In this issue: What to keep an eye on in 2022, Belt and Road and Five Year Plan Monitor, experts weigh in on what China in the CPTPP means for Western Canada
As this issue will be the last for the year, the China Brief team wishes all of our readers a safe and happy holiday season and best wishes for 2022. As we look forward, we hope this issue also gives you a sense of what to watch in terms of supply chains, trade agreements, and diplomatic tensions around the Olympics.
B.C. floods impact supply chains
Recent floods in B.C. cut off the Port of Vancouver from the rest of the country and compounded supply chain issues the brief has been monitoring over the past year. The port is the largest in the country and also the key port for Canada’s Asia trade, including China. In 2020, China “accounted for 34.9 million tonnes of the Port of Vancouver’s exported and imported cargo in 2020.” Fortunately, CN Rail has reopened the Kamloops to Vancouver corridor which should help ease constraints.
However, as Wade Sobkowich, executive director of the Western Grain Elevator Association, noted in a recent CBC interview “we don’t have rail movements up to where we need them to be” and “As far as a natural disaster goes, this is probably the most significant event … to the rail lines in our collective memory.”
The rail line disruption is particularly difficult for grain exporters as a “backlog of Prairie grain may lose much of its value if trains can’t ship it to port before spring, when prices typically drop amid heightened global supply.” However, there is less grain to go to market because “farmers in the prairie provinces harvested an estimated 47.2 million tonnes of principal field crops in 2021, down 36 percent from the previous five-year average and the lowest production since 2002.”
In a previous China Brief, we noted that ships continue to unload and return to Asia empty as it is more profitable for container companies. This practice will exacerbate the problem of moving commodities out of the port. Steve Pratte, policy manager at the Canadian Canola Growers Association, says “the reverberations back through the grain supply chain in Western Canada (and all commodities) will be measured in months.” For countries such as China looking for dependable export partners, the situation could cause concerns over Canada’s reliability. Mark Hemmes, president of Quorum Corp, told the Western Producer “Ottawa and the two main railways need to start ‘working in earnest’ on how to bolster rail infrastructure in that region of the country.”
ASEAN, China, Canada and the U.S. trade agreements
Canada has entered formal trade talks with the Association of South East Asian Nations (ASEAN); the Regional Comprehensive Economic Partnership (RCEP) comes into force in January; China formally applied to enter the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) alongside Taiwan and the UK.
Whew! Let’s break each of these down.
An agreement with the ASEAN networks would, according to International Trade Minister Mary Ng, “[build] on the [CPTPP] to create greater access for Canadian businesses … So this is very much an opportunity to grow our economy.” New markets would also mean a way to diversify from existing markets, like China. The Canadian Cattleman’s Association has expressed its support for talks, particularly as an agreement free from tariffs would mean new market access to Thailand and the Philippines.
However, negotiations could be difficult as the CBC points out: “ASEAN has never agreed to a trade deal with labour or environmental standards” and “[l]anding a deal that isn’t off-brand with the Liberal ‘progressive’ trade agenda won’t be easy.” The U.S. has also made moves to engage with ASEAN, as the East Asia Forum reports, with the recent U.S.-ASEAN summit meeting.
Our Trade and Investment Centre director is still trying to wrap his mind around how one squares a progressive trade agreement with Myanmar (Rohingya genocide) and the Philippines (with its government sanctioned death squads).
However, both Canada and the U.S. are well behind China on relations with ASEAN. China and ASEAN recently marked the 30th anniversary of joint relations with a virtual summit and joint statement on “Comprehensive Strategic Partnership for Peace, Security, Prosperity and Sustainable Development.”
China and the ASEAN nations are also members of RCEP, which will become the world’s largest free trade agreement; Canada and the U.S. are not members. A recent Barron’s article lays out the advantages for China:
As the largest economy within the bloc and largest or second-largest trading partner of every RCEP member, China will have outsize influence in setting future standards and regulations for the region moving forward. Lower tariffs, common rules of origin with a relatively low-value content threshold, and eased trade facilitation will help China lock in regional supply chains, attract new foreign investment, and expand its Belt and Road Initiative by strengthening transportation, energy, and communication links. RCEP’s standing secretariat gives the bloc a sense of permanency and provides China with a platform to further integrate its state-centric economic model.
