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No windfall for Canada in U.S.-China trade fight: experts

Without Meng Wanzhou case resolution, trade war fallout will hurt Canada regardless of its outcome, analysts say

Canadian economic observers have been warning for weeks that Canada should brace for Beijing favouring U.S. goods and dealing a further blow to Canadian exports.

Trade negotiations between China and the United States appeared to have been inching toward a resolution in April. But as the Washington-Beijing talks took a dramatic downward turn, with both sides now threatening each other with new rounds of export tariffs, anyone expecting that China might now again look to Canadian exports instead of U.S. goods could be in for a disappointment.

That’s because, analysts say, a breakdown of U.S.-China trade relations would upset the foundations of global trade established since the 1950s, and the resulting ripple effects in institutionalized economic systems would be far greater than the sector-
specific downturns facing Canada if China switches import preference to U.S. producers for commodities like agricultural products.

Essentially, Canada is in a “damned if they do, damned if they don’t” situation.

“The bad part for Canada, if they reach an agreement, would be the special deals that the U.S. would get on agriculture, energy and whatever else,” said Yves Tiberghien, director emeritus at the University of British Columbia’s Institute of Asian Research and the executive director of the UBC China Council.

“So in Canada, we would suffer on the agriculture side. But if there’s no deal, the next round of tariffs going into effect would then mean a trade war that could put us in an economic situation we haven’t seen since at least the 1930s…. Stock markets would fall, international trade growth would likely go into negative, and global economic growth would likely go down, as well.”

Business Council of BC executive vice-president Jock Finlayson suggested that higher U.S. tariffs on Chinese goods may cause Chinese companies to dump them into third-country markets, including Canada. “This would hurt Canadian firms that produce similar goods,” he said.

Andreas Schotter, the F.W.P. Jones faculty fellow and associate international business professor at the University of Western Ontario’s Ivey Business School, said Canadian companies’ attachment to U.S. supply chains that link to the Chinese market could also be hit by China’s new tariffs on U.S. imports if the threat comes to fruition. Schotter, a former business executive in China, added that Canada is already in the doghouse in Beijing due to the arrest of Huawei Technologies Co. Ltd. CFO Meng Wanzhou on a U.S. extradition request.

“My concern is that Canadian firms are very embedded in U.S. supply chains and those U.S. firms’ exports to China,” Schotter said.

“There will be, at least temporarily, more pressure on those Canadian firms exposed to such risk, since it is almost impossible for them to disentangle themselves from the follow-through effect of Chinese tariffs. In addition, Canada is currently also in a difficult relationship with China, and there is a real threat that we get punished by association [with the U.S.] or that we will be used as a pawn.”

According to B.C. government statistics for 2018, 49% of B.C.’s exports were to the U.S. and 14.5% went to mainland China – the second-largest export destination.

The two sides of the U.S.-China trade negotiations had a dramatic falling-out earlier this month after U.S. President Donald Trump tweeted that Washington plans to impose another 25% in tariffs on the remaining US$325 billion of Chinese goods imported by the United States. Trump had already raised tariffs to 25% from 10% on US$200 billion in Chinese imports. The decision came as reports emerged that the proposed trade agreement once thought to be nearing completion was returned to the U.S. side in late April from Chinese reviewers with as much as 30% changed. China sent Vice-Premier Liu He to meet with U.S. Trade Representative Robert Lighthizer in Washington, but the talks ended without a result.

China returned with a counter-threat of retaliatory tariffs against U.S. imports, while Trump said May 14 that the dispute is a “little squabble” that can still be resolved if Beijing is willing.

Sean King, senior vice-president of New York-based consultancy Park Strategies and an affiliated scholar at the University of Notre Dame’s Liu Institute for Asia and Asian Studies, said he is unsure whether countries like Canada can capitalize on U.S. difficulties with China, given that Ottawa’s relationship with Beijing “has its own issues.”

But King, a noted critic of Beijing, said the tariff war is not necessarily an effective way for Washington to deal with China.

“I definitely want to see us trading less with mainland China, but tariffs aren’t the best remedy. Forced import substitution rarely, if ever, works in a developed economy. Rather, Trump should be further opening, or keeping open, other markets to give U.S. companies and consumers viable alternatives to the PRC [People’s Republic of China].”

That’s why King would rather see Washington re-enter the Trans-Pacific Partnership (TPP) as a way to provide U.S. businesses with viable alternative markets to China. King added that Canada, as a current Comprehensive and Progressive Trans-Pacific Partnership member, has that option still open to it as a potential solution.

“Canadians can capitalize on America’s self-defeating exit from the Trans-Pacific Partnership and help fill the U.S. void in some of these friendly markets where you don’t have to worry about your citizens being arbitrarily arrested,” King said. “I only wish we [the U.S.] had been smart enough to have stayed in TPP; Canadians are free to make the most of our own short-sightedness.”

Tiberghien estimated the odds of reaching a deal were around 70%. He added that the real deadline will be the next G20 summit in Japan in late June. Both Trump and Chinese leader Xi Jinping are scheduled to attend.

Tiberghien said that, for Canada, the most important question regarding the U.S.-China trade talks may be whether the Meng Wanzhou arrest is part of the negotiations.

“It’s plausible that the case could be one of the issues breaking down the U.S.-China negotiations. And depending on whether the eventual deal resolves the issues – maybe Huawei would plead guilty and pay a big fine, but the U.S. would drop the extradition case on Meng – whether or not this happens would have huge implications for Canada, because the whole Canadian economy with China now is held hostage to the Meng case.” •

– With files from Glen Korstrom