The Canada-China Trade Puzzle: A Sectoral Approach 

Prime Minister Trudeau meets with President Xi at the Great Hall of the People in Beijing, China. December 5, 2017. Adam Scotti photo
Sources: U.S. government and Global Affairs Canada


As the Trump administration transforms America’s role as the democratic anchor of the rules-based international order, the global trading system is also in flux. While the United States Mexico Canada Agreement has been completed, the negotiations confirmed that Canada’s trade future lies in diversification. China will be part of that strategy.

Edward Greenspon
and Kevin Lynch 

Geopolitics has been turned on its head in the three short years since the Liberal government of Justin Trudeau came to power. China, the 21st century’s new Great Power, has continued its impressive economic growth while further centralizing political control in the hands of the Communist Party and its leader, Xi Jinping, and expanding its global presence through infrastructure, trade, institution building and military and intelligence efforts.

It is busily shifting its economy from an export to consumer base and has opened more sectors to imports and investment as it becomes increasingly responsive to the demands of its growing middle class for a clean environment and safe products. Economically, it is investing heavily in education and advanced industries such as robotics, artificial intelligence and data analytics, aerospace and electric vehicles. “China is at an historic juncture. After decades of high-speed growth, the government is now focusing on high-quality growth,” the International Monetary Fund (IMF) recently stated.

As this plays out across the Pacific, a relatively new administration in the United States is also redefining its relationship with the global, rules-based trading system it conceived. It has withdrawn from the Paris Climate Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and is sowing uncertainty with attacks on stalwart institutions such as the World Trade Organization (WTO), the IMF and the North Atlantic Treaty Organization (NATO). It is pushing hard to control trade arrangements—more managed trade than free trade—through a hub-and-spoke system with America at the centre. To those who resist, including long-time allies, it is ready and able to impose arbitrary penalties.

Yet even amidst its isolationism, the U.S. has made it clear it does not countenance China’s rise, viewing the Asian power as a strategic rival rather than a mere competitor or potential partner. Upset by a trade imbalance heavily in China’s favour, President Donald Trump has initiated a tariff war. In the recently negotiated United States-Canada-Mexico Agreement, the administration used its economic weight to impose a condition making it virtually impossible for the two sovereign nations on its doorstep to negotiate free trade agreements with China. By dint of geography, history, security, culture and economics, Canada’s relationship with the U.S. will remain its most important. But it is a relationship in flux—and where it is headed over time is uncertain at best.

It is within this environment that the Public Policy Forum convened a group of business executives, academics, former public servants and elected politicians and NGOs over the past 18 months to wrestle with what an economically beneficial and politically acceptable Canada-China strategy should look like. Mindful of the need to mitigate the risks to Canada of “Make America Great Again,” PPF’s Consultative Forum on China decided—well before the USMCA—that the best way forward was not a comprehensive free trade agreement, but rather a more focused sectoral approach coupled with fresh policies in such areas as international cooperation, investment reviews and Canadian sovereignty. We noted that one of the most successful trade arrangements in the country’s history was the 1965 sectoral arrangement known as the Canada-U.S. Auto Pact.

We felt that by growing trade in key sectors, through the removal of non-tariff barriers and the promotion of mechanisms to facilitate the movement of goods and people and ward off or mediate disputes, Canada could record early wins and advance the cause of a rules-based trading system. This stood in contrast to a likely five-to-10-year free trade negotiation that would stretch over several governments and economic cycles, and seemed tilted more toward failure than success. (The CETA agreement with the EU took eight years.) Moreover, by thoughtfully choosing which sectors to pursue first, the approach could forestall the highly sensitive issues of technology transfer and national security while Canada consults with allies and rethinks its regime. Selling lobsters, filling hotel rooms, shipping timber or oil and gas and reaching consumers via internet platforms don’t pose direct security threats to Canada or our allies.

It weighed on us that without China, the second largest economy in the world and the largest global purchaser of much of what this country produces, Canada would be left again without a credible diversification strategy. The comportment of the United States, including the USMCA, has rendered such a strategy all the more imperative. Yet the behaviour of China, particularly the centralizing of power flowing from the 19th Party Congress in October 2017 and the treatment of its Uyghur minority, often makes it more difficult.

