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Canada tightly bound to China despite calls to cut connections

Trade ties difficult to loosen even though there is a public, political push to alter course
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The latest statistics show how difficult it will be for Canada to reduce its trade with China, the country’s second-largest partner, despite increasing evidence of Beijing’s willingness to wield political ties as weapons.

That is the observation of several experts, who noted that despite growing public disillusionment with China, Canada will find it difficult to extricate itself from supply-chain networks and trade ties built over multiple decades.

“It is a constant topic of discussion, whether Canada should pull one of the very, very weak levers that they have [on trade with China],” said Carlo Dade, director of the Trade & Investment Centre at the Canada West Foundation. “I haven’t heard anything specific, but it makes perfect sense. But the first point I make to folks … is that we are not a centrally planned economy. The private sector makes the decision on where to trade, not the government.”

There has been some anticipation of Canada diversifying trade and supply chains away from China in the last two years because of increasingly frosty relations between Ottawa and Beijing. Some moves may indicate a similar will from the federal government, such as Canada launching free-trade talks with Indonesia earlier in 2021. (Analysts also anticipate that Canada could follow Europe’s lead in resuming trade talks with India, the world’s second-most-populous country and a staunch rival to China).

However, despite persistent tension since the arrest of Huawei Technologies Co. Ltd. CFO Meng Wanzhou in Vancouver in late 2018, followed by two retaliatory arrests of Canadians in China and a Chinese ban on Canadian imports like canola and red meat, as well as Beijing’s human-rights abuses in Xinjiang and Hong Kong, Canadian exports to China rose in 2020 to $25.2 billion – up 7.5% from 2019; 2020 exports to China exceeded all previous years on record other than 2018 ($27.7 billion).

According to Statistics Canada’s International Trade Explorer, China was one of only a handful of markets where Canadian exports increased last year. Others include Great Britain, the European Union, Peru and the Philippines.

Hugh Stephens, distinguished fellow at the Asia Pacific Foundation of Canada and vice-chairman of the Canadian Committee on Pacific Economic Co-operation, said it is important to note that 2019 was a down year for Canada-China trade, in part because of Beijing’s trade ban on Canadian canola and red meat.

Stephens noted that the private sector ultimately decides where to do business, so a large-scale change in current trade patterns would likely require a change in global economic fundamentals – something that does not happen overnight.

“Given the role that China plays globally and in the North American supply chain, it’s not a short-term proposition to suddenly turn off the switch,” Stephens said. “There is a gradual diversification taking place as China’s costs increase, as companies assembling in China move operations to Southeast Asia.… But that’s long term. And other than exerting brute force – as China has done with our Australian friends – there’s not a huge amount of things governments can do.”

China’s heated row with Australia helps explain why Canadian exports may have benefited in the last year. China’s resurgent consumer demand has driven barley, wine, beef, lobster and timber imports.

All of those commodities produced by Australia have been targeted by Beijing trade barriers after Canberra called for an international investigation into China’s early handling of COVID-19.

And despite political solidarity among the Five Eyes (including Canada and Australia) to take a harder line against China, Canadian exporters have not had the same hesitation in filling the demand left by Australian goods – resulting in a 38% spike in farm, fish and food product exports to China last year.

“You do need to diversify … but you still have to go to markets based on demand and price,” Stephens said. “There’s no question that the way China plays the game makes us all more vulnerable, but at the moment, we happen to be benefiting from that. They could beat up again on us … but the role China plays on commodities – especially those from Western Canada – is very hard to replace.”

Dade said it’s possible to divert some trade from China in the short term.

For instance, a shift towards crushed plant proteins instead of raw goods like dry peas, lentils and chickpeas would naturally facilitate a shift of exports from China (where the raw seeds are in demand) to Europe and North America (where plant protein is needed).

But making that change, again, is not easy. Dade noted that attempts to expand the plant protein sector in Alberta – where anti-Chinese sentiment in government is the strongest among provinces – faltered because the provincial government cut funding to the cause.

“Here you have the province that’s the most worried about trade dependence on China and is the most vocal about cutting trade with China,” Dade said. “And the one thing they could do … to keep the peas in Canada to process and to export elsewhere, neither the farmers nor the government were interested [in]. Producers are not interested in taking the risk of developing a new market, so we are stuck in this trade-dependency pathway.”

Stephens said Canada could also take advantage of existing trade deals. While free-market governments usually cannot dictate the direction of trade, they can make access to markets more attractive. Agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, with Japan, Vietnam, Malaysia and others, and the Comprehensive Economic and Trade Agreement, with the European Union, are the best examples of such market-access facilities, Stephens said.

For Dade, however, Canada’s trade history with the United States might point to the outcome of its struggle with China.

“Look at the softwood lumber trade,” Dade said. “If anyone has given us just cause to really diversify, it would be the Americans with softwood lumber. Time after time after time, they’ve imposed penalties and fines. They’ve blocked imports. They ignored rulings from the WTO [World Trade Organization] and the NAFTA panel. Everything [trade related] that China has done, the U.S. has done 10-times worse.… But over the past couple of decades, softwood lumber export numbers haven’t moved except for periods of decrease in demand in the U.S.

“If we haven’t learned with the United States, I see nothing happening with China to give any indications we would learn here.” •