In search of a winning China strategy

John Bruk lists three issues that should be top of mind during Trudeau’s upcoming China visit.

By: /
August 26, 2016
People watch a light show for 30 day countdown of the upcoming G20 Summit in Hangzhou, Zhejiang Province, China, August 5, 2016. REUTERS/Stringer

As Prime Minister Justin Trudeau heads to China next week, and in his dealings with President Xi Jinping, he should consider the words of German philosopher Gottfried Wilhelm Leibniz.

During the reign of Sun King Louis XIV, Leibniz wrote that if the king understood the culture of his Chinese counterpart and knew his accomplishments, France would be blessed by having knowledge of the secrets of Chinese ways, and “commerce of enlightenment” would follow. With enlightenment stretching both ways, mutual relationships would flourish, enriching both nations.

A deep understanding of Chinese culture and of Chinese ways is as important today as it was in the times of Louis XIV and China’s Emperor Kangxi. And while we have ignored the importance of gaining this insight before trying to do business with China — and before so widely opening up to China — the Chinese have diligently acquired in-depth knowledge of Canada, our ways and our culture. Is it any wonder that our leaders have come out losers in their dealings with China?

During former Prime Minister Stephen Harper’s term, Canada opened up to China at an accelerated pace, prodded on by special interest groups. There was no “China strategy” – issues were not debated, which left the government acting reactively and relying on China’s promises of mutual benefits and reciprocity. And while there have been some benefits for Canada, there has been minimal reciprocity. China is now harvesting substantial profits, while Canada is facing several financial challenges.

Canada’s housing crunch, its increasing trade deficit and foreign state investment in its core assets are the issues Trudeau should keep front of mind as he travels to China next week for an official visit and the G20 Leaders' Summit. 

Remedy the impact of the housing crunch.

The most publicized financial challenge related to China is Canada’s housing crunch. This can be traced to Canada’s ill-conceived immigration and taxation policy, which encourages rich foreigners to obtain citizenship through a process perceived as “buying” said citizenship and allows them to use offshore trusts to avoid Canadian taxes.  

Lately, large numbers of wealthy Chinese have qualified for Canadian citizenship. Their objective is not to work here, but to settle their families, educate their children and invest in housing, especially on Canada’s West Coast. The result is skyrocketing prices, making houses unaffordable for local citizens. And while these immigrant families have free access to medical services, unemployment insurance and subsidized schooling, paid for by local taxpayers, the breadwinners are working and paying taxes in China.

By far the most damaging aspect of this misguided immigration policy is that many affected Canadians react with mounting resentment directed, regrettably, at rich Chinese immigrants. In some communities, Canadians see recent immigrants living in expensive houses and crowding lineups for medical services while claiming unemployment benefits — all of which they have every right to do. They are not to blame for the crisis. The blame falls on all three levels of Canadian government, primarily the federal government.

It is inexcusable that our governments have ignored the possibility of their mismanagement leading to resentment and estrangement among Canadians. Canadians must not allow this to adversely affect our relations with Chinese people.

This crisis presents an opportunity to generate new tax revenue to offset increasing pressures on social services, but only if our government takes remedial action. Sharing tax revenue between the Chinese and Canadian governments is one solution; taxing Chinese who have obtained Canadian citizenship and returned to China while leaving their extended families in Canada is a better solution.

Together with properly enforced tax laws and better administered immigration — managed by civil servants and eliminating licensed consultants who aggressively promote immigration for profit — this would yield substantial tax revenue and more than offset costs.

Trudeau has an opportunity to affirm his government’s commitment to resolving the housing crisis by establishing emergency measures with the premiers and mayors of impacted jurisdictions. Measures should include restricting foreign purchasers to new housing, requiring resident foreigners to prove sufficient Canadian taxable income to qualify for mortgage loans and ensuring unoccupied homes meet neighbourhood standards. Once the federal working group reports back, the three levels of government should replace the emergency measures with regulations.

While we await positive government action, rich Chinese immigrants will continue to bid for our best housing and commercial real-estate, our best known companies and our core assets. And who can blame them, considering we have bought over CAD$400 billion of goods more from China than we have sold to China, since it resurged as an economic power. This $400 billion gives them plenty of money to continue acquiring our best assets. This would not be happening if we had a better trade policy with Asia.

Don’t ignore trade deficits.

Our most pressing crisis with China is a dangerously increasing trade deficit. Again, Canada is to blame, not the Chinese. Successive Canadian governments have failed to develop a winning strategy, resulting in our $1.6 billion trade surplus with China in 1988 becoming a $45 billion deficit by the end of 2015. For the first time in many years, Canada’s usually large trade surpluses have disappeared. Because international trade is a major component of Canada’s GDP, this is very serious.

