The impact of China’s recent dynamic growth and commer- cial integration within the world trade system is, arguably, of the same magnitude as the emergence of England as the dominant 18th century industrial power, or the industrializa- tion of the United States of America beginning in the late 19th century. In each case, the balance of global economic might shifted decisively. The convergence of global technological expertise, investment capital, cutting edge logistics and supply chain management along with cheap and plentiful labour, new infrastructure, and a mercantilist Chinese state, has created the conditions for another great revolution in the international economy. The post-collectivist Chinese economy is highly open. The degree to which Chinese growth is dependent on trade is remarkable: the sum of its total exports and imports of goods and services amounts to around 75 percent of China’s GDP. By way of comparison, in 2002, Canada’s figure was 39.7 percent, the US was 11.7 percent and the G-7 average was 25.2 percent, according to the OECD 2005 Factbook.

As the audit and consulting firm Deloitte has noted, what we are seeing are new patterns of global integra- tion by large companies and offshore investors, who are now seeking to integrate China-based sourcing into their global supply chains. The larger firms are rolling up smaller competitors and concentrating their manufacturing in a few key Chinese locations, taking advantage of scale economies and a low cost, well trained and largely docile labour force. Distribution is facilitated by China’s enormous investments in transportation and containerization. In a sense, as the Financial Post puts it, the country has become a gigantic maquiladora (Mexican processing plant using duty-free imports in the production of exports) zone. All of this is tak- ing place under the direction of a Chinese state committed to growth and industrialization at all costs.

China’s presence in the global economy impacts in ways that are paradoxical. As the author Ted Fishman has noted, at the same time that China’s insatiable demand for industrial commodities has run up the price for steel, copper, aluminum, nickel and plastics in 2003 and 2004, the price of cars in major markets dropped. Cheap car parts produced in Chinese factories were one reason, notes Fishman. In a country as reliant on trade as Canada, the emergence of China raises hard questions for gov- ernment decision-makers about the adequacy of existing economic and transportation policies. One crucial consideration is what the impact of the massive increase in Chinese- driven, trans-Pacific com- mercial trade may be on the port-rail complex in Canada, and what the contours of an adaptive and appropriate policy response might be.

China’s accession to the World Trade Organization in December of 2001 did not precipitate its near-double digit GDP growth; that trend had been long under way. China has achieved an average annual GDP growth rate of 9.7 percent since 1979. But from the mid-1990s, the substantial economic strides registered by the Chinese were being obscured by the West’s preoccupation with the infor- mation and high technology boom and its subsequent meltdown. The hyperbole about technology stocks and the IPOs of start-up firms concealed the reality that a China of 1.3 billion people was steadily integrating into the global market econ- omy. Only now is Chinese economic integration getting the attention it mer- its; the Economist recently trumpeted that China is driving, ”œin a new and per- vasive way,” economic developments and trends that many countries had assumed to be domestically determined. Many analysts contend that China alone has been responsible for much of the increase in global commodity prices and that Chinese demand for oil has been notably responsible for the steep rise in world oil prices.

These facts illustrate the transfor- mative changes underway in China:

  • It is the world’s largest recipient of foreign direct investment ($53 bil- lion in 2003), $33.9 billion in the first half of 2004)

  • It has the world’s largest foreign currency reserves

  • It became the world’s third largest exporter in 2004, pushing Japan into fourth place

  • By purchasing power parity, the size of its economy is second only to that of the US.

  • A dramatic expansion in the pri- vate sector has produced 2.5 mil- lion firms, increasing by some 200,000 per year

  • Less than 50 percent of its GDP is now state-controlled and virtually no prices are controlled

  • About 400 of the Global 500 com- panies have investments in China

  • It has a large consumer class of 300 million people

  • There is massive urbanization underway such that by 2010, the top 30 cities will have populations in excess of 450 million

  • There are already 31 Chinese cities with populations greater than Toronto’s; there are over 100 cities with more than 1 million inhabi- tants (the US has nine)

  • It recently surpassed Japan as the world’s second largest importer of oil, after the US, importing 1.75 million barrels a day

  • It adds the equivalent of Britain’s entire electrical generating output every two years

In 2003, China became Canada’s sec- ond largest trading partner. In 2002, Canada ranked 13th in terms of China’s export destinations (1.8 percent of their global exports). In the last decade, two- way trade between Canada and China increased almost five-fold, from $4.8 billion in 1993 to $23.3 billion in 2003. However, Canada’s trade deficit with China grew last year (2004) to $17.5 bil- lion. In essence, we are exporting to China raw materials such as wood pulp and various ores, metals, chemicals, fer- tilizer and foodstuffs and importing from them mechanical appliances, elec- trical machinery and parts, toys, sport- ing goods, furniture and apparel. China’s industries are moving rapidly up the value chain, absorbing foreign expertise and technology very quickly, which raises questions about the poten- tial displacement of Canadian manufac- tured exports in the US market by Chinese ones. In 2003, the US account- ed for 21.1 percent of China’s total mer- chandise exports, up steeply from 7.1 percent in 1998. While Industry Canada expects China to gain market share in the US at the expense of other Asian countries, Japan and the EU, there are fears that Canada will soon face robust competition from China in the US auto- mobile and auto parts market. According to Statistics Canada, while auto production in China was slightly below Canada’s in 2001, it jumped by 1 million units in 2002 alone, to surpass Canada’s total by 50 percent.

In other respects, Canada is well sit- uated. Canada possesses a lot of the raw materials, including coal, scrap, synthet- ic resins and chemicals, that are needed to fuel what former Canadian ambassa- dor to China, Howard Balloch, has described as ”œa dragon at full gallop.” This has a number of important implica- tions for domestic policy makers. First of all, we must recognize that many of our resource industries and producers are located a long way from tidal water, which makes the transportation compo- nent of final unit cost highly important. Source competition from Australia, whose mines and mineral producers are located much closer to ports, means our railways, for example, must be able to continue helping our exporters compete for Chinese market share. To take another example, the Australians have recently agreed to provide huge amounts of natural gas to China, contracts worth tens of billions of dollars. It is clear that to continue to benefit from the huge Chinese demand for energy products such as bituminous coal, we must, among other things, position favourably our domestic transportation industries (see chart 1).

Canada is also an important gate- way for in-transit, US-bound Chinese exports destined for Chicago’s distri- bution and logistics depots, which are central to the NAFTA marketplace. The onus is on us, therefore, to do what we can to make our ports, especially those on the west coast, as efficient as possi- ble in handling North American-bound Chinese and North Asian marine freight.

This flow of commerce is described in industry circles as the eastbound, trans-Pacific container trade. Container- ization has become the preferred method for moving merchandise because of its standardization, its ability to move seam- lessly from one mode (marine) to anoth- er (rail or truck), and the reduction it offers in damage/loss to cargo. The capac- ity, cost, efficiency and reliability of port gateways and their inland rail/inter- modal and truck distribution systems are key criteria for shipping lines and freight- forwarding companies as they select their ports of call. Essentially, as container ships grow in TEU-carrying capacity, with the largest post-Panamax vessels carrying between 8,000 to 12,000 TEUs, shipping lines maximize efficiency by calling at fewer ports with a larger num- ber of containers. This, as the British Columbia Ports Strategy notes, ”œputs pressure on inland transportation sys- tems to increase efficiency and on ports to expand terminals.” At present, the BC government has set a target of attaining 15 percent market share of the Pacific North America container trade. The main competitor container ports are Seattle, Tacoma, Oakland, and Los Angeles-Long Beach.

These statistics illustrate the stag- gering growth in the container market in recent years:

  • World container port traffic grew by more than 750 percent between 1980 and 2003

  • In 2004, US $25 billion was invested in new cellular containerships

  • China remains the hotspot for contain- er shippers, with Chinese ports experi- encing 29 percent growth in 2004

  • Three of China’s major ports " Shenzhen, Shanghai and Qingdao " together have moved from han- dling 2.4 million TEUs in 1995 to 33.3 million TEUs in 2004.

  • Between 1992 and 2004, the aver- age annual growth in trans-Pacific eastbound container trade was 17 percent from China/Hong Kong

  • The new Yangshan port complex is under construction near Shang- hai, in the Yangtze delta region, at a cost of US $12 billion; by 2020 Shanghai and area will easily be the largest port in the world

The Port of Vancouver handled 1.66 million TEUs in 2004, which was an increase of 8 percent over 2003. Container TEUs in Vancouver have increased 43 percent since 2000, and 835 percent since 1985 (see chart 2). The Vancouver Port Authority (VPA) is pre- dicting container numbers will grow to 6 million TEUs by 2020. The Port of Vancouver is Canada’s busiest port, adding $1.6 billion to the nation’s GDP in 2003. It is important to bear in mind that Vancouver is predominantly an export port, with 80 percent of its volume con- sisting of bulk exports of Canadian resource commodities. However, at the same time that bulk resource exporters are looking to seize upon opportunities in China, Chinese exports of containerized merchandise are flooding our shores. Canada has only 1 percent of China’s export trade and is struggling to cope with the stresses and strains that recent traffic growth in containerized freight has imposed. The shipment of ocean-going containers on flat-bed, double-stacked intermodal trains is a large and growing part of the business for Canadian class 1 railways (CN and CPR). In 2004, the glob- al or port-related business of the two class 1s amounted to 27 percent of their total freight revenues (see chart 3). We must not discount the possibility of further increases in the size of the trans-Pacific container trade. As a trading nation, Canada has an interest in expanding and modernizing its port-rail complex, and the government must act upon the com- mitment of International Trade Minister Peterson, who indicated earlier this year that it was his responsibility to ”œhelp put in place an infrastructure that will galva- nize commercial flows between both countries.”

A number of recent developments in the port and rail sectors highlight how industry is attempting to grapple with the unprecedented volume of containers originating from China.

Deltaport, located at Roberts Bank in the Lower Mainland of BC, houses both a coal terminal and a container facility. It is part of the Port of Vancouver, along with the Vanterm and Centerm contain- er facilities located on Burrard Inlet. Deltaport has a container handling expansion program on the books that would see it eventually increase total TEUs handled to 3.2 million from the current 900,000. Subject to federal and provincial regulatory approvals, the pro- gram will initially add a third berth to the existing two-berth Deltaport container terminal, followed by the development of a new three-berth container terminal "Terminal 2. The Deltaport Third Berth project will be built at an estimated capi- tal cost of approximately $272 million and will be jointly financed by the VPA and private terminal operator TSI Inc. The new berth is expected to be complet- ed by mid-2008. The VPA is also plan- ning to expand its Centerm and Vanterm container handling facilities on Burrard Inlet at a cost of nearly $190 million. The Fraser River Port Authority also has a $190 million containerization handling upgrade underway to address growing TEU volumes.

The development of a new contain- er terminal in Prince Rupert at an esti- mated capital cost of $173 million is driven by the desire to cap- ture container traffic from China. Prince Rupert is locat- ed the shortest distance to Hong Kong in nautical miles of all west coast ports in North America. At 440 miles closer to Asia than other North American ports, the Port of Prince Rupert will be able to offer shipping times 1.5 days closer to markets. It also asserts that, as the deepest port in North Ameri- ca, it will be able to handle the next gen- eration of super post-Panamax container vessels carrying 8-12,000 TEUs. The proj- ect, which was given the green light in April 2005, is being pursued as a public/ private partnership involving $30 mil- lion in federal funding, matching provin- cial funding of $30 million, $30 million from CN Rail, $60 million from Maher Terminals of New Jersey and $25 million in bank-secured financing from the Port of Prince Rupert. Phase 1 of the terminal development is expected to provide ini- tial throughput capacity of 500,000 TEUs per year and is part of a broader plan to build a facility capable of handling 2 mil- lion TEUs per year. The container port will be serviced by CN intermodal trains, which will haul freight to Prince George and then to Chicago and the US Midwest on a daily basis. CN will construct termi- nal trackage at the port and is planning to undertake infrastructure improve- ments to tunnels and bridges on its BC north line, so that it can accommodate double-stack container operations. There are also plans to build a liquefied natural gas import and trans-shipment facility at Prince Rupert. The container port is slat- ed to come on-line in early 2007.