In terms of U.S. disadvantages of concern for Canadians, Barron’s also notes “[t]he entry into force of RCEP poses significant concerns for the U.S. Commercially, U.S. manufacturers and workers all stand to lose from the deal. U.S. agriculture also will become less competitive in Asia compared with its Australian and Japanese competitors.”
CPTPP provides Canada with an access point to Asian markets that the United States does not as the U.S. withdrew from the agreement. China has also recently applied to join the partnership, which could provide Canada with another way to engage in trade with China. However, there are interesting implications and considerations for Western Canada as Canada and CPTPP member countries consider the application. See the Spotlight Feature at the end of this issue for more from experts on what those considerations are.
Diplomatic tensions over Olympics
With Beijing set to host the 2022 Winter Olympics and concerns over human rights abuses in China, Canada and other countries have announced a diplomatic boycott of the games. The move means that no government officials will attend, but their athletes will still compete . Weng Wenbin, a Foreign Ministry spokesman for China, said that the boycott would have “no impact.” Zhao Lijian, another Foreign Ministry spokesperson, said of the U.S. boycott “that China would take ‘countermeasures’ if Washington were to go through with the boycott.” Whether such countermeasures are taken, and if they would apply to Canada and others, remains to be seen.
In other news
- China’s Evergrande has defaulted on two bonds and, as Bloomberg reports, “[i]nstead of market panic, China’s benchmark CSI 300 stock index hit a five-month high and the country’s currency gained to the strongest against the U.S. dollar in three years.” Evergrande isn’t the only one to watch: CTV News reports that Kaisa Group Holdings is also not expected to meet its offshore debt deadline on December 14.
- Dominic Barton, Canada’s Ambassador to China, has resigned and will be gone from his post at the end of December. No replacement has been announced.
- The USDA’s Economic Research Service has taken a close look at China’s wheat import quota under the World Trade Organization. The analysis estimates “that import volume in 2021 is poised to reach that quota for the first time in two decades” and points to the use of feed wheat as a possible reason.
- The White House has released a joint statement with Australia, Denmark and Norway on the Export Controls and Human Rights Initiative. The initiative will “establish a voluntary, nonbinding written code of conduct around which like-minded states could politically pledge, to use export control tools to prevent the proliferation of software and other technologies used to enable serious human rights abuses.” Canada, France, the Netherlands and the UK have expressed their support.
CWF’s Belt and Road and Five Year Plan Monitor
China’s multibillion dollar Belt and Road Initiative (BRI), the state-backed global infrastructure development strategy, has the potential to enormously shift global trade through new levels of infrastructure and supply chain integration, in the Asia-Pacific region as well as globally. China’s most recent five year plan (FYP) sets the country’s priorities for 2021 to 2025 as well as the vision for 2035. These shifts have the potential to alter both the Chinese and global markets for Western Canadian-produced commodities. The China Brief now includes a section with relevant BRI and FYP developments. We welcome feedback as we continue to develop this new feature.
EU counters Belt and Road
The European Commission is setting up its own counter to the Belt and Road Initiative with the Global Gateway Strategy. The plan “aims to mobilise up to €300 billion in investments between 2021 and 2027 to underpin a lasting global recovery, taking into account our partners needs and EU’s own interests.” Mateo Szlapek-Sewillo with the Lowry Institute writes that the strategy “illustrates two key shifts: a strengthening consensus among European leaders for a more interest-driven form of economic diplomacy – and a hardening of views regarding China.”
