Image credit: Prime Minister’s Office
By Sarah Kutulakos
This article is published as part of IPD’s project, Canada’s Interests in a Shifting Order.
Canadians await their government’s Indo-Pacific Strategy this month. Minister Mélanie Joly’s November 9 speech gave us a preview, essentially that trade will continue, but business is on its own and should know the risks.
Rest assured, Canadian business is well aware of China risks and has been focused on diversification even without official exhortation to do so. Any company that wants to be globally competitive is already diversifying. But companies must follow their customers, and whether business-to-business or selling to consumers, global customers are in China. Recently, a Canada China Business Council (CCBC) member was told by a large client, “if you can’t supply to me everywhere I do business in the world, including China, I’ll have to find another supplier.”
In a 2020 survey, CCBC members voiced a desire for Canada to have a China strategy – even a hardline one – as it reduces uncertainty. Other countries take hardline approaches to China but still maintain relationships that allow for two-way communication. Canada has many bilateral dialogues with China, all of which have been frozen for nearly four years, meaning that we can’t communicate our dissatisfaction on any issues, from Taiwan to trade. This prevents us from fighting for fair treatment in China for our companies, which are losing ground to competitors from like-minded Western countries.
Despite all the uncertainty, goods trade between Canada and China steadily increased between 2019 and 2021, and trade in services grew prior to COVID’s impact on tourism and education. Canadian exports to China grew 14 percent year-over-year in 2021 – a new record. COVID lockdowns in China make 2022 less robust, but demand exists and will return. Even in a rough geopolitical environment, other nations are also trading more with China. Except for certain high-tech supply chains, US trade with China continues to grow. And China has surpassed the US to become the EU’s largest trading partner in goods. So, it is critical that Canada stay engaged, lest we risk falling behind.
Unfortunately, data shows that Canada is indeed already falling behind. Despite 2021’s export growth, for many industries, business with China is not going well, as shown by CCBC’s 2021 business survey. Canadian companies are less profitable and optimistic than those from the US, Europe and the UK. Companies in those countries are being granted market access and are breaking down barriers, while Canadian companies have little hope of catching up while bilateral channels remain frozen. China’s zero-COVID policy, which disrupts regular business travel, also disproportionately impacts Canadian firms, many of which rely on travel for business development. Companies with teams and operations in China are faring better.
My US counterparts tell me that U.S.-China relations are worse than they’ve ever been, yet the US sends 9% of its exports to China, while Canada only sends 4.5% of our global exports there. While 4.5% of Canadian exports going to China doesn’t sound like a lot, it is 7x our exports to India. The ranks of middle-class Chinese are growing and consuming, so demand in China outstrips that anywhere else in the world. As companies diversify, they also know that finding demand equivalent to China’s is not easy. If trade with the world involves a series of open windows, China’s is currently large and open wide for many sectors, while the windows in other Asian countries are small and just starting to open.
Key products demanded by China’s growing middle class, like pet food and meat, are moving smoothly from the US but blocked from Canada. The pet food industry alone is losing tens of millions of dollars this year, with fears that in a sector with 13.5% growth, Chinese pet owners will shift preferences from Canadian pet food to US brands, causing a massive loss of the advantage Canada has gained in this market. Year-to-date pet food exports to China are down nearly 40%.
There is no good reason for these market access issues, but as US officials frequently meet with their Chinese counterparts, Washington is demanding its voice be heard and Ottawa is not. Resumption of bilateral discussions is the only way Canada can hope to catch up. Many of the frozen dialogues allow us to voice concerns on security, interference, and other issues. One of the easiest – and for the business community, the most important – is the resumption of the Canada-China Economic and Financial Strategic Dialogue, which will help both governments address a growing list of commercial challenges, many of which can easily be crossed off the list if such dialogue takes place. This dialogue was established in 2016, with the first official round in 2018 yielding a variety of agreements. Bilateral tensions began just weeks afterward with the detentions of Meng Wanzhou, Michael Kovrig and Michael Spavor, resulting in the freezing of such mechanisms.
China is a complicated country, with many issues on which Canada rightfully disagrees. Canada needs to make a conscious choice to engage and use the relationship with China to explain our point of view, to push on issues we feel strongly about, but also to build Canada’s prosperity. A bilateral relationship with such a large country needs to encompass multiple tracks, including channels that allow us to share with China why Canada sees things differently.
Speaking out on issues is important, but even more important is speaking with China on these issues.
We can fight for what we think is right, while also fighting for our own position. If we’re falling behind our competitors in profitability and market access in China, it will impact our competitiveness everywhere in the world. This month’s G20 summit in Bali may have featured an uncomfortable interaction between Prime Minister Trudeau and President Xi. But this does not affect the fact that Canadian leaders must meet with their Chinese counterparts at these sorts of multilateral gatherings as a first step toward restarting dialogue.
Sarah Kutulakos (@skutulakos) is Executive Director & COO of the Canada China Business Council (CCBC).