China Brief: China, the Indo-Pacific and Canada’s West
Issue 97 | September 2023

Before the news, an update…

This issue marks a shift in the CWF China Brief to replace our Five-Year Plan coverage with a broader examination of news from the Indo-Pacific Region. This aligns with and builds on the enhanced CPTPP focus of the Trade and Investment Centre. It also recognizes the shift by the federal and western provincial governments to focus on the Indo-Pacific. From the 40 countries and economies in the federal strategy, we follow 16 of importance to Western Canada: Australia, Bangladesh, China (including Hong Kong), India, Indonesia, Japan, South Korea, Malaysia, New Zealand, Pakistan, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, and Vietnam. And, of course, after we made this decision the news on India broke.

Now the news and analysis.

In this issue: No place to go but up?, wheat prices down despite the war and a look at Canada-India trade.

China News

Not our fault, but China’s further decline?

India aside, the BIG story this summer has been the decline of China as the world’s driver of economic growth. This is a meta story that touches everyone impacted by trade with China, so it is particularly important for western Canadian exporters. 

There’s been more written on this topic than we could get through. Essentially, after an expected spurt of economic growth as China ended COVID measures, the recovery stalled. As opposed to Canada and the U.S., consumer prices are falling, a real estate bubble has burst and exports are in now in a slump after that initial post-COVID surge. Youth unemployment has gotten so bad that the Chinese government stopped publishing the numbers. Bloomberg has a very good comprehensive but short (less than 10 min) video explainer 

As the South China Morning Post reports, six international financial institutions lowered annual growth forecasts for China for this year to below the government’s target of five per cent. The forecast GDP growth of 4.5 per cent advanced by some institutions is almost half of China’s average growth since it joined the WTO.  

The views on China’s current troubles and the ability of the government to counter them generally run pessimistic. Take, for instance, the heavy political science analysis in The End of China’s Economic Miracle. In it, Adam S. Posen, president of the Petersen Institute, argues that China is suffering from problems inherent in authoritarian regimes.   

The headline of a Globe and Mail op-ed by our good friend and former CWF economist Todd Hirsch pretty much sums the situation in “Letting go of China’s money – the price Canada must pay for its principles.” 

As a real-life example of how Todd’s point plays out in, say, Banff and Vancouver…reckless Chinese Gen-Z travel spending would normally be a bright spot for Canada’s hard hit tourism industry which pre-COVID had benefited from over C$1bn in Chinese tourist spending. But, as BBC and others note, Canada is not one of 138 countries on the Chinese Ministry of Culture and Tourism’s approved list for group tours. In case you were wondering, there are 193 members of the U.N. So, roughly three quarters of the world is on China’s approved tourist list, just not Canada 

A more optimistic take on China’s economy has emerged in the past few days as consumer demand seems to be rebounding according to CNBC reporting on China Beige Book’s survey of Chinese businesses. More interestingly, a piece in Time Magazine last week finds that despite high youth unemployment, Gen-Z spending on leisure and travel is up. And of course, the Chinese government has its spin, which according to Xie Feng, ambassador to Washington D.C. is “The Chinese economy is doing better than you might think.” 

What does this mean for commodities?

The Bloomberg piece accompanying the video clip has a good overview. For agriculture in particular, S&P has an excellent, brief snapshot that adds Chinas expected 80-million-person population decrease predicted by the World Bank to slower economic growth. The article uses soybeans as an example of already falling prices. This example with soy makes the strong case for producing renewable diesel with Canadian canola even stronger.

The picture for wheat is not good, but for pork it is worse. We ran the numbers from the January 2023 OECD agricultural outlook and got the following chart for pig meat imports by China to 2037.  

What to make of all of this?

Over the summer to the present, the tone of news about China has shifted from impending disaster to more guarded caution. China’s economy continues to grow and 5.5 per cent or even 4.5 per cent annual growth is more than double the 2.7 per cent predicted by the Philadelphia Federal Reserve’s survey of 37 U.S. GDP growth forecasts. But what if there is a significant weakening? For a single-party state obsessed with domestic stability, will the government risk allowing their state-owned enterprises (SOES) to act solely on commercial considerations or will they instruct them to continue to purchase key food commodities from abroad so food supplies are not put at risk. Our money is on the latter.  

Economist and former U.S. cabinet secretary Paul Krugman has a good, short summary and analysis in the NYTimes that aligns with our thinking at CWF. Acting on China’s decline or recovery needs a period of analysis and evidence longer than the current news cycle. This is especially true for analysts and businesses whose frameworks for analysis are not grounded in the day-to-day operation of the radically different Chinese state-led system. If this turns out to not be the case, we’ll blame Paul. With a noble peace prize, his reputation can survive the hit.  

Finally, to go deeper, 134 pages deeper, here is the most recent IMF staff report on China if one wants to dive into the numbers.  

Indo-Pacific News 

India-Canada relations decline

The big news for Canada is the sudden, sharp downturn in the Canada-India relationship. 

On the economic and trade aspects, Reuters has a high-level snapshot. On what the dispute means for trade between Canada and India, the Economic Times (India) asked “Does India-Canada’s flaring tensions risk multi-billion trade, investment ties?” The answer it found was largely no,tense diplomatic relations between India and Canada are unlikely to impact trade and investments between the two countries.” A specific example of this point was made by Reuters, which looked at Canadian potash exports and found that “Indian Potash does not expect supplies of Canadian potash to be affected by the diplomatic row between the India and Canada…and hopes to extend a contract with Canadian supplier Canpotex beyond the end of September.” This view has the implicit assumption that liberal market democracies tend not to intervene in the economy as a means to retaliate over diplomatic disputes. 

Canada’s Financial Times had a similar take that didn’t quite come across in the article, based on an interview with the author of this Brief. Three points that didn’t quite make it through the interview: 

  1. The recent China example. During the time of the two Michaels when China-Canada relations were at what has been described as an all-time low, trade continued to grow. A data point that CWF has made repeatedly. Unless one of the governments intervenes, there is no reason to think that won’t be the case here.  
  2. One of the greatest worries in media coverage is that the end of trade agreement negotiations will harm trade. This concern is a headscratcher. Canadian businesses have figured out how to trade with India without an agreement. The continued lack of an agreement, therefore, will not worsen trade conditions.
  3. Even if one is worried about the cost of lost opportunity in not having a trade agreement with India, what was being negotiated was going to be modest because it was not a comprehensive deal.  As noted by the Hindu Business Line the “…Early Trade Agreement (EPTA) being negotiated between the two countries will exclude all “difficult areas’’ such as labour, environment, intellectual property rights and digital trade.”  

It was not clear at the beginning of negotiations if ag would be on the table, given India’s sensitivities as a country with a large number of (voting) small farmers. India’s High Commissioner to Canada and Canadian Trade Minister Ng have both been cagey in answering questions on the status of ag in the talks. But the bottom line has been that ag is included (a win for Canada) but both governments have cautioned to keep expectations minimal. Our good friend Neil Moss at the Hill Times has details on ag in the India-Canada negotiations 

More than the potential for greater market access, Canadian producers need to see market certainty meaning fewer non-tariff trