China probably did us a favour when it rejected Prime Minister Justin Trudeau’s efforts to launch negotiations on a free trade deal in December. Now at least we know what the Chinese don’t want: an ambitious, progressive set of trade and economic commitments on labour, environment, human rights and gender equality. They have also given us time to pause and think carefully about the emerging new world order into which we may be inadvertently stumbling. It’s worth taking the opportunity to think this through.
Geopolitics: China waxing, US waning
Having led the creation of the new world order after the Second World War, the US now appears to be in retreat. Whether it will be a phenomenon limited to the Donald Trump administration or an enduring trend is anyone’s guess. But it does seem that the high cost of being the sole superpower would be difficult for any administration to sustain.
Meanwhile, challengers to the unipolar world order, in particular the nuclear powers Russia and China, have a deep interest in contesting US dominance. While maintaining his own domestic power base, President Vladimir Putin appears intent on reasserting the expansionist global role that the former Soviet Union played following the Second World War.
But the bigger geopolitical story is China. Starting in the 1970s, the Chinese government has orchestrated an economic miracle. The result today is a $15-trillion centrally planned economy, on track to become eventually the biggest economy in the world. Visitors to China marvel at the modernity of its big cities, while choking on persistent smog — perhaps a fitting metaphor for modern China.
The Chinese Communist Party openly rejects the Western liberal democratic model and aims to reshape the world order. China’s current president, Xi Jinping, has an ambitious plan to build “Belt and Road” trade infrastructure links connecting China to the rest of Asia and ultimately Europe.
China has flouted international law and asserted expansionist sovereignty claims to the South China Sea by building artificial islands in previously open waterways and then establishing military installations on them — a dangerous flashpoint made worse by territorial disputes with Japan and nuclear threats from North Korea.
Canada-China trade: A glass half empty
This is what we are up against in our quest for a progressive free trade deal: it’s an epic mismatch.
We sell $21 billion a year in merchandise to China, mostly raw materials. That’s important, but only about 4 percent of our total exports to the world. In return, it sells $64 billion in largely manufactured goods back to us. On the investment side, China has $21 billion in Canada, while we have $13 billion there. And the trend line is clear. Our exports to China have grown by only about $1.6 billion since 2012; China’s to us have risen by almost $14 billion.
Unlike the Canadian economic system, which is based on relatively free enterprise and open markets, dependent on trade and economic integration with our neighbour the US, China’s economy is centrally planned, with 150,000 state-owned enterprises, owned by the central government and local governments. Chinese businesses are capable of swallowing Canadian ones effortlessly. The 2013 purchase of Nexen’s oil sands business by the Chinese National Offshore Oil Company is a case in point.
In short, Canada’s free trade project must be assessed realistically. Those of us who favour free trade in principle do so because it has been empirically proven that clear rules and open markets increase trade. Yet most realists have long recognized the limits of the theory of comparative advantage, which suggests that countries will benefit if they specialize and export what they are relatively good at producing in return for importing what they are relatively less good at producing. When one partner has a gross production advantage and a system that is tilted to ensure that this will always be so, theory yields to practical considerations. Combine this systemic imbalance with the geopolitical context and it’s clear that we need to manage the trade relationship with China carefully.
So what does China want from Canada through a free trade deal? It certainly won’t be offering to balance our bilateral trade for free.
We can presume that signing its first ever trade deal with a G7 country, and with the US’s closest trade and security partner, would be a significant strategic gain for China. It will want to sell more manufactured goods and services and also gain greater access to our supply chains with the US market, including autos and parts. As China is by far the world’s largest vehicle producer, this is no small matter for our industry. It will also be interested in our energy and natural resources, agrifood industries and advanced technology.
China’s interests do not necessarily align with our own, which is the core problem. We should not delude ourselves into thinking that it will be easy to obtain an advantageous trade deal with China.
Canada’s goals: Trade triage
Given recent setbacks, we need to be clear-eyed about what we want and don’t want. First, it is certainly not in our interests to have the current systemic and growing structural trade imbalance with China.
Second, while we want to sell more agrifood products and commodities, it’s not in our interests to have the Canadian companies that export these products bought outright by Chinese enterprises; nor is it in our interests to have China buy up land and companies and use Chinese labour to compete with our own exporters.
Third, it is in our interests commercially to develop China as a market for our oil and gas exports — again, without selling control of our resources. The energy sector is political dynamite with regard to the environmental file, both domestically and internationally, however.
Fourth, it is in our interests to sell such services as banking, insurance, engineering, education and tourism. On the latter two, however, we have to be realistic about our limited ability to absorb the enormous numbers of students and tourists that China could generate.
Fifth, we want to sell high-value manufactured products, while protecting our intellectual property. Since protecting IP has proven almost impossible in China, and the Chinese are more technologically advanced anyway, we must play defence.
While dispute settlement mechanisms are normally included in trade deals, we must remember that they cut both ways. On China’s side, the rule of law is a less compelling factor than gaining favours at home by resolving appeals. Usually the real obstacles are nontariff barriers.
In sum, we could be risking a lot, and China not so much.
Recalibrating our priorities: Choices, choices
Rather than a classic free trade deal, what we need more urgently is an aggressive trade promotion program in China: more trade commissioners to help Canadian businesses take advantage of existing export opportunities.
Canadians understand that our first priority by far is to retain and grow the massive $575-billion two-way merchandise trade relationship with the US. The US is also our preeminent investment and security partner. Everything else is small by comparison, and the current worries about the North American Free Trade Agreement (NAFTA) are well founded and extremely serious.
We do need other customers. But new trade agreements aren’t the only answer. If we assess some of our other trade agreements, the balance sheet is not always positive for us.
The Canada-South Korea free trade agreement, for example, has done little to increase Canadian exports, leaving us with a 2:1 trade deficit. We need to boost trade promotion and help our businesses enter this market.
The Comprehensive Economic and Trade Agreement (CETA) with Europe, a huge win for Canada in terms of both trade and geopolitics, will now require a constant effort in trade promotion if we are to gain European business. If NAFTA collapses, a trilateral deal between Canada, the US and the UK would be worth considering.
In Asia, the recent breakthrough agreement to sign the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) deal is a positive step forward, though work remains to ratify and implement it. While it certainly hasn’t pleased every sector, it meets most of our progressive goals and offers a small counterbalance to NAFTA. Japan, the world’s third largest economy, is the main prize. Mexico is included as well, which ensures continuity no matter the outcome with NAFTA. Once we sign and ratify the CPTPP, we should of course pursue broader access to Asia, including the giant markets of China, India and Indonesia.
We have choices on how to do this, besides our current bilateral approach. We could invite others to join the CPTPP. Having China inside this tent would greatly expand its collective market size, as would, of course, having the US back in. Another option would be to join the Regional Comprehensive Economic Partnership (RCEP) process, an ongoing set of trade talks among the major economies of Asia.
The RCEP members are the 10 Association of Southeast Asian Nations countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam) and ASEAN’s six Free Trade Agreement Partners(Australia, China, India, Japan, Korea, New Zealand). While the RCEP agreement is not expected to be as ambitious or progressive as we would like, and needs to be carefully analyzed in this light, it does offer much broader market access across Asia.
These options don’t completely exclude the possibility of a bilateral trade deal with China, should China change its mind and accept the standards established in CETA and the CPTPP. In the end, however, a bilateral agreement is no more make-or-break for China than it is for us. Trade will go on.
Be careful what you wish for
Canada has a tradition of multilateralism, which relies on international institutions to maintain global order. We seek open markets, along with respect for democracy and human rights. Rather than casting these aside at the very moment the global order is shifting, it is as important as ever that we align with those who share these enduring interests and values.
In that light, our pursuit of progressive free trade deals clearly suits our broader interests. As a trading nation, there is no doubt that we need access to other markets. But, in a rapidly changing world, we must also be careful what we wish for.
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