Chinese President Xi Jinping shakes hands with Canadian Prime Minister Justin Trudeau ahead of their meeting in Beijing on August 31, 2016. Photo: Reuters/Wu Hong/Pool

Lord Palmerston once said that nations do not have friends or foes, only national interests. To that end, it is in Canada’s interest to negotiate a free-trade agreement with China. Canada is a trading nation with the value of its exports exceeding C$520 billion (US$400 billion) or almost a third of the country’s gross domestic product in 2016, according to Statistics Canada. Its two largest export markets are the US and China, 75% and 4% of the total respectively.

However, with US President Donald Trump renegotiating the North American Free Trade Agreement to make “America First”, Canadian exports to its southern neighbor could face a rocky future.

Indeed, the uncertain US-Canada trade relationship is showing signs of stress, with the Trump administration imposing a countervailing tariff on Canadian softwood lumber in June. The impact is hardest felt in British Columbia, a heavily forestry-dependent province.

Moreover, the major economies Canada wants to deal with are in a state of economic flux, limiting their ability to import large quantities of Canadian products.

Economies of Canada’s allies

The International Monetary Fund downgraded its 2017 growth forecast for the US economy from 2.7% to 2.1% because of policy uncertainties and a lack of sufficient domestic demand. The public-debt-to-GDP ratio is nearing 110% and growing. Private debt as a percentage of disposable income is also over 100%. Additionally, wages barely keep up with inflation. Private and public consumption account for 85% of GDP. Moreover, Trump’s “America First” policies may backfire because other countries will push back. For these reasons, making “America Great Again” may have to wait.

As for the European Union, its economy remains in a state of stagnation, with an estimated growth rate of o.5% year on year in the first quarter of 2017 hailed by the IMF as a “miracle”. Its chances of significant import of Canadian goods and services would be marginal at best.

Japan, like the US and EU, is still trapped in more than a quarter-century of deflation, suggesting that Prime Minister Shinzo Abe’s “three arrows” – monetary easing, fiscal stimulus, and structural reform – have all missed their target of raising inflation to 2% as a way to spur economic growth. This is because the policies did not address the nation’s aging population and declining competitiveness. Therefore, Japan’s deflationary spiral will likely continue in the near future.

While India has the potential of being a lucrative market for Canadian exports, it is still a relatively small economy, estimated at just a little over US$2.2 trillion, and the value of Canadian exports to the South Asian country was a little over US$3 billion in 2016. Moreover, the success of Prime Minister Narendra Modi’s reform policies is being questioned because of internal politics, prompting some analysts to downsize the economy’s 2017 growth forecast from above 7% to around 6.5%. The Indian market is potentially huge for Canadian goods, but it will take time to cultivate.

The China factor

Contrary to some Western commentary, China’s relatively strong and growing economy (2016 GDP at US$11.4 trillion and growing at more than 6.5%) makes it an ideal trading partner for Canada. It is Canada’s second-largest trade partner, but two-way trade totaled only around US$60 billion last year and Chinese investment was less than US$10 billion. If it can free itself of ideological hangups, China should be an ideal economic partner.

First, the two economies are highly complementary. Canada has the resources and first-class educational system that China desires and has the money to buy. Second, Canada is highly regarded in China, largely because of Norman Bethune, the leaders’ Canadian physician during the Chinese Civil War period. Third, China is accelerating outbound foreign investment, surpassing US$125 billion in 2016 and growing.

Fourth, China’s economy and financial system are actually quite strong, contrary to the claims propagated by the Anglo-American news media and some pundits over the past 30 years.

In addition to spreading the “gloom and doom” message on China’s  economy and financial system, the critics propagate the “Chinese threat” rhetoric, accusing the Chinese government of “aggression”, abusing human rights, currency manipulation, not playing by “universal rules”, and a host of other “evil” deeds.

Is China ‘evil’?

Whether or not the Chinese government abuses human rights depends on whom one talks to. because of differences in definition and perception: What the West considers freedom of expression is interpreted as disruptive in China. China defines human rights in terms of what is best for society. In that sense, the government will not tolerate any “freedom of speech or expression” that might lead to economic, political or social chaos, a major cause of China’s past misfortunes. Preventing “chaos” from happening again is said to be the reason pro-democracy activists are detained and foreign non-governmental organizations are closely monitored.

These “anti-human rights” measures were prompted by history. It was foreign powers colluding with “hanjians”, Chinese traitors, that led to China’s 150 years of foreign occupation and humiliation. Deng Xiaoping crushed the Tiananmen Square protests in 1989 because he had been informed that the US was highly likely to have funded and instigated turning the more than three-month protest against corruption and inflation into a political one. In Hong Kong, the 2014 “Umbrella Movement”, Occupy Central and the Pan-Democrats were similarly suspected of being under foreign influence.

There was no evidence to support these conspiracy theories, but many people in China wonder how the leaders of the Tiananmen Square protest were able to land in Hong Kong hours before the tanks rolled in and how they were offered “scholarships” to top US and UK universities. And judging from local polls, newspaper reports and comments, the majority of Hong Kong people opine that foreign powers funded and instigated the city’s pro-democracy movements. One newspaper estimated that the “Umbrella Movement” cost more than HK$200 million (US$25 million). The Pan Democrats and Occupy Central championed British colonial rule and never traveled overseas to denounce British authoritarianism; many Hong Kong people find it curious why they protested against Chinese dictatorship.

China is a one-party state, but the government is reforming  the country’s economy and polity China-style, on its own terms and timetable. That authoritarian and gradual approach has served China well, avoiding major mistakes or missteps, maintaining political and social stability, and creating an “economic miracle”.

It is also debatable whether China is a threat to Canada’s national security and that it is spying and stealing Canadian secrets. The China National Offshore Oil Corporation takeover of Nexen for C$15 billion in 2012 did not lead to Canada losing its resources to China. Wealthy Chinese immigrants making “huge” donations to the ruling federal Liberal Party did not gain them political influence. The speculation of China stealing Canadian secrets and spying on Canada is just that – there is no proof that it is doing anything of the sort.

Closer economic ties make sense

During the period of cool China-Canada relations between 2006 and 2009, Canada’s GDP growth averaged around 2% while that of China was over 10% annually. Indeed, it was Chinese purchase of Canadian resources in 2008 that kept the economy from falling into the recession caused by the 2007 global financial crisis.

Taking the debate to its logical conclusion, Canada should forge a free-trade agreement with China, but should negotiate with caution, because neither country really understands the other. Both sides should take the time and effort to understand each other’s cultures, business practices, values, economic systems, governance architecture and other aspects relevant to a mutually beneficial agreement. That awareness would pre-empt, or at least minimize, misunderstanding and conflicts.

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Ken Moak

Ken Moak taught economic theory, public policy and globalization at university level for 33 years. He co-authored a book titled China's Economic Rise and Its Global Impact in 2015. His second book, Developed Nations and the Economic Impact of Globalization, was published by Palgrave McMillan Springer.

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