The Prospect of Mature Canada-China Trade Relations

By: /
August 8, 2011

Foreign Minister John Baird vowed, during his July 16-20 trip to China, to build closer and deeper ties with China. Good for him. There is much to be gained and little to lose from pursuing a mature relationship with China – one that accepts China’s growing importance as a major player on the world stage. A mature relationship should also lead to more realistic expectations about Canada’s role and influence in China. While ministerial trips are useful ways to build better political relations, economic ties flow from the myriad other mundane decisions by consumers, investors, and traders. On that count, prospects are bullish.

With a population of more than 1.3 billion and a rapidly growing economy, China deserves credit for the progress it has made over the last 30 years. Sometime in the next few decades, it will surpass the United States as the world’s largest economy. It is already the world’s leading exporter and trails only the United States as an importer. It is now twice as dependent on international trade as the comparably sized U.S., Japanese, and EU economies. On a bilateral basis, China is now Canada’s second-largest trading partner; two-way trade reached $57.7 billion last year.

From a humanitarian perspective alone, China’s new economic prowess is a welcome development. Since 1979, China’s reform program has lifted more people out of poverty than all of western aid combined, and has improved the well-being of millions more. Nevertheless, Canadians, if they are not worrying about China’s human-rights record, fret about whether the government has been sufficiently aggressive in gaining a share of the burgeoning Chinese market. Neither is a particularly productive sentiment. In both cases, time is on the side of those who wish the Chinese well and hope to participate in China’s further growth.

China has now emerged as the prime site for locating labour-intensive assembly and related activities, replacing the role of other Asian suppliers that have moved up the value chain to supply the higher value-added components used by assembly facilities in China. China’s burgeoning imports are made up of two principal parts: resources to feed China’s basic industries – many of them geared to domestic infrastructure and related needs – and components for assembly into final products destined for North American, European, and Asian markets. The process of increasing value through global disaggregation and re-bundling is, in many ways, the key to understanding the rapid growth in China’s trade and economic development. More than three-quarters of the value of Chinese exports represents imported components, while more than two-thirds of Chinese imports are for use in exports, with only one-third going to domestic consumption. No other country has embraced the benefits of these new production patterns more enthusiastically than China. It provided the means by which the reforms initiated in the late 1970s could be harnessed to bring development to large parts of China and to its huge population of underemployed workers.

The results are impressive. The Chinese economy grew at an average rate of 10 per cent per annum for 30 years – enough to lead to a 16-fold increase in output. Imports, exports, and foreign investment grew even faster. Chinese firms have scoured the world for the raw materials needed to feed modernization, becoming important foreign investors in their own right, while global corporations have increased the flow of components for the growing range of products assembled in Chinese factories. On the export side, China’s role as the most attractive low-cost labour economy has attracted overseas investment in facilities that finish a wide range of consumer and producer products made available to consumers at attractive prices.

For all the hype about its newfound economic prowess, however, China remains a poor country. The rapid development that has taken place over the last 30 years is concentrated in the coastal regions, particularly in the cities and provinces ringing Hong Kong and Shanghai. Further inland, the challenges remain huge. More than half the people still live in the countryside, and in rural towns and villages. The need to extend modernization to this half of the population remains a daunting challenge. China may boast the world’s largest manufacturing work force at over 100 million workers, but it is also saddled with a pool of some 70 million underemployed workers living on the periphery of the cities, and more to come from farms and villages as the wealth of cities pulls them in. Rural output now contributes 11 per cent to GDP, but still requires 40 per cent of the workforce. Domestic demand remains underdeveloped, and the high savings rate – a plus in the early stages of development – is now a drag on the economy. Environmental degradation from rapid development has reached alarming proportions.

The leading concern among Canadian commentators is that Canada may lose out to others in gaining a place in this increasingly attractive market. Various econometric, and other, studies suggest that Canada is underperforming in its economic relations with China, particularly when compared to Australia. This concern is part of a deeply embedded longing among some analysts for a trade diversification strategy based on the romantic, if thoroughly unrealistic, notion that trade dependence upon the United States generates volatility in Canadian export earnings, leading to a less-than-optimal export performance. More stable earnings and higher exports would allegedly flow from more diversified markets. The absence of economic evidence to support these convictions does not seem to weaken the widespread view that the government should be aggressively seeking new markets.

It is difficult to understand exactly what such commentators believe is the remedy to this “problem,” and what Canadians are failing to do. Over the past decade, China has been Canada’s fastest-growing trading partner, albeit from a relatively small base, growing at a rate 10 times faster than trade with the rest of the world. The pattern of growth has been similar to that experienced by the United States. As a result of the global recession, trade in general was down in 2009 from 2008, including in Canada, but rebounded in 2010 and has continued to grow in 2011. Total two-way trade should surpass $60 billion in 2011.

Canada-China investment numbers have also been growing quickly, but again from a very low base. They increased by approximately 300 per cent from 1998 to 2007. Over the same period, China’s investments in Canada increased by approximately 170 per cent. The pace has quickened since then, as Chinese parastatals have invested in Canadian resource companies. The basis for greater trade flows in the future, therefore, is gradually being established.

Finally, various federal, provincial, and private-sector initiatives over the past decade have sought to improve the infrastructure required to increase trade with China. Canada’s Asia-Pacific Gateway and Corridor Initiative, for example, is geared towards advancing Canada’s capacity to act as a conduit not only for Canada-Asia trade, but also for positioning Canada as a transportation hub for trans-Pacific value chains involving American, Canadian, and Asian partners. As this and other projects mature, Canadian firms’ ability to increase business in the Asia-Pacific region should increase substantially.

Over the past three decades, China has demonstrated that it is finally emerging from its long sleep. Modernization, urbanization, and marketization are now taking place at a dizzying pace. Canada has benefited from China’s growth both as an exporter and an importer. It is in Canada’s interest that China continue to develop along the pragmatic lines of the past 30 years. While human rights and lack of democracy continue to be an affront, a weakened China could well let loose nationalist and militaristic forces that would become much more confrontational and destabilizing.