Despite differences of detail, the Consultative Forum nontheless quickly agreed that the question before Canada was not whether we should rethink Canadian policy toward China. It is what should that policy should be? How could we make it coherent and strategic? How would we represent our interests while staying true to our values? As the report notes:

Canada can only provide the rising incomes, rewarding jobs and expanding market opportunities familiar to past generations by trading more with economies that are growing faster than our own, and are sufficiently big to make a material economic impact. Trading with slow-growth economies will not do the trick. For the most part, the economies that blend high growth with scale can be found in Asia, with China its main engine.

In 2000, China was responsible for a mere four per cent of the global economy and the U.S. a dominant 31 per cent. Today, China accounts for 15 per cent and the U.S. 24 per cent. Those numbers are forecast to converge in a decade or so, after which China will surpass the U.S. as the world’s largest economy. According to the IMF, China alone accounted for an astonishing 33 per cent of global growth in 2017, outstripping all the rest of Asia (28.8 per cent), as well as Europe (15.2 per cent) and the Western Hemisphere countries (12.8 per cent), including the U.S., combined. Even with stronger U.S. economic performance this year, China’s one-third share of world growth is holding steady.

Sources: U.S. government and Global Affairs Canada

In the year the Trudeau government added the word diversification to the previous title of the Minister of International Trade, a diversification strategy that doesn’t include China is bound for the trash heap alongside failed dalliances by earlier governments. As things stand, the ratio of our exports to the U.S. versus our second largest destination, China, is 17:1, and just a small fraction of Canadian companies actually sell beyond our borders. If we are going to reduce the risks of dependency and continue to prosper, we simply need to have more businesses sell more goods and services to more places. Better balance in our portfolio of trade markets will allow us to tap into buyers willing to pay world price for our goods in contrast to our current situation as a captive supplier unable to secure world price for our oil and gas. To succeed requires all hands on deck, including SMEs; we need to become not just a great trading nation, but a nation of traders.

We call our report, Diversification not Dependence: A Made-in Canada China Strategy, partly in acknowledgement that we are one of the most trade dependent major economies in the world. A point of comparison: whereas 75 per cent of Canadian merchandise goods go to the U.S., the corresponding figure for the United Kingdom, after more than four decades in the European Union, is under 50 per cent.

Canada’s excessive reliance on a single market was something it could get away with when that market represented the great global engine of growth. For many decades, the U.S. soaked up what we produced—from crude to cars—and accorded us kid-glove treatment. But our special status began fading even before Donald Trump came to office. President Barack Obama rejected the Keystone pipeline and insisted Canada bear all the costs of a new border crossing at Windsor. Precisely where American foreign and trade policy is headed in the long-term remains an unknown, but the trend lines do not invite complacency.

Despite strong growth in absolute trade numbers with China since 2000, Canada is a slacker within the G7 in establishing a presence. Canada’s market share has fallen by about 25 per cent since 1995. The most intriguing comparator actually is the U.S. Herein lies an important argument for how Canada, while cut off by USMCA from comprehensive free trade negotiations (essentially interpreted by the WTO as covering “substantially all trade”), has room to grow through the sectoral approach we recommend. In 2017, Canada’s shipments to China accounted for just 4.3 per cent of our total exports. Meanwhile, 8.4 per cent of the U.S. export basket, nearly double the Canadian footprint, went to China. If Canada were simply to match the U.S. standard, it would translate into almost $25 billion in new exports—more than our current sales to Japan, India and South Korea combined. This would mark a good, yet hardly politically provocative, start down the diversification road.

The Consultative Forum has put forward an interrelated set of recommendations, starting with our sectoral approach, for achieving economic and geo-political gains for Canadians without sacrificing principle. These are not intended as a buffet table. To pick here and there would be to deny the necessary integration of measures that make for a strategy rather than merely a series of one-off actions. We would start sectoral discussions with agri-food (including fisheries) and natural resources, where mutual interests are already well established and where benefits will fall disproportionately to rural and remote areas hard-pressed for economic development. We would then look to move quickly to such areas as education and research, tourism, forestry, insurance and wealth management, clean tech, life sciences and engineering services. We would also seek agreements around ‘enabling’ sectors, such as aviation and e-commerce, the latter of which holds out great promise to reduce the costs and practical obstacles to SME’s reaching foreign markets.

At the same time, we recommend negotiating an international cooperation arrangement between Canada and China in areas of mutual global interest, such as environmental protection, climate change and the governance of international institutions. Polls show that Canadians strongly favour the two countries working more closely together on common challenges, particularly concerning the environment.

On the contentious subject of foreign investment, we would move to restore clarity and consistency for all foreign investors while enacting more rigourous enforcement mechanisms to ensure compliance with undertakings given as part of the investment approval process. Special attention must be paid to the relatively new category of national security reviews. We recommend working with like-minded nations on identifying risks and how best to handle them. These assessments should emerge from a more transparent process than at present, led by a formal committee of economic departments, intelligence officials and independent security experts. Our model is the Committee on Foreign Investment in the United States (CIFIUS), which endeavours to actively manage these situations rather than being buffeted by them.

Ultimately, final determinations on national security issues must rest with the elected government. But its decisions should emerge out of a coherent and explicable evidence-based process, with as little mystery as possible.

The other deeply vexing issue, of course, is human rights. We were told by NGOs of the importance of holding China’s feet to the fire on the international undertakings it has already made, while trying to get it to go further. They saw no magic solution and said they are “not against” closer trade ties. We recommend working more closely with our allies to build a greater rule of law consciousness in China. According to public opinion polls, Canadians don’t see economic partnership and human rights as binary choices, believing the former will help the latter. In this, they are in sync with Harvard political science professor Graham Allison, author of Destined for War: Can America and China Escape the Thucydides’s Trap, about how shifts in power have more often than not led to war. He cites the Soviet-American rivalry as an important exception, arguing engagement with rivals beats isolation in that it allows them to negotiate around their disagreements and to communicate, compromise and coordinate their way out of crises.

Canadians understandably want to be confident their sovereignty is always being safeguarded. Canada has a head start over countries like Australia in countering foreign interference by virtue of our stricter election financing rules. We call on Parliament to draft and debate an unambiguous declaration of our intent to protect our sovereignty from whomever might treat it lightly. We hope such a debate will begin to forge common foreign policy understandings among parties, so Canada’s interaction with the world is built on a solid national-interests foundation rather than the shifting winds of electoral outcomes.

Among other recommendations, our formula includes adjustment policies to assist the transition of Canadians firms and workers that may be adversely affected by new trade and investment rules, as was the case with the Canada-U.S. Free Trade Agreement and most famously the wine industry. We also propose measures to ensure that SMEs and female and Indigenous-led business can reap the benefits of new trade opportunities. Trade agreements that are not inclusive and do not speak to our values are unlikely to generate the requisite public support to succeed. We were made acutely aware through our process of the need for our foreign interlocutors to understand the historical rights of the country’s Indigenous peoples and to engage them directly in discussion.

Finally, we note that at this particular juncture in China’s development as a middle-class society, Canada has the opportunity to offer up its experience in such areas as public pensions, eldercare, workplace safety, livable cities, national parks, financial market regulation, consumer protection and the like. We reject entirely the notion that Canada has nothing to offer China. As a successful society, and a G7 nation with a natural resources endowment and advanced economy, we bring a great deal to the table.

As Canada approaches the 50th anniversary of recognition of China, we think the time is ripe for a blueprint with a 50-year horizon to finally make Canada as engaged with its Pacific flank as it is with its Atlantic and American ones. The choice is simple: negotiate a serious diversification course or perpetuate the dependency that has recently illustrated the weakness of our bargaining position.  

Edward Greenspon, President and CEO of the Public Policy Forum, is a former editor-in-chief of The Globe and Mail. 

Kevin Lynch, Vice Chair of BMO Financial Group, is a former Clerk of the Privy Council and Head of the Public Service.