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Why ‘friend-shoring’ might not work in B.C.

The push to diversify trade away from China fails to account for the private sector, expert says
Canada sent five per cent of its exports to China last year. B.C., meanwhile, sent 15 per cent of its own exports. Carlo Dade of the Canada West Foundation says talks of diversifying trade away from China frequently don’t take into account the economics of Western Canada. | Chung Chow, BIV

“I think friend-shoring is here,” Deputy Prime Minister Chrystia Freeland told Canadian business leaders and reporters last week in Quebec.

A portmanteau of “friend” and “off-shoring,” it was the second time in as many weeks Freeland had been publicly pushing the concept of diversifying trade and supply chains away from authoritarian regimes and relying more on like-minded democracies.

She noted at the Oct. 17 news conference that the European Union had already proposed a ban on imports of products made through forced labour. The move has been seen as a direct shot across the bow at China, which is under fire over human rights abuses targeting the Uyghur people in the country’s Xinjiang region.

“We also need to be realistic and be sure that where our economies are vulnerable to decisions of another country … we should aim to have that dependency be with a fellow democracy,” Freeland said.

Between the arbitrary detention of the two Michaels, supply-chain pain caused by China’s zero-COVID lockdowns and ongoing aggression towards democratic Taiwan, talk of decoupling from China has been intensifying in some circles since the outset of the pandemic. Such a task, though, might prove to be untenable.

“Theoretically, it could happen,” said Carlo Dade, director of the Canada West Foundation’s Trade & Investment Centre. “But you know, theoretically, I could also dunk on LeBron James.”

Dade said the problem with trying to diversify trade away from China is that the private sector would somehow have to be persuaded to go through extraordinary measures to walk away from business partnerships and a giant market and incur extraordinary losses as a result.

“But then the other aspect of it, too: Where would trade go?” he said, noting that Canada has spent decades trying to diversifying its trade so as not to be so dependent on the U.S.

The U.S. accounted for 75.6 per cent of Canadian exports ($477 billion) in 2021 – a high not seen since 2013, according to Statistics Canada.

China came in second, accounting for 4.6 per cent of Canadian exports ($29 billion) last year.

“Not all sectors would be able to pivot to increase to the U.S., but do we think that the U.S. could pick this up? Are we comfortable becoming even more entangled with the U.S.?” Dade said.

He also noted that much of the discourse surrounding diversifying trade away from China seems to emanate from Central Canada.

While China accounted for 4.6 per cent of Canada’s exports last year, B.C. sent 16 per cent of its exports ($8.9 billion) there in 2021.

Some B.C. companies that have ventured into China seeking business opportunities in the world’s second-largest market have faced a rough go. But it hasn’t necessarily deterred them.

In 2015 Burnaby-based Ballard Power Systems Inc. (TSX:BLDP) terminated a contract with a Beijing business partner in what CEO Randy MacEwen described at the time as a “costly and embarrassing toast-up” (MacEwen was not CEO at the time the deal was signed).

The hydrogen fuel cell maker cut ties with China’s Azure Hydrogen, citing breach of contract after Ballard spent nearly two years providing fuel cell modules for hydrogen buses and later licensing its telecom backup power system. Services were being provided, but money eventually stopped coming in, according to Ballard.

MacEwen said Ballard wouldn’t curb its activity in China, but would instead pursue only “strong, well-capitalized local partners.”

The CEO emphasized to investors during the Azure “toast-up” that no intellectual property (IP) transfer occurred prior to the bad deal that ultimately cost Ballard US$7.5 million.

Within three years, Ballard’s new joint venture with Weichai Power Co. Ltd. brought $184 million into Ballard’s coffers when the Chinese company upped its ownership stake in the B.C. firm.

And late last month Ballard announced that it had entered into an investment agreement that would see it commit $130 million towards building a new R&D centre and manufacturing facility in Shanghai.

“The appetite is still there, but I think it’s lower than it was,” lawyer Roch Ripley, a partner at Gowlings WLG and head of the firm’s Vancouver IP department, said about B.C. companies’ interest in expanding in China.

“Some of it is geopolitical. But I think a lot of it is just … that China has just gotten more expensive.”

He said many companies are now eyeing manufacturing opportunities in Vietnam, where costs are cheaper.

Meanwhile, Ripley said China’s legal system is no longer what many Canadian companies might assume following a shift over the past 15 to 20 years to offer more protections to non-Chinese firms.

“One misconception which used to be true and which now is less true is that you can’t enforce IP rights in China,” he said.

“If you’re a foreign market and you’re looking to attract foreign IP to enter your jurisdiction and foreign investment, then you’ve got to offer these protections in order for people to invest in that jurisdiction.”

His B.C. clients are typically small- to medium-sized enterprises looking to scale up production or access a new market.

Ripley said common mistakes when entering China include not registering one’s IP or trademarks.

He said Canadian companies might have just assumed their trademarks would not be enforceable in China anyway, but they then find themselves entangled with “trademark squatters.” These squatters will try to sell the Canadian company’s trademark back to them upon entry into China.

“You can maybe try to expunge it for what’s bad faith, but that takes time, it costs money and there’s always uncertainty,” Ripley said.

He also noted that sometimes clients will enter into a supplier or distributorship agreement with a Chinese partner only to later discover their supplier or distributor is siphoning off those products or making counterfeits at the same time.

Meanwhile, Dade said that even if Canadian politicians think the risks are too great to become further entrenched in China, whether for political or security reasons, it’s ultimately up to the private sector to decide.

“If you’re looking to diversify or to have the country’s exports diversified in the Indo-Pacific, you’re going into a region where China is the largest economy, the largest economic power, the largest political power,” he said.

“Even if you’re somehow miraculously able to run away from China, you’re going to run smack into China.”

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