Fraser Forum

Canada’s closer ties to China may strain ties with U.S.

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Prime Minister Trudeau’s recent visit to China promises to strengthen the economic and political relations between Canada and China. Among other things stemming from the visit, the Canadian government announced the signing of 56 business deals worth more than C$1.2 billion.

In addition, the Chinese government announced it would delay introducing stricter standards on canola shipments from Canada to China. A month-long dispute between the two countries stemmed from Chinese demands that Canadian canola farmers reduce the level of “dockage” (or foreign material such as plants and weed seeds) found in Canadian canola exports to China. Chinese officials claimed that the tougher import rules were necessary to prevent the spread of blackleg disease from Canadian canola into the Chinese rapeseed crop. Meeting the new standard for dockage would impose substantial additional costs on Canadian exporters of canola, thereby reducing the profitability of Canada’s top export market for oilseed. The announced delay by the Chinese government has raised hopes for a more favourable settlement from Canada’s perspective.

Two other developments with less immediate but potentially much more profound consequences are the prime minister’s announcement that Canada will apply to join the Asian Infrastructure Investment Bank (AIIB), which is led by China, as well as a statement by the Chinese premier that Canada and China will launch a feasibility study on an eventual free trade deal.

China founded the US$100 billion AIIB to provide other countries in Asia with access to capital for investments in projects in areas such as transportation and communications. A feature of the lending arrangements is that preference is given to companies from lending countries in bidding on work related to the funded projects. Hence, Canadian companies see potential business opportunities emanating from Canada’s decision to join the AIIB. While Canada joins 57 other member countries in the AIIB, a notable non-member is the United States. The latter has opposed the AIIB, ostensibly on the grounds it may undercut similar infrastructure development programs under the aegis of the World Bank and the Asia Development Bank, which enjoy substantial funding and direction from the U.S.

American opposition to the AIIB also likely reflects concern on the part of the U.S. government that China will use the AIIB as an instrument to expand its geopolitical influence in the Asian region.

Canada’s decision to join the AIIB might therefore be seen by the current and incoming U.S. administrations as a weakening of the political support that Canada is prepared to offer the U.S. and Japan (another non-AIIB member) in the ongoing dispute between China and its Asian neighbours regarding China’s claims to and seizure of territory in the South China Sea. A Canada-China free trade deal would certainly be seen by the U.S. government as an initiative that would convey important advantages on Canadian-based companies relative to companies based in the U.S. Indeed, many North American-based companies might see it in their economic interests to relocate production capacity from the U.S. to Canada to gain duty-free access to the Chinese domestic market. At the same time, those companies would retain duty-free access to the U.S. market under NAFTA.

The recent drift of U.S. government officials towards trade protectionism, as illustrated by widespread Congressional opposition to the Trans-Pacific Partnership Agreement (TPP) and the anti-trade rhetoric of the two main presidential candidates, suggests that a free trade agreement between Canada and China would be quite problematic for the U.S. government.

In particular, both Hillary Clinton and Donald Trump have expressed strong opposition to U.S. companies relocating facilities outside the U.S. if it involves any loss of U.S. jobs. They promise they would implement penalties against such companies including imposing tariffs on goods that they export back to the U.S. Any such policy targeting outward foreign direct investment would threaten the continued existence of NAFTA. Indeed, prospective U.S. administrations might push for a renegotiation of NAFTA, if not withdraw from the agreement entirely, if Canada became a magnet for U.S. investment pursuant to a Canadian free trade deal with China.

At the least, the U.S. would likely become much more aggressive in enforcing North American content rules under the NAFTA on Canadian exports to the U.S., which would likely prove to be a major trade irritant to the bilateral relationship.

While a free trade agreement between Canada and China is a distant event, at best, it behooves Canadian government officials to think carefully about how closer economic and political linkages between Canada and China might affect Canada’s relationship with its largest trade and investment partner.    


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