Orientation East

By Fred Edwards

Orientation East

By Fred Edwards

Why China and Canada are perfect bedfellows

The author is an editor at the Toronto Star and aformer editorial consultant at Beijing Review

A t first glance, China and Canada would seem to be ideal trading partners. The Canadian economy is oriented heavily toward the export of natural resources and Prime Minister Stephen Harper has described the country as an “emerging energy superpower.” China, on the other hand, is a manufacturing superpower with a voracious appetite for energy and raw materials to feed its thousands of factories and hundreds of growing cities. It would seem to be a match made in economic heaven.

The consensus among economists and trade analysts, however, has been that bilateral trade and investment have failed to live up to their potential. This is particularly true regarding Canadian exports to China. While China is Canada’s second largest trading partner overall and ranks third among exporters behind the United States and the United Kingdom, Canada accounts for just 1 percent of Chinese imports and fails to crack the top 10 countries exporting goods to China. The result is chronic trade defcit that has risen to more than $30 billion a year, according to Canadian statistics.

Recognition of this problem has been a long time coming, but now, rather suddenly, both governments seem to have ambitious plans to expand trade and investment.

Exploring free trade

Last month, Zhang Junsai, Chinese Ambassador to Canada, said the two countries should begin talks on a free trade agreement.

“It’s high time to begin the exploratory work on the possibility of a free trade agreement,” he toldThe Globe and Mail. “Under a free trade agreement, there will be more and more trade and investment.”

His comments came in the wake of the signing of a bilateral Foreign Investment Promotion and Protection Agreement, which was widely seen as a key step on the way to a more extensive trade relationship. Zhang’s support for free trade also coincided with the high-profle bid by China National Overseas Oil Corp. (CNOOC) for Nexen Inc., an Alberta oil firm. The $15.1-billion takeover offer has already been approved by Nexen shareholders, but Canadian critics of the deal are suspicious of CNOOC’s status as a stateowned company. It is not a conventional commercial enterprise, they say, but an arm of the Chinese Government.

Zhang dismissed these concerns. “We are not coming to control your resources,” he toldThe Globe and Mail. “Business is business. It should not be politicized. If we politicize all this, then we cannot do business.”

The Canadian Government is reviewing the takeover bid and will decide whether to approve it before the end of November. There are reports of divisions in the cabinet, but the prime minister is believed to be in favor. If that’s true, perhaps it is no coincidence that even while critics of the Nexen deal were expressing their opposition in the media, word was fltering out of Ottawa that the Canadian Government, too, was considering free trade with China.

A prominently displayed report byNational Postcolumnist John Ivison said an announcement on exploratory talks is expected to be made after the Canadian Government’s review of the Nexen deal.

Ivison quoted Canadian trade consultant Peter Clark as saying, “Harper wants to do it. And I was in China three to four weeks ago talking to senior Chinese people and they are very positive. They see the advantage to them of getting Canada on side on certain product sectors where they cannot get the United States on side.”

Examining compatibility

The Canadian prime minister was, in fact, already on record as being favorably disposed toward a free trade agreement. Back in February when he visited China, Harper noted in a CBC radio interview that his government wants to diversify Canadian trade. Commenting on the Foreign Investment Promotion and Protection Agreement and plans for a study on the compatibility of the two economies, he said these developments would set the stage for “discussions to examine the feasibility and some of the potentials of a free trade agreement.”

“There will be enormous opportunity in China if we could ever get to that stage,” he said, “but at the same time [we’re] not under any illusions that there would be…a significant number of economic and other questions that would have to be answered.”

MA DAN

The study on economic compatibility, which was released in mid-August, concluded there is “untapped potential for further growth” in bilateral trade and investment.

It focused on seven sectors: agriculture and food; clean technology and environmental goods and services; machinery and equipment; natural resources; services; textiles; and transportation infrastructure and aerospace.

The study described natural resources and agricultural production as “two particularly notable areas” for Canadian export growth because China’s domestic resources “cannot meet the needs of its 1.34 billion people and rapidly expanding economy.”

Besides these traditional areas, the study also highlighted emerging sectors such as clean energy and transportation and aerospace. According to the report, “In each of these areas, Canadian businesses can provide advanced technology and leading product and services solutions. For its part, China can provide input for advanced materials and equipment that will help Canadian producers remain competitive.”

In order to turn these opportunities into reality, however, the report said the two governments would have to address existing “impediments to trade,” such as “the clarity and predictability of the Chinese and Canadian regulatory environments; differences in national standards, and in technical and certifcation requirements; the application of tariffs; and the protection of intellectual property rights.”

On that last point, the report deviated from the usual criticism of China to say, “It is important to acknowledge that China’s intellectual property protection framework has advanced greatly since the country’s World Trade Organization accession in 2001. Further improvements in this and the abovementioned areas would enhance business opportunities in both economies.”

The report’s reference to “impediments to trade” would seem to lead naturally to the current buzz about a free trade agreement.

Shifting focus

There is a certain irony in the fact that a government led by Harper is contemplating free trade with China. Economic ties between the two countries were a priority under the Liberal governments of Jean Chrétien and Paul Martin (1993-2006), and Liberals had long favored trade diversifcation away from over-reliance on the American market.

Harper’s Conservatives, however, were suspicious of the China connection and changed Canada’s trade priorities after coming to power early in 2006. Relations with China were allowed to stagnate, and Harper and his ministers rarely missed an opportunity to criticize Beijing on a wide range of issues. On trade, the focus swung to the Western Hemisphere, including free trade agreements with Chile and Colombia. These moves were controversial; even Harper’s supporters in the business community wondered how relatively small Latin American economies could replace the potential of China. By 2008, criticism of the government’s ideological aversion to nurturing relations with China became so loud that Harper and his cabinet could no longer ignore it. The financial crisis that erupted later that year, which crippled Canada’s traditional trading partners in the United States and Europe, accelerated the rapprochement with China.

Canada’s “energy superpower” strategy has now swung away from the United States, where there is widespread criticism of the environmental impact of the development of the western Canadian oil sands, and is focused on China and other Asian markets. Harper’s government favors the construction of the“Northern Gateway” pipeline that would carry bitumen from the oil sands to Canada’s west coast for export to China.

During his February interview with the CBC, the prime minister noted that Canada currently sells 99 percent of its energy to the United States, and “hasn’t penetrated the Asian markets very far and obviously that’s a priority for the government.”

Oil exports would be the ultimate answer to Canada’s nagging trade defcit with China, while being an important step toward the long-term Canadian goal of trade diversifcation. As for Beijing, it would gain a stable and reliable energy supplier. The first indication that the two countries are on a new economic course will come when Ottawa makes its decision on the Nexen deal. Should it be approved, that match made in economic heaven could well be on its way toward consummation.

yanwei@bjreview.com