to­ward fail­ure than suc­cess. (The CETA agree­ment with the EU took eight years.) More­over, by thought­fully choos­ing which sec­tors to pur­sue first, the ap­proach could fore­stall the highly sen­si­tive is­sues of tech­nol­ogy trans­fer and na­tional se­cu­rity while Canada con­sults with al­lies and re­thinks its regime. Sell­ing lob­sters, fill­ing ho­tel rooms, ship­ping tim­ber or oil and gas and reach­ing con­sumers via in­ter­net plat­forms don’t pose di­rect se­cu­rity threats to Canada or our al­lies.

It weighed on us that with­out China, the sec­ond largest econ­omy in the world and the largest global pur­chaser of much of what this coun­try pro­duces, Canada would be left again with­out a cred­i­ble di­ver­si­fi­ca­tion strat­egy. The com­port­ment of the United States, in­clud­ing the USMCA, has ren­dered such a strat­egy all the more im­per­a­tive. Yet the be­hav­iour of China, par­tic­u­larly the cen­tral­iz­ing of power flow­ing from the 19th Party Congress in Oc­to­ber 2017 and the treat­ment of its Uyghur mi­nor­ity, of­ten makes it more dif­fi­cult.

De­spite dif­fer­ences of de­tail, the Con­sul­ta­tive Fo­rum nonethe­less quickly agreed that the ques­tion be­fore Canada was not whether we should re­think Cana­dian pol­icy to­ward China. It is what should that pol­icy should be? How could we make it co­her­ent and strate­gic? How would we rep­re­sent our in­ter­ests while stay­ing true to our val­ues? As the re­port notes:

Canada can only pro­vide the ris­ing in­comes, re­ward­ing jobs and ex­pand­ing market op­por­tu­ni­ties fa­mil­iar to past gen­er­a­tions by trad­ing more with economies that are grow­ing faster than our own, and are suf­fi­ciently big to make a ma­te­rial eco­nomic im­pact. Trad­ing with slow-growth

economies will not do the trick. For the most part, the economies that blend high growth with scale can be found in Asia, with China its main engine.

In 2000, China was re­spon­si­ble for a mere four per cent of the global econ­omy and the U.S. a dom­i­nant 31 per cent. To­day, China ac­counts for 15 per cent and the U.S. 24 per cent. Those num­bers are fore­cast to con­verge in a decade or so, af­ter which China will sur­pass the U.S. as the world’s largest econ­omy. Ac­cord­ing to the IMF, China alone ac­counted for an as­ton­ish­ing 33 per cent of global growth in 2017, out­strip­ping all the rest of Asia (28.8 per cent), as well as Europe (15.2 per cent) and the Western Hemi­sphere coun­tries (12.8 per cent), in­clud­ing the U.S., com­bined. Even with stronger U.S. eco­nomic per­for­mance this year, China’s one-third share of world growth is hold­ing steady.

In the year the Trudeau gov­ern­ment added the word di­ver­si­fi­ca­tion to the pre­vi­ous ti­tle of the Min­is­ter of In­ter­na­tional Trade, a di­ver­si­fi­ca­tion strat­egy that doesn’t in­clude China is bound for the trash heap along­side failed dal­liances by ear­lier gov­ern­ments. As things stand, the ra­tio of our ex­ports to the U.S. ver­sus our sec­ond largest des­ti­na­tion, China, is 17:1, and just a small frac­tion of Cana­dian com­pa­nies ac­tu­ally sell be­yond our bor­ders. If we are go­ing to re­duce the risks of de­pen­dency and con­tinue to pros­per, we sim­ply need to have more busi­nesses sell more goods and ser­vices to more places. Bet­ter bal­ance in our port­fo­lio of trade mar­kets will al­low us to tap into buy­ers will­ing to pay world price for our goods in con­trast to our cur­rent sit­u­a­tion as a cap­tive sup­plier un­able to se­cure world price for our oil and gas. To suc­ceed re­quires all hands on deck, in­clud­ing SMEs; we need to be­come not just a great trad­ing na­tion, but a na­tion of traders.

We call our re­port, Di­ver­si­fi­ca­tion not De­pen­dence: A Made-in Canada China Strat­egy, partly in ac­knowl­edge­ment that we are one of the most trade de­pen­dent ma­jor economies in the world. A point of com­par­i­son: whereas 75 per cent of Cana­dian mer­chan­dise goods go to the U.S., the cor­re­spond­ing fig­ure for the United King­dom, af­ter more than four decades in the Euro­pean Union, is un­der 50 per cent.

Canada’s ex­ces­sive re­liance on a sin­gle market was some­thing it could get away with when that market rep­re­sented the great global engine of growth. For many decades, the U.S. soaked up what we pro­duced—from crude to cars—and ac­corded us kid-glove treat­ment. But our spe­cial sta­tus be­gan fad­ing even be­fore Don­ald Trump came to of­fice. Pres­i­dent Barack Obama re­jected the Key­stone pipe­line and in­sisted Canada bear all the costs of a new bor­der cross­ing at Wind­sor. Pre­cisely where Amer­i­can for­eign and trade pol­icy is headed in the long-term re­mains an un­known, but the trend lines do not in­vite com­pla­cency.

De­spite strong growth in ab­so­lute trade num­bers with China since 2000, Canada is a slacker within the G7 in estab­lish­ing a pres­ence. Canada’s market share has fallen by about 25 per cent since 1995. The most in­trigu­ing com­para­tor ac­tu­ally is the U.S. Herein lies an im­por­tant ar­gu­ment for how Canada, while cut off by USMCA from com­pre­hen­sive free trade ne­go­ti­a­tions (es­sen­tially in­ter­preted by the WTO as cov­er­ing “sub­stan­tially all trade”), has room to grow through the sec­toral ap­proach we rec­om­mend. In 2017, Canada’s ship­ments to China ac­counted for just 4.3 per cent of our to­tal ex­ports. Mean­while, 8.4 per cent of the U.S. ex­port bas­ket, nearly dou­ble the Cana­dian foot­print, went to China. If Canada were sim­ply to match the U.S. stan­dard, it would trans­late into al­most $25 bil­lion in new ex­ports— more than our cur­rent sales to Ja­pan, In­dia and South Korea com­bined. This would mark a good, yet hardly po­lit­i­cally provoca­tive, start down the di­ver­si­fi­ca­tion road.

The Con­sul­ta­tive Fo­rum has put for­ward an in­ter­re­lated set of rec­om­men­da­tions, start­ing with our sec­toral ap­proach, for achiev­ing eco­nomic and geo-po­lit­i­cal gains for Cana­di­ans with­out sac­ri­fic­ing prin­ci­ple. These are not in­tended as a buf­fet ta­ble. To pick here and there would be to deny the nec­es­sary in­te­gra­tion of mea­sures that make for a strat­egy rather than merely a series of one­off ac­tions. We would start sec­toral dis­cus­sions with agri-food (in­clud­ing fish­eries) and nat­u­ral re­sources, where mu­tual in­ter­ests are al­ready well es­tab­lished and where ben­e­fits will fall dis­pro­por­tion­ately to ru­ral and re­mote ar­eas hard-pressed for eco­nomic de­vel­op­ment. We would

then look to move quickly to such ar­eas as ed­u­ca­tion and re­search, tourism, forestry, in­sur­ance and wealth man­age­ment, clean tech, life sciences and en­gi­neer­ing ser­vices. We would also seek agree­ments around ‘en­abling’ sec­tors, such as avi­a­tion and e-com­merce, the lat­ter of which holds out great prom­ise to re­duce the costs and prac­ti­cal ob­sta­cles to SME’s reach­ing for­eign mar­kets.

At the same time, we rec­om­mend ne­go­ti­at­ing an in­ter­na­tional co­op­er­a­tion ar­range­ment be­tween Canada and China in ar­eas of mu­tual global in­ter­est, such as en­vi­ron­men­tal pro­tec­tion, cli­mate change and the gov­er­nance of in­ter­na­tional in­sti­tu­tions. Polls show that Cana­di­ans strongly favour the two coun­tries work­ing more closely to­gether on com­mon chal­lenges, par­tic­u­larly con­cern­ing the en­vi­ron­ment.

On the con­tentious sub­ject of for­eign in­vest­ment, we would move to re­store clar­ity and con­sis­tency for all for­eign in­vestors while en­act­ing more rigourous en­force­ment mech­a­nisms to en­sure com­pli­ance with un­der­tak­ings given as part of the in­vest­ment ap­proval process. Spe­cial at­ten­tion must be paid to the rel­a­tively new cat­e­gory of na­tional se­cu­rity re­views. We rec­om­mend work­ing with like­minded na­tions on iden­ti­fy­ing risks and how best to han­dle them. These as­sess­ments should emerge from a more trans­par­ent process than at present, led by a for­mal com­mit­tee of eco­nomic de­part­ments, in­tel­li­gence of­fi­cials and in­de­pen­dent se­cu­rity ex­perts. Our model is the Com­mit­tee on For­eign In­vest­ment in the United States (CIFIUS), which en­deav­ours to ac­tively man­age these sit­u­a­tions rather than be­ing buf­feted by them.

Ul­ti­mately, fi­nal de­ter­mi­na­tions on na­tional se­cu­rity is­sues must rest with the elected gov­ern­ment. But its de­ci­sions should emerge out of a co­her­ent and ex­pli­ca­ble ev­i­dence-based process, with as lit­tle mys­tery as pos­si­ble.

The other deeply vex­ing is­sue, of course, is hu­man rights. We were told by NGOs of the im­por­tance of hold­ing China’s feet to the fire on the in­ter­na­tional un­der­tak­ings it has al­ready made, while try­ing to get it to go fur­ther. They saw no magic so­lu­tion and said they are “not against” closer trade ties. We rec­om­mend work­ing more closely with our al­lies to build a greater rule of law con­scious­ness in China. Ac­cord­ing to pub­lic opin­ion polls, Cana­di­ans don’t see eco­nomic part­ner­ship and hu­man rights as bi­nary choices, be­liev­ing the for­mer will help the lat­ter. In this, they are in sync with Har­vard po­lit­i­cal sci­ence pro­fes­sor Gra­ham Al­li­son, au­thor of Des­tined for War: Can Amer­ica and China Es­cape the Thucy­dides’s Trap, about how shifts in power have more of­ten than not led to war. He cites the Soviet-Amer­i­can ri­valry as an im­por­tant ex­cep­tion, ar­gu­ing en­gage­ment with ri­vals beats iso­la­tion in that it al­lows them to ne­go­ti­ate around their dis­agree­ments and to com­mu­ni­cate, compromise and co­or­di­nate their way out of crises.

Cana­di­ans un­der­stand­ably want to be con­fi­dent their sovereignty is al­ways be­ing safe­guarded. Canada has a head start over coun­tries like Aus­tralia in coun­ter­ing for­eign in­ter­fer­ence by virtue of our stricter elec­tion fi­nanc­ing rules. We call on Par­lia­ment to draft and de­bate an un­am­bigu­ous dec­la­ra­tion of our in­tent to pro­tect our sovereignty from whomever might treat it lightly. We hope such a de­bate will be­gin to forge com­mon for­eign pol­icy un­der­stand­ings among par­ties, so Canada’s in­ter­ac­tion with the world is built on a solid na­tional-in­ter­ests foun­da­tion rather than the shift­ing winds of elec­toral out­comes.

Among other rec­om­men­da­tions, our for­mula in­cludes ad­just­ment poli­cies to as­sist the tran­si­tion of Cana­di­ans firms and work­ers that may be ad­versely af­fected by new trade and in­vest­ment rules, as was the case with the Canada-U.S. Free Trade Agree­ment and most fa­mously the wine in­dus­try. We also propose mea­sures to en­sure that SMEs and fe­male and Indige­nous-led busi­ness can reap the ben­e­fits of new trade op­por­tu­ni­ties. Trade agree­ments that are not in­clu­sive and do not speak to our val­ues are un­likely to gen­er­ate the req­ui­site pub­lic sup­port to suc­ceed. We were made acutely aware through our process of the need for our for­eign in­ter­locu­tors to un­der­stand the his­tor­i­cal rights of the coun­try’s Indige­nous peo­ples and to en­gage them di­rectly in dis­cus­sion.

We re­ject en­tirely the no­tion that Canada has noth­ing to of­fer China. As a suc­cess­ful so­ci­ety, and a G7 na­tion with a nat­u­ral re­sources en­dow­ment and ad­vanced econ­omy, we bring a great deal to the ta­ble.

Fi­nally, we note that at this par­tic­u­lar junc­ture in China’s de­vel­op­ment as a mid­dle-class so­ci­ety, Canada has the op­por­tu­nity to of­fer up its ex­pe­ri­ence in such ar­eas as pub­lic pen­sions, el­der­care, work­place safety, liv­able cities, na­tional parks, fi­nan­cial market reg­u­la­tion, con­sumer pro­tec­tion and the like. We re­ject en­tirely the no­tion that Canada has noth­ing to of­fer China. As a suc­cess­ful so­ci­ety, and a G7 na­tion with a nat­u­ral re­sources en­dow­ment and ad­vanced econ­omy, we bring a great deal to the ta­ble.

As Canada ap­proaches the 50th an­niver­sary of recog­ni­tion of China, we think the time is ripe for a blue­print with a 50-year hori­zon to fi­nally make Canada as en­gaged with its Pa­cific flank as it is with its At­lantic and Amer­i­can ones. The choice is sim­ple: ne­go­ti­ate a se­ri­ous di­ver­si­fi­ca­tion course or per­pet­u­ate the de­pen­dency that has re­cently il­lus­trated the weak­ness of our bar­gain­ing po­si­tion.

Ed­ward Green­spon, Pres­i­dent and CEO of the Pub­lic Pol­icy Fo­rum, is a for­mer editor-in-chief of The Globe and Mail. Kevin Lynch, Vice Chair of BMO Fi­nan­cial Group, is a for­mer Clerk of the Privy Coun­cil and Head of the Pub­lic Ser­vice.

Adam Scotti photo

Prime Min­is­ter Trudeau meets with Pres­i­dent Xi at the Great Hall of the Peo­ple in Bei­jing, China. De­cem­ber 5, 2017.

Sources: U.S. gov­ern­ment and Global Af­fairs Canada

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