As China and U.S. inch toward a trade deal, Canada gets a warning of potential harm

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The prospect of a trade deal between Washington and Beijing has rallied markets and raised hopes that U.S. pressure can prise open greater foreign access to the world’s second-largest market for countries around the world.

But for Canada, which has already felt Chinese economic punishment in the midst of a dispute over the arrest of a Huawei executive, a U.S.-China trade deal also carries risk Beijing will increase its orders for American goods and slash its demand for those sold by others.

“That could be harmful to Canada,” said Pedro Antunes, chief economist at the Conference Board of Canada. “Especially in a situation where we’re already kind of in their sights over the Huawei issue.”

U.S. and Chinese negotiators have, in nine rounds of talks, shaped the contours of an agreement that is expected to see Beijing lower some of the barriers that have made it home to the most hostile rules for foreign investors among any major economy monitored by the Organization for Economic Co-operation and Development.

All of China’s trading partners are likely to benefit from changes to protectionist policies, protections for intellectual property or requirements for technology transfer, said Tomas Valasek, the director of Carnegie Europe, on a recent visit to Beijing.

But in other respects, the United States is playing “a complete zero-sum game” relative to other countries, he said. Observers believe Washington is seeking roughly US$200-billion a year in additional Chinese purchases of U.S. goods, which over the six years to 2025 could amount to US$1.2-trillion.

It all amounts to “purchases that would have been dispersed or divided between all of the other countries, and now won’t be,” Mr. Valasek said. On at least three different occasions, European leaders have reached out to the White House to suggest joining forces in trade talks with China, Mr. Valasek said.

“We’ve been turned down,” he said. “And presumably the answer is because the deal from the get-go was going to be a combination of things that are good for all of us, and things that are good for the United States at the expense of the rest of us.”

Canada exported just under $27-billion in goods to China in 2018.

China has already moved to substantially block an important component of that trade – sales of Canadian canola, which amounted to $2.7-billion last year.

But Canada also exports large quantities of other goods to China, including $1.7-billion a year in soybeans, $1.8-billion in meat and seafood, $5.9-billion in forest products and $2.9-billion in coal, oil, iron and copper.

“We produce a lot of things that the U.S. produces,” said Robert Kwauk, a Blakes lawyer who has spent more than 20 years in China. Any agreement by China to buy U.S. goods “is going to be highly risky for companies producing fungible goods” in Canada.

That’s not to say other buyers won’t be available.

“If you have one market that’s favouring the U.S., that means there’s an opening somewhere else,” Mr. Antunes said.

“But even if that’s the case, it’s costly in terms of adjustments.” In particular with agricultural and food products, if Chinese importers look elsewhere, Canadian producers "could end up with much lower prices,” he said.

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Goldy Hyder, president of the Business Council of Canada, pointed to the certainty a U.S.-China deal would provide to global markets. “The U.S. has tariffs in place on over US$250-billion in Chinese imports. This hurts Canadian companies with integrated North American supply chains,” he said. And “Canadian companies face the same IP, technology transfer and investment challenges as U.S. companies in China,” he said.

At the same time, “assuming the agreement results in Chinese purchasing agreements from the U.S., some Canadian sectors and companies could be adversely affected,” he said. That prospect “provides further impetus for Canada to articulate a clear China strategy and continue to execute on government’s own diversification plan.”

Other potential dislocations could be of greater concern to the Canadian economy.

“If you look at what corporate Canada can do, it’s actually quite dangerous to think about because we could actually be encouraging our companies to produce in the U.S. rather than produce in Canada,” Mr. Kwauk said.

Canada’s exports of manufactured goods to China remain comparatively small. Canadian companies sold $1-billion in machinery and a further $1.3-billion in trains and planes to China last year.

But “this also speaks to Canada’s biggest problem. We are not exporting high-value-added products to China,” said Loren Brandt, an economist at the University of Toronto who specializes in China. “China also wants to ‘control’ the value chains in these sectors, suggesting that the long-run benefits to Canada from exporting in these sectors is limited.”

Still, he said, “market access to China is the big issue, and the U.S. may be making progress here. This is a multilateral issue rather than a bilateral issue. Canada should be working with their counterparts in the EU, especially Germany and France, Japan and [South] Korea, to open up the Chinese market in both goods and services.”

A U.S.-China deal stands to expose Ottawa’s weaknesses in dealing with Beijing, added Wendy Dobson, a China scholar who is co-director of the Institute of International Business at the Rotman School of Management. “Face it, we have no strategy,” she said. “We need to do a lot of work with China leaders, first by senior bureaucrats and business, and then by high-level diplomacy by those very senior Canadians Chinese respect, such as Jean Chretien.”

Europe, by contrast, has mounted its own push for greater access to China in parallel with U.S. trade negotiations. In a joint statement released this week following talks in Brussels, the European Union and China agreed to conclude an investment agreement by next year and to work together on reforms to the World Trade Organization. China has also pledged to stop obligating European companies to transfer key technology as the price for investing in China, the EU said.

The EU has, at the same time, called China “an economic competitor in the pursuit of technological leadership, and a systemic rival promoting alternative models of governance.”

Canada could nonetheless “learn from the EU and its tactics when dealing with trade issues with China,” said He Weiwen, a former Chinese diplomat who now sits on the executive councils of the China Association of International Trade and the China Society for WTO Studies.

It is “groundless” to suggest that China would leverage a U.S. trade agreement “as a weapon to fire on Canada,” he said.

But it’s clear that the Vancouver arrest of Meng Wanzhou, the Huawei chief financial officer whose extradition the United States has sought, has placed an obstacle between Canada and China at a critical time for global trade.

“It’s obvious that nothing tangible will be achieved unless China and Canada are determined to improve their government-level relations,” Mr. He said. “The most urgent imperative for Canada, if it wants to secure its own interests, is to stand with China to resolve the dispute around the Meng case and support multilateral development and globalization with China.”

With reporting by Alexandra Li