Worsening U.S.-China trade relations will likely slow economic growth in Canada

Trade and investment relations between China and the United States have been fraught for years. Unfortunately, recent indications point to the economic relationship between the two countries becoming even more contentious over the foreseeable future, and this prospect does not bode well for the health of the international economy including the Canadian economy.

A particular focus of concern on the part of the U.S. government has been China’s weak protection of intellectual property (IP) rights. A recent ruling affecting Apple Inc. will likely intensify this concern.  Specifically, a little-known Chinese startup company won a surprise injunction against the sales of Apples’ iPhone 6 and iPhone 6 Plus in the Beijing area based on a patent covering smartphone designs.  This follows a Chinese government initiative in April 2016 to shut down Apples’ iBooks and iTunes Movie services. In the latter case, Apple was told by the Chinese government that it did not have the necessary licenses to operate the services.

While it is still relatively rare for Chinese companies to mount legal attacks against the intellectual property of Western companies, Chinese companies are increasingly laying claim to patents, even if they were not the first to develop the broader technology.

The recent patent ruling by the Beijing Intellectual Property Bureau posted by the Bureau in May 2016 adds to the growing contentiousness surrounding how China treats foreign-owned intellectual property. Indeed, U.S. government officials have long been concerned about the pressure that the Chinese government has brought to bear on Western companies to transfer technology to Chinese companies as a condition of the former doing business in China. While the ruling by the Beijing Intellectual Property Bureau might ultimately be overturned by the country’s National Intellectual Property Court, it seems likely that the Chinese government will bring to bear leverage in the area of its IP protection to retaliate against U.S. government tariffs levied on Chinese steel products and other exports.

Recent high-level talks between U.S. and Chinese government officials failed to make progress on a host of other contentious dimensions of the bilateral relationship including China’s currency policy and Chinese hacking of U.S. government and business computer systems. Nor were the two countries able to conclude an anticipated bilateral investment agreement. The importance of the failure to negotiate an investment agreement was highlighted by China’s banking regulator recently excluding foreigners, including a U.S. firm, from investing in a Chinese Internet bank.

Given that the presumptive presidential candidates for the two major parties (Hillary Clinton and Donald Trump) have expressed strong reservations about the benefits of free trade agreements to the U.S. economy, and in Mr. Trump’s case, threats of trade retaliation against Chinese imports, it's easy to imagine that hostile economic relations between China and the U.S. will only get worse, especially given growing populism in the U.S. polity.

Any intensification of anti-trade and investment actions on the part of the two countries will result in reduced real economic growth of both in the future. Slower growth of the U.S. and Chinese economies will, in turn, likely contribute to reduced trade and slower economic growth of major trading partners of the two countries, including Canada. The threat of an escalating trade war between the U.S. and China underscores the importance of the Trans-Pacific Partnership (TPP), since the TPP would create a broad free trade area among Pacific Rim countries (including Canada albeit excluding China).

Unfortunately, current prospects for the U.S. Congress implementing the TPP are poor, and there would be little interest on the part of other parties to the TPP implementing the agreement if the U.S. failed to do so.