US-led zinc-lead project and the China and Transformational Export Program
Ironbark Zinc Ltd.’s Citronen project in Greenland is “the first standalone project application worldwide to qualify for privileged 402(A) support status under the US Government’s recently introduced China and Transformational Export Program.” What does that all mean? The Export-Import Bank of the United States oversees the China and Transformational Export Program. The program is meant “to help U.S. exporters facing competition from the People’s Republic of China (PRC) and ensure the U.S. continues to lead in the 10 Transformational Export Areas.” The Citronen zinc-lead project in Greenland “represents one of the world’s largest undeveloped zinc-lead resources with a resource in excess of 13 billion pounds of contained zinc and lead metal.” The program is a US counter to the Belt and Road initiative and the granting of funds to a Greenland project highlights the interest in the Arctic and surrounding regions for rare earth minerals.
Beijing-Hong Kong Symposium results in $8.81 billion worth of deals
While the US and others look to secure key technologies and resources, so does China. China Daily reports that at the recent 24th Beijing Hong Kong Economic Cooperation Symposium “11 projects－including a cooperation agreement and 10 investment projects－were signed with a total contract value of $8.81 billion.” The funded projects which would be part of the BRI would include a medicine research lab for Pharmaron Inc. and a research and development lab in Beijing for Hong Kong-based AI company SmartMore.
Cold Chain Logistics build out in China
From Xinhua.net comes news tied to China’s five-year plan that the country plans to build 100 major cold-chain logistics bases and “eight major channels […] linking core areas for farm production and 19 city clusters” by 2025. The announcement comes as a new rail line between China and Laos opened with a cold storage train running the inaugural trip on the line. As the Produce Report notes the event “[marks] the official opening of the dedicated cold-chain rail service between the Laotian capital [Ventiane} and the Tengjun International Land Port in Kunming.” The line cuts transport times between Ventiane to Kunming from two days to three hours, according to the Produce Report.
Economic stability, self-suffiency key for 2022
A statement following the annual Central Economic Work Conference says that, from a Reuters report, “China will focus on stabilising the economy and keeping growth within a reasonable range in 2022.” To meet this priority, “China will implement new tax and fee cuts and front-load infrastructure investment next year in an appropriate way.” President Xi has also emphasized the need for China to be self-sufficient, particularly in terms of grain. The Asian Times summarized Xi’s words: “The more food we have, the more we have to think about when there is no food,’ […] ‘I’ve repeatedly said that Chinese people must firmly hold their rice bowls in their own hands at all times and should never let others grab our necks in the matter of food supply, a basic survival issue.”
Quarterly Spotlight Feature
China has formally applied for membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Member countries, including Canada, have made clear that China must adhere to the high standards of the agreement, including tariff cuts, rules of state-owned enterprises, intellectual property and labour rights and other progressive elements. What do you expect will be the major issues on which Western Canada needs to keep an eye as China begins consultations with CPTPP members in preparation for its bid to join the pact? How does Canada handle application and approval processes given recent relations with China?
Our friends at the Latin America Advisor, the inspiration for the Spotlight feature, put a similar question to their roster of experts from Latin America and the U.S. Click here to see what others in our hemisphere, including CWF’s Carlo Dade, had to say on this question.
Brett Stephenson, Public Affairs Lead for North Asia with UPS, and Policy and Government Relations Chair, Canadian Chamber of Commerce in Hong Kong
As Singapore becomes the next CPTPP Chair, Canada is just one voice among many in the CPTPP agreement on considering China’s application. As CPTPP members prepare to consider China’s application, Western Canada should be considering a few issues. A top issue with China’s application relates to its treatment on SOEs and the SOE chapter. CPTPP spells out rules that prevent preferential behavior (e.g. subsidies) that force SOEs to operate at a level playing field with other CPTPP firms. In addition, local courts and administrative bodies in a CPTPP country must be impartial when concerning legal and commercial disputes. Given Western Canada has had some problems over the past few years with agricultural exports to China becoming wrapped up in geopolitics between U.S.-China-Canada, the agreement “on paper” would be a welcome insurance in the future for western Canadian agriculture.