Railways have been making gains in efficiency and capacity over the last two years by improving their use of technolo- gy, asset utilization (longer and heavier trains) and operating practices (improved cycle times). In 2004, CN and CPR announced a series of co-production agreements to make rail operations more efficient for Port of Vancouver freight traf- fic. Essentially, the agreements jointly increase capacity on key sections of track in the Vancouver area to improve the flu- idity of rail operations over existing infra- structure. The objective is to improve the flow of traffic destined for the Port of Vancouver. The agreements provide for reciprocal access over each others’ track to optimize route distances, grades and inter- change arrangements. They build on the joint CN and CPR directional running agreement though the Fraser River Canyon, which was implemented in 2000 to expedite the flows of export traffic.

The CN purchase of BC Rail in 2003 at a cost of $1 billion saw the Crown retain ownership of the railbed and CN assume responsibility for rail transporta- tion and infrastructure maintenance on a lease basis for a 60-year period. The main benefit of the purchase is the improved access by BC resource industries and ship- pers to an integrated, continental rail net- work with faster shipment times to Chicago and points east. Also, grain shippers and the forest industry will now have improved access to Asia through the con- tainer terminal expansion planned for Prince Rupert. As part of the deal, CN agreed to re-open the Dawson Creek-to- Hythe line to facilitate grain handling from Alberta’s Peace region. The transac- tion creates the possibility of new oppor- tunities to enhance BC’s northern transportation and trade corridor with Alberta. CN also agreed to keep the line to the Tumbler Ridge/Northeast Coal min- ing region open for at least another five years. With the robust Chinese demand for metallurgical coal and the surge in commodity prices, a number of the deposits/mines that had lain dormant are now coming back on stream. While it is too early to tell whether the north will experience an economic revival as a result of the China-related economic and trans- port activity, the prospects for the region have improved.

Canadian Pacific Railway announced this year a $160 million expansion of its track network in its western corridor extending from the Prairie region to the Port of Vancouver. The project is designed to increase capac- ity by 12 percent, or more than 400 freight cars a day. Once completed, it will help to expedite the flow of western commodities such as coal from the BC interior and grain, sulphur and fertilizers from the Prairies to the west coast for shipment to Asia. As mentioned earlier, the capacity and efficiency of inland cor- ridors serving port gateways often deter- mines the success of that port in attracting business. This $160 million expenditure is incremental to CPR’s planned or base capital investment of approximately $760 million in 2005.

These changes are important and necessary, but it remains to be seen whether they will be sufficient to cope with the trade flows being generated by the ascendant Chinese economy. The container handling industry in Vancouver was caught off-guard last spring by the massive spike in container volumes originating from Asia. This increased dwell times for containers arriv- ing at Deltaport, a situation that was eventually resolved by a new protocol between the terminal manager, TSI, and the railways serving the port. However, as the president and chief execu- tive of Maersk Inc, one of the largest shipping companies in the world, has said recently, ”œThe issues of 2004-05 will seem inconsequential by comparison with what’s com- ing down the road.”

Many countries are looking to profit from the China phenome- non. Factors of production in today’s world such as capital, technology and commercial expertise are highly mobile, and competition for market share and joint ventures with Chinese firms is tenacious. Furthermore, there are strains appearing in Canada’s trad- ing relationship with the US: border delays stemming from security con- cerns, massive US current account and domestic budgetary deficits, and a trou- bling US penchant for unilateralism and arbitrariness in commercial deal- ings with Canada (i.e. softwood lumber, beef, and wheat) are portents we should not ignore. The US will continue to be our largest market, and action is being advocated to protect that relationship, but prudence suggests further trade diversification would be a wise move.

