Canada and China remain far apart on trade issues

Canada has natural resources to sell, and China is happy to buy Canadian timber, metals, oil and gas. But is that all there that can be done with Canada’s much-hyped second-largest trading relationship?

Jim Prentice, vice-chairman of CIBC
Photo: Peter Power, The Globe and Mail

The roomful of Canadian and Chinese business executives who gathered in late June in a hotel ballroom in east Beijing for the first-ever Canada-China Investors Forum struggled to come up with an answer.

On the surface, they had much to celebrate. As political ties between Ottawa and Beijing have defrosted, the economic relationship has heated up. Bilateral trade grew more than 28% between 2009 (when Prime Minister Stephen Harper made his first trip to China) and 2011, from just over $50 billion to just under $65 billion. But when the discussion turned to what could be done to move the relationship beyond natural resources, delegates at the forum quickly came to polite loggerheads.

Chinese delegates complained that Canadian firms still feared technologies would be pirated if they moved research and development or production lines to China, a “misunderstanding” they said was slowing the expansion of economic ties. Canadian speakers, meanwhile, warned that the trading relationship couldn’t be a one-way street, and that Beijing needed to even the playing field by granting Canadian firms the kind of market access Chinese firms are now getting in Canada.

“China needs to be aware that within Canada, there is growing public interest in the need for greater reciprocity in our relationship,” former industry minister Jim Prentice, now vice-chairman of CIBC, told the forum. In an interview later, he added: “If it’s going to be a strategic partnership, it has to be a partnership that works both ways.”

Trade with China will rise even faster in the years ahead as oil and gas exports that were headed south to the United States are redirected westward across the Pacific Ocean. “China relies on Alberta to supply the energy that they need to continue to grow, and we’re very pleased about that. Market access is among Alberta’s most pressing priorities … one that will help define the future of our energy industry, and how China can benefit from it,” the forum’s keynote speaker, Alberta Premier Alison Redford told an audience of about 150 people, including representatives of some of China’s largest state-owned institutional investors.

She told them that the controversial Northern Gateway pipeline—currently under federal government review—would mean Alberta’s oil sands and the Chinese market would soon be “connected closer than ever before.”

That was the easy part of the pitch. With no environmentalists or civil society groups present, everybody in the room supported having crude from the Alberta tar sands heading west as soon as legally possible. Chinese money is already flowing into Canada’s energy sector at unprecedented rates; Beijing has invested $16 billion over the last two years alone, and Ottawa recently raised the bar at which a federal review is required for foreign investment (from $330 million to $1 billion) in order to ease the way for more.

But the growing relationship in energy hasn’t fully matured, and some tensions exist. Ding Yifan, deputy director of the Institute of World Development, a policy research body that advises Premier Wen Jiabao’s cabinet, said China didn’t just want Canadian oil, it wanted Canadian oilfield technology and know-how. Techniques such as horizontal drilling—a key to exploiting the oil sands north around Fort McMurray—could help China develop the large but unexploited shale gas fields in the interior of the country, for example, or the oil believed to be lying beneath the disputed South China Sea.

“China expects Canada to give it some expertise, technology in the resource exploiting sectors,” Ding told the audience. In an interview later, he added the manufacturing sector, civil aviation and railways as other industries where China was seeking Canadian technology.

But, he said, there was reluctance on the part of Canadian firms to share technology, and few companies were willing to fully take the plunge and move their research and development arms into China, the way Finland’s Nokia Corp. did as far back as 1999. That reticence, Mr. Ding said, hampers the ability of Canadian companies to be globally competitive.

“They should understand that China, the Chinese market, would be a good one for Canadian firms to develop their technologies and become global companies,” he said. “There is a lot of rumours about China, that China is not respecting [intellectual] property rights, or something like that. But, over time, these obstacles can be overcome.”

Ding quickly flipped from free-trader to protectionist when Mark Kruger, the head of the economic section of the Canadian Embassy in Beijing, suggested during the forum that high-quality Canadian agricultural products might be a perfect fit for the Chinese market. China’s emerging middle class, Kruger said, is seeking trustworthy options following a series of shocking food safety scandals involving some of the country’s best-known food producers. “There’s huge opportunities for Canadians to serve this market for high-quality, and also safe, agricultural goods.”

But, Ding quickly made clear that Canadian farmers shouldn’t plan on exporting large amounts of food to China because the Communist Party leadership had a policy of ensuring the country could always feed itself without relying on trade. “China considers agriculture as a matter of national security,” he said.

Those who successfully pushed for Canada to drop resistance to Chinese investment in the energy sector are now anxious to see China reciprocate by easing access to Chinese markets in which Canada is interested. Prentice said China—for a start—needed to be more open large Canadian investors, such as pension funds, looking to invest in China.

“If either country looks at strictly what’s good for itself, then I can guarantee the relationship will fail over time,” said Derek Holt, vice-president of Scotia Economics.