| || ||Glen Hodgson |
Originally published in the Globe and Mail on February 21, 2017.
A new, more diversified Canadian trade and economic era has begun, and the protectionist attitude of the Trump administration is accelerating the emergence of this era. Canada’s trade with the rest of the world almost doubled over the past decade and China is already Canada’s second-biggest trading partner, even though we haven’t developed a clear and consistent strategy to make it happen. What should be Canada’s game plan in China to maximize the economic benefits to Canadians?
China’s spectacular rise since the early 1980s made it an intriguing trade and investment prospect for almost everyone, Canada included. China relied upon relatively cheap labour, trade surpluses and capital inflows to fuel its development. The period of double-digit growth has come to an end and China’s growth potential is slowing as its economy matures and its population ages. Although it is transitioning to greater reliance on domestic, consumer-driven growth, the Chinese economy is still expected to grow by 6 per cent in 2017. Real Chinese growth will still likely reach 4 per cent annually in the coming decades – double that projected for Canada.
Not surprisingly, China’s attractiveness as a trade partner continues to grow. Up to 400 million Chinese citizens have entered the “middle class,” meaning they have discretionary income available to spend on goods and services. According to International Monetary Fund data, per-capita incomes in China now exceed $8,000 (U.S.) at current exchange rates and are much higher using purchasing power parity comparisons.
China also faces risks, notably large imbalances in housing and financial markets, which fuelled the downdraft in commodity prices that hit Canada hard. These imbalances appear to have stabilized and the vast oversupply of new housing and commercial space is gradually being absorbed. However, China will remain subject to financial imbalances as it grapples with financial sector and currency policy and management.
Canada has seen large bilateral trade deficits in goods with China for years, now exceeding $30-billion Canadian annually. These deficits in goods trade have meant cheaper end products for Canadian consumers and cheaper inputs into business production processes. But this deficit may also represent lost sales opportunities for Canadian businesses.
Of course, understanding Canada’s “true” trade relationship with China requires a deeper evaluation of things such as Canadian inputs into U.S. and global value chains that engage with China.
So what’s the plan to make the trade relationship with China more dynamic? The federal government is at an early stage of examining a potential free-trade agreement with China and will need to get the right preconditions in place before any serious discussions occur. Ottawa should start by identifying priority Canadian business interests in China.
The Conference Board of Canada recently assessed areas of projected strong demand growth in China and Canada’s competitive supply capacity in those areas. The best sectoral candidates identified by our analysis included agricultural products and processed food; manufactured products, including aircraft; and a variety of high-value services, including educational, technical, financial, recreational and entertainment. Sectors such as commodities and energy are other candidates for export growth, once the housing market stabilizes and if Canada invests in infrastructure for energy exports to Asia.
Improving Canadian business prospects in these and other Chinese market segments will require a differentiated strategy. The strategy would include: seeking ways to reduce tariff and non-tariff or regulatory barriers to improve market access for Canadian goods and services; targeted and expanded business development by the federal and provincial governments and business; deepening business relationships through expanded two-way foreign direct investment and sales from foreign affiliates; and continuing Canadian openness to Chinese knowledge workers and students.
China also has regional and global ambitions that need to be taken into account. It has already created the Asian Infrastructure Investment Bank (AIIB) as a competitor in the region to the World Bank and Asian Development Bank. After dithering, Canada finally chose to join AIIB to ensure it has a voice in Bank governance and to give Canadian firms access to procurement opportunities. (The United States is not a member, unlike other G-7 countries.)
China is also promoting the creation of the Regional Comprehensive Economic Partnership (RCEP), which would lower trade barriers among China, India, and members of the Association of Southeast Asian Nations (ASEAN). The United States’ withdrawal from the Trans-Pacific Partnership has given China greater de facto economic room to operate in Asia. Canada and others outside the region are unlikely to be invited to join RCEP, but we will need to consider ways to engage with its members.
In recent Report on Business commentaries, we have argued that North American trade has reached a maturity point and Canada’s long-term economic interests would be well served by diversifying its greater trade and investment. It is time for a fully developed economic strategy for China.
Glen Hodgson is senior fellow at the Conference Board of Canada.