The other issue Western Canada should be watching is how Japan/Australia/Vietnam/Singapore respond to the application vs what is said in Ottawa. Japanese businesses across the board have far more in-depth business ties than Canadian business. To give you an idea, there is no national Canadian Chamber of Commerce in China – whereas the American Chamber of Commerce and Japanese Chamber of Commerce and Industry were established in 1919 and 1991, respectively. Western Canada should be assessing American and Japanese business perspectives of in-market conditions and how China treats foreign businesses as a test on whether China is committed to meeting the standards of CPTPP. In addition, Western Canada will need to watch Ottawa on whether the government is going bend to allow exemptions on SOEs or intellectual property, issues that could put Canada in tensions with CPTPP partners – something that Canada should avoid given the mistakes and reputation impacts that Canada has had in the past few years in the Indo Pacific region.
Bart Édes, Distinguished Fellow, Asia Pacific Foundation of Canada, former North American Representative, Asian Development Bank, and Senior Associate (Non-resident), Project on Prosperity and Development, Centre for Strategic and International Studies. Montréal, Canada.
By 2028, China is expected to become the largest consumer for some key agricultural goods produced in Western Canada. Recent years have witnessed strong growth in China’s purchases of Canadian wheat, barley, soybeans, canola seeds, peas, and canola oil. During consultations with China on its CPTPP application, Canada should probe China’s willingness to adhere to the agreement’s high standards on issues like labour rights, intellectual property, digital trade, and state-owned enterprises. Assurances should also be sought on rule of law, transparency, and predictability, including China’s use of technical and non-tariff trade barriers (NTBs).
China is a major producer of agricultural goods and desires food self-sufficiency. Negotiating a substantial reduction in tariffs and NTBs for Canadian commodities could be a challenge. However, China needs reliable foreign sources of commodities to complement domestic production, and Canada will continue to be one such source. Further, China could benefit from what Canada can offer in many other areas such as clean tech, environmental, and energy efficiency products and services, as well as agriculture and mining equipment.
Compared to failed past efforts to negotiate a free trade accord with China, Canada is more likely to achieve improved access to China’s vast market by working closely with other countries, like Australia and Japan, to bring China into the CPTPP. The multilateral accord provides a key advantage that bilateral accords do not – a common set of rules for multiple markets which would allow Canadian companies to participate in regional supply and production chains.
That said, China’s habit of employing trade as an instrument of economic coercion and political retribution, broad violations of its 2001 WTO accession agreement, and increasing economic nationalism, call for a cautious response to the Asian giant’s bid for CPTPP membership. China needs to convince Canada and others that, moving forward, it will be a dependable partner that will adhere to both the spirit and letter of agreed rules on international trade.
Stephen R. Nagy, PhD, is a senior associate professor at the International Christian University in Tokyo, a Senior Fellow at the MacDonald Laurier Institute and a visiting fellow with the Japan Institute for International Affairs (JIIA). He is currently the Director of Policy Studies for the Yokosuka Council of Asia-Pacific Studies (YCAPS) and a Governor for the Canadian Chamber of Commerce in Japan (CCCJ).
Western Canada stands to benefit moderately if China is successful in its accession efforts to join the CPTPP. Notwithstanding, the CPTPP focus on IPR protection, strong labour and environmental laws, and the limiting of State-Owned Enterprises (SoEs) trade indicates that Western Canada’s traditional strengths such as agriculture and natural resources are a mismatch for the agreement.
Importantly, China’s accession faces strong political headwinds from current CPTPP members but also the NAFTA 2.0 clause that requires Canada to notify USMCA partners of trade talks with ‘non-market’ countries.
Western Canadian businesses should watch how Japan and the U.S. discuss China’s CPTPP application. Tokyo may prolong negotiations to pressure the U.S. into joining at the same time as China and likely Taiwan. The same prolonged negotiations may pressure the U.S. to advocate for a TPP 2.0 that includes current members of the CPTPP. Both are a longshot at this stage as the U.S. is tilting inward to build back better at home.
It will be also important to watch if China advocates for both Taiwan and China joining at the same time. This is important as current CPTPP members are unlikely to accept one without the other.
With the hostage diplomacy issue resolved between Ottawa and Beijing, there may be a window of opportunity for Ottawa to try to reset bilateral relations with China through a transparent process of reviewing China’s application. This would not move forward without Taiwan’s application being considered at the same time.
Lastly, Western Canadian business should be mindful that the U.S. has floated the idea of an inclusive and flexible “Indo-Pacific framework” that includes trade, digital trade, and resilient supply chains. Western Canadian businesses should be conscious that trading regimes including the Indo-Pacific framework are transforming into blocs with shared values and they should position themselves accordingly.
Dan Ciuriak, Director and Principal of Ciuriak Consulting, Inc., Senior Fellow at the Centre for International Governance Innovation, a fellow in residence with the C. D. Howe Institute, and a distinguished fellow with the Asia Pacific Foundation of Canada
China’s application to join the CPTPP should be seen as an opportunity for a much-needed course correction on Canada-China relations.
- Having China sign onto CPTPP disciplines, which are subject to dispute settlement procedures, can only help Canada in its trade relations with China. Canada, after all, is already subject to those commitments in other trade.
- China already has preferential trade arrangements with most of the other CPTPP members – and a “forced trade agreement” with the United States that siphons off trade from Canada. China acceding to the CPTPP would work to reduce these adverse preferential terms for Canada.
- China’s applied tariff averages 7.5%; Canada’s averages 3.9%. Guess who wins?
- China is not going away. In the traditional industrial economy it remains the “workshop of the world” with the deepest supply web in the world and the most intricate connections to the global industrial production system. In the knowledge-based economy it is rapidly catching up to the technology frontier and in the digital economy, it is it is at the technology frontier (the first data exchange in the world launched in Shanghai in November). The decoupling initiatives mounted by some governments to subsidize restructuring of supply chains out of China have simply fizzled: China’s share of inward foreign direct investment doubled in 2020 compared to 2019 at the height of the campaign. As Nick Lardy put it writing earlier this year: “Global economic decoupling from China or, as some call it, reshoring, is not happening.”
China accounts for one-fifth of humanity. It can neither be ignored nor “contained.” It has risen to every geopolitical challenge from the militarized “pivot to Asia”, to denial of access to the International Space Station, and interference in its use of the U.S.-run GPS system. It is well on its way to meeting the challenge posed by the denial of access to computer chip-making technology.
Deborah Elms, PhD, Founder and Executive Director of the Asian Trade Centre, Vice Chair, Asia Business Trade Association.
Trade agreements can help strengthen relationships, but they are not a silver bullet that will resolve all possible sources of tension. Higher quality, more ambitious agreements, like the CPTPP, do more to reduce risk and increase certainty in outcomes more than those having no specific commitments in place.
Canada has had a recent rocky relationship with China. While many of the specific points of concern are outside the scope of any trade agreement (such as extradition arrangements), what the CPTPP would provide is nearly 600 pages of rules that ensure greater alignment in policies between Canada and China. Many of these rules go far beyond any existing arrangements.
There will also be some specific promises that should interest Canadian firms, such as reductions in tariffs on key export products like agriculture and forestry. To take just one example, China’s tariffs on Canadian seafood range from 10-17%. Once inside the CPTPP, these tariff rates will drop to become duty-free as a key outcome of CPTPP membership is to allow members to trade without tariffs.
Of course, it will be important for Canadian companies to clearly indicate to officials which tariffs are most critical so these commitments can be implemented over the shortest possible timeline and, potentially, on the first day when the agreement enters into force. Given the high volumes of seafood consumed within China, a reduction or elimination of tariffs would deliver significant bottom-line benefits to Canadian seafood producers and exporters.
CPTPP is not only about trade in goods. Services and investment firms should provide details about any specific obstacles or challenges they face when trying to enter the Chinese market. Some of these barriers may finally be tackled through the negotiating process, particularly if multiple members have similar issues to be raised.
– Stephany Laverty, policy analyst
The China Brief is a compilation of stories and links related to China and its relationship with Canada’s West. The opinions expressed in the links are those of the articles’ authors and don’t necessarily reflect the views of the Canada West Foundation and our affiliates.