The former Canadian ambassador to China, Howard Balloch, has argued force- fully that there is significant evidence of Canada’s ”œcompetitive torpor” as regards China. As he puts it: ”œWe all need to understand how deeply China can and will likely impact our environment, as part of every global supply chain, as a market for everything, and as a competi- tor for everything from white collar jobs to American political attention.” The port and railway sectors have been seeking a number of enlightened policy changes for some time now. The robust growth of China ought to serve as the catalyst for adoption of these policy proposals now.

In the case of the port sector, chart 4 below illustrates some of the key dif- ferences in the US and Canadian treat- ment of their respective port industries. Under the rubric of the Canada Marine Act changes, the ports would like to see:

  • Improved access to capital

  • Lowered cost of capital

  • Elimination of stipend payments to the federal government

  • Broadened eligibility for all ports for direct federal investment in port infrastructure and security, when in the national interest

More generally, the ports would like to see a greater focus by provincial and federal governments on a fair and balanced system of taxation, the provision of investment incentives to stimulate economic growth, and the expediting of environmental and permitting approvals for development projects. The British Columbia Ports Strategy also calls for the establishment of a joint federal- provincial management entity for the west coast ports system to coordinate planning across the supply chain. They allege the new entity would have the critical mass to allow a cost-effective means of funding priority infrastructure projects and investments. The stated goal of Canada’s port authorities is to aggressively grow their share of two-way Chinese and Asia-Pacific trade. The Port of Halifax is also laying claim to a share of the bur- geoning Chinese trade by touting the benefits of the Suez Canal route to the eastern seaboard of North America.

The railways, as highly capital intensive members of the supply chain, also have a number of policy proposals that they believe should be adopted in a timely fashion by governments:

  • The capital cost allowance rate for rail rolling stock should be increased to at least 30 percent. This rate should apply to railways and to Canadian private owners such as leasing companies relative to these assets. This will foster faster asset renewal.

  • The federal fuel excise tax on rail should be reduced from the current 4 cents per litre to put it on par with the current US federal rate and match planned US rate reductions. Government should invest in public- private partnerships with the railway industry to ensure that short-line infrastructure investment needs are met. Short-line railways connect shipper and industries in regional and remote parts of the country to the class 1 trunk lines and, in turn, to the ports on our coasts.

  • A policy of land-banking in order to protect industrial land that is adja- cent to rail corridors should be insti- tuted. The disappearance of industrial land situated on rail corri- dors is a particularly acute problem in the Lower Mainland of BC. Rezon- ing by local councils to take advan- tage of retail or residential developments is hastening the departure of firms to areas where road-only access is the norm while creating new ”œproximity” problems between established railways and new residential tenants.

  • The existing running rights provisions in the CTA should remain in place as written. They have fostered a modern, efficient and well invested rail sector which offers competitive rates to Canadian shippers and industries. Regulatory stability is crit- ical for owners of the infrastructure.

These kinds of regulatory and fiscal changes will facilitate investment by the railways to accompany current and predicted growth of international (port-related) traffic. As the railways spend currently about 20 to 25 percent of their retained earnings on invest- ments in physical plant and rolling stock annually, these measures would help to foster the modernization and renewal of the industry as it faces up to Balloch’s galloping Chinese dragon.

Canada has a long-standing relation- ship with China, touching on immi- gration, cultural and political relations, and now trade. But China’s current zeal for export-driven growth trumps other considerations. Canada must therefore adopt a proactive, realistic and forward- looking stance. The port-rail complex is a vital part of Canada’s commercial prosper- ity. As our window on the world, it ensures the seamless flow of Canada’s trade in bulk products, parts and finished merchandise to our trading partners. Ensuring that Canadians benefit from the rampant growth of the Chinese economy will require a well-invested and efficient surface transportation system based on modern logistics and the latest technolo- gy. Several investments have been made by key players in the transportation indus- try, but more are required. Governments must foster the adaptive commercial instincts that reside within Canada’s ports and railways by creating the most con- ducive fiscal and regulatory context possi- ble. If the rise of China does herald the coming of the Pacific century, then Canada will be well-placed to compete.