Many factors contributed to the trade deficit, but none more than the Third Option, conceived in the 1970s when it was thought Canada might become too dependent on the United States. While foreign investment restrictions successfully dealt with that threat, the Third Option, as a means of successful trade diversification, is generating large deficits.

Now we face a similar danger with China. We had better not ignore it. This is one of the main issues for Canada’s governments to consider before developing a new strategy.

Trudeau should ask China to immediately increase purchases of agricultural products and potash, which to quote Vice Minister of Financial and Economic Affairs Han Jun, China is “most in need of,” rather than waiting until a free trade deal is negotiated, as Han suggested.

Immediately increasing purchases is how a good trading partner demonstrates its concerns about lopsided trade and its willingness to work with Canada to redress a situation that might strain our long-standing friendship.

Next, Canada should consider a new approach to trade and investment. It could invite foreigners to invest in processing raw materials in Canada. Call it the “Fourth Option.” This would increase the value of its exports and reduce the deficit. Joint ventures with Canada’s energy companies to build facilities for processing its bitumen would provide China’s investors with excellent opportunities, while reducing China’s energy import requirements, as the processing plants would be built in Canada. And China would have assured supplies of derivative products, such as petrochemicals, reducing its need to pressure Canada to build a pipeline to the coast, which the majority of Canadians oppose.

Canada and the U.S. were both winners when we encouraged our American friends to build car manufacturing facilities in Canada. Likewise, Canada and China can end up winners by joint venturing to build facilities for processing raw materials in Canada, for export to China and elsewhere.

Tread carefully over investment.

During Harper’s tenure, state-owned Chinese companies bought over $40 billion of some of Canada’s best energy assets. This trend must be stopped. We need to protect our core assets and develop a better China investment strategy.

Before allowing state-owned companies to invest further in Canadian assets, we should be forewarned by the example of how the Philippines lost access to its traditional fishing grounds. It remains to be seen how China will respond to the ruling on the South China Sea, and while we hope a more inclusive China will emerge, Chinese scholar Huang Jing expressed China’s approach more organically. The Chinese expand like a forest, very slowly, he told The New York Times. But once they get there, they never leave.”

If China is allowed to invest in Canadian Arctic regions, this becomes a very high stakes issue. The Canadian Arctic presents an opportunity similar in magnitude to the Canadian Pacific Railway project, which Canadians insisted on being Canadian owned and Canadian operated. Then, like now, special interest groups told us foreign ownership should not be feared, that we do not have enough capital. Neither did the 1880s Canadian population of just 4,255,000. What they had was deep patriotism, grit and smart leadership. Do we have that today?

The world is not short of capital, but of good projects and assets to invest in. Those who tell us we need to open wide to foreign investment because we need capital miss this fact. As Larry Fink of U.S. investment management company BlackRock noted, US$55 trillion is sitting in bank deposits. Canada’s public companies have more than $630 billion in cash reserves, and our various pension funds invest billions outside Canada.

We should continue to welcome private foreign investors, but keep state-owned companies out, as their ownership restricts Canadian sovereignty over Canadian assets. An investment strategy that better protects Canadian assets should not alienate China any more than it did the U.S., which, in spite of our first restrictive investment regulations targeting primarily U.S. investments, remained our closest friend and most important trading partner. It is a realistic expectation, as China is even more protective of its core industries.

Safeguarding Canadian ownership of our core assets — our natural resources, banks, insurance companies and airlines — is a higher priority than attracting investment capital and, in the long run, is even more important than the trade deficit with China. Selling Canada’s core assets rather than what they produce will diminish the sources of Canada’s profits and standard of living, and reduce opportunities for our children and grandchildren. 

Developing a winning China strategy

These are the issues for the prime minister to think about and discuss with China. Some special interest groups advocate that opening up more to China would benefit Canada. They fail to tell us how. Only by urgently developing a China strategy that’s grounded in self-interest and reflective of Canada’s national aspirations can the government tackle the negative outcomes of its rudderless strategy.

Fortunately, Canada is positioned to benefit greatly, as it has everything China needs: agricultural and mineral resources, investment opportunities for building processing facilities, and a well-earned reputation as a most reliable supplier and investment partner.

Trade minister Chrystia Freeland’s statement that “We’re building a real foundation of positive human relations, and that is…an essential foundation for building a closer commercial relationship” is encouraging. We must build that relationship. Previous governments failed to do so, ignoring the deteriorating trade balance and public concerns.

Fortunately, it appears Trudeau believes that important national issues must be analyzed openly and thoroughly before acting. The hope, therefore, is that when he returns from China his government will solicit diverse opinion, most importantly from the provincial and First Nations leaders, so it will be well-informed and ready to develop a winning China strategy.