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Trade alliance could ease Canada’s China dependence

The country’s trade future may align with its geopolitical lines on the global stage, observers say

Canada’s foreign-trade picture could look significantly different in a few years – especially in the technology and communications sectors – if Ottawa follows the trend of global commerce retrenching along geopolitical lines.

That’s the observation of a number of experts in Canada’s trade policy on the international stage, who pointed to the U.K.’s proposal earlier this year to form a “D10” group that would include G7 members along with Australia, India and South Korea, to create a more stable supply chain for fledgling 5G technology that would bypass China.

Given Canada is already in the G7 and having its own difficulties in relations with Beijing, supporting initiatives such as the D10 could be a precursor for other Canadian industries to find new markets with friendlier political systems as well as economic interdependencies.

In the case of the tech sector, the fruits of creating such new supply chains may be seen as early as 2022 – if the D10 starts taking form by the end of this year.

“I think we could be seeing 5G components with Canadian involvement by that time,” said Margaret McCuaig-Johnston, senior fellow at the University of Ottawa’s Institute for Science, Society and Policy.

“Ideally, what you would have is a larger company … that could act as a core, around which smaller companies would provide components. In Waterloo, we have a lot of young companies that can take advantage of this, and we have a number of labs that have worked with [Huawei Technologies Co. Ltd.] that may start working with [D10] groups, too.”

What is most promising about such an alliance is the potential for India (and, to a lesser degree, South Korea) to displace China in mass-manufacturing capability. India also brings to the equation a population nearly the same size as China’s, as well as labour-cost advantages that most industrialized nations do not carry.

This is also not the first time that Canada has participated in an upstart global initiative with successful results, McCuaig-Johnston said, noting Ottawa’s participation in a 2010 climate change research initiative that combined efforts from a dozen countries.

And if this trade model is successful, there’s no telling what other industries it can expand to include. McCuaig-Johnston said that, while she does not support Ottawa decoupling with the Chinese market, a new trade alliance would benefit Canada greatly, especially since the other four “Five Eye” nations have already officially shut out Huawei from their 5G networks.

“We could see trade trends go in that direction,” she said. “In the case of technology trade with China, it has really been Canadian investment in Chinese joint ventures, which then sell into China and often other third markets, and not a trade of actual goods from Canada to China. These cases undercut direct Canadian trade to those third countries. So I think a huge amount of problems that Canadian companies have had in trading to these other countries can be avoided by working with countries that don’t have these type of business practices.”

In many ways, proponents of Ottawa taking a closer look at reshuffling trade alliances often cite Great Britain as a prime example. In addition to proposing the D10, London has also renewed its efforts to gain membership to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The 11-nation trade pact led by Japan (after the United States pulled out in 2016 when Donald Trump entered the White House) includes Canada.

Sean King, senior vice-president of Park Strategies in New York and an affiliated scholar at University of Notre Dame’s Liu Institute, said that while the U.K.’s move towards the CPTPP may seem strange it is logical given the underlying factors – something Canada should consider.

“The CPTPP makes economic sense for London, as default CPTPP leader Japan was Britain’s fifth-largest foreign direct investor as of 2019,” King said. “What’s more, six of CPTPP’s members are Commonwealth countries. …  Friends and allies – in particular, democracies – should be trading with, and investing in, each other.”

Andreas Schotter, associate professor at the University of Western Ontario’s Ivey Business School, said that while he doesn’t see many new large multilateral trade deals on the horizon, global trade becoming “refocused” along new, more regionalized lines is an inevitability that Canada must be prepared for by finding new, trustworthy trade partners – whether or not D10 becomes a reality.

“Canada needs to do a much better job in creating bilateral agreements, which is for counterbalancing somehow the dependence on the U.S.,” Schotter said. “At the same time – and this might sound counterintuitive – Canada also needs to double down on the relationship with the U.S., because it will continue to be a dominant force in the Americas. The U.S. can afford some form of economic nationalism simply because of the size and power of its market.”

And that, ultimately, is the deciding factor for how far any of Canada’s diversification of trade and supply chains along democratic allies will go, said Canada West Foundation’s Trade & Investment Centre director, Carlo Dade.

He noted that for a global realignment of trade systems along geopolitical and ideological lines to work, the world’s largest economy and most powerful democracy has to emerge from its protectionist stance.

Without it, any realignment initiative like the D12 can only be viewed as a “stopgap” as Washington withdraws its support for the global trade order, Dade said.

“If [Democratic presidential candidate] Joe Biden wins – and if moderates from both parties [Republicans and Democrats] win – then we’ll see a return of the U.S. On things like rejoining the TPP, not so much; he’ll need to bring along his own party. But rejoining the World Health Organization, making helpful and constructive changes at the World Trade Organization, not throwing us down as disposable roadkill on the path to dealing with China, and assuring co-operation on fighting COVID and sharing pandemic supplies, I see a Biden administration seizing things like economic co-operation and reassuring allies as low-hanging fruit.”

Without such a change, Canada’s own foreign trade moves towards “trusted partners” would be significantly smaller, Dade said, as the COVID-19 pandemic has seen 69 countries [including the United States] impose export restrictions on materials needed to fight the disease’s spread.

“Critically for Canada, this list of countries includes almost all those from which Canada imports critical supplies.”

Dade added that it means the list of which countries that can be viewed as trusted trade partners dwindles quickly.

“No on China, no on the U.S.A., and no on the U.K. Countries with whom we could forge an ‘I’ve got your back in a pandemic’ agreement are Taiwan, South Korea, Japan, Australia, Mexico and New Zealand. You want countries that don’t have a current rap sheet for withholding supplies.” •