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Business Commentary Why Canada isn’t profiting from the U.S.-China trade feud

In a perfect world, the trade showdown between the United States and China would be good for Canada.

The two countries are our No. 1 and No. 2 export customers. And they have hit each other with punitive tariffs on hundreds of billions of dollars worth of goods.

You would think Canadian companies could exploit the high tariffs and low Canadian dollar to sell a lot more to both countries.

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Unfortunately, that isn’t happening, except in a few product categories where Canada has plenty of excess export capacity, such as forest products.

“The idea of Canadian firms rushing to fill the gaps created by U.S.-China trade tensions is an appealing one, but such a scenario appears unlikely,” Toronto-Dominion Bank economist Brian DePratto concluded in a recent report. “We do not have the capacity to respond quickly to trade opportunities.”

Consider some of the big items the U.S. sells to China. These include aircraft, plant machinery, soybeans, luxury sport-utility vehicles and semiconductors. Canada does not produce any of these items in sufficient quantities to become an alternative supplier. As Mr. DePratto pointed out, the U.S. sells large-body Boeing commercial jets, while we make small regional jets and turboprop aircraft.

It’s a similar story across many export categories. We can’t easily crank up production of SUVs or soybeans in sufficient quantities to meet Chinese demand, at least in the short-term.

“U.S. exports to China are by and large in products and categories where Canada would need to undertake significant investment to seize market share,” Mr. DePratto said.

Canada does grow soybeans, but in relatively small quantities. Soybeans make up just 10 per cent of Canadian farmland dedicated to grains and oilseed production. Much of that farmland is currently devoted to canola. Farmers would have to make dramatic shifts in operations and planting this spring to take advantage of what could be a short-lived price advantage in China.

In many cases, other countries are much better placed to quickly take advantage of the situation. Brazil, already a major global soybean producer, has supplanted the U.S. as the major foreign supplier to China.

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Several U.S. multinationals have acknowledged in recent weeks that weaker demand in China is affecting their bottom line. Among them are Apple (phones and computers), Caterpillar (construction equipment) and Nvidia (computer chips).

None of these products play to Canada’s strengths.

Problems also hinder Canada’s ability to seize opportunities in the United States.

Consider aluminum. The U.S. could be buying more of it from Canada. But the Trump administration nullified our advantage by hitting us, as well as the Chinese, with tariffs on aluminum. Those same tariffs are hurting Canada’s competitiveness in the rest of the world. The U.S. Aluminum Association, which represents downstream manufacturers, warned recently that tariffs on aluminum from Canada and Europe are having the perverse effect of making heavily subsidized Chinese aluminum more competitive. Chinese aluminum production rose sharply last year, continuing a trend of recent years.

And sadly, we no longer make many of the things the U.S. buys from China in large quantities. Over the past couple of decades, Canadian manufacturers have ceded market share in the U.S. to exporters from other countries, most notably China, in products such as steel, plastics and toys.

A number of other factors are also working against Canada at the moment. Yes, our dollar has lost value versus the U.S. dollar, but so has the Chinese renminbi. This has helped to keep China’s products competitive in the U.S., in spite of the tariffs.

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Finally, there is the ongoing fight between Canada and China over the fate of Huawei executive Meng Wanzhou. She’s currently out on bail in Vancouver after being detained by Canadian authorities at the request of Washington, which is seeking her extradition to the U.S. to face charges related to circumventing U.S. sanctions on Iran.

Her arrest has put a chill on Canada-China relations that now risks slowing a lucrative flow of Chinese students and tourists to Canada. That flow is a big part of growing Canadian exports of services to China.

Meanwhile, the global economy is slowing. So even if we were successful in grabbing additional export market share, it might not produce any net gains in exports.

The obvious lesson here for Canada is that there are no shortcuts to reviving the export economy. New markets won’t just land in our lap.

Canadian companies will have to fight for every bit of market share in global markets – by exploiting recent trade agreements in Europe and Asia, innovating to produce things others don’t and finding markets that match our natural strengths.

There are no easy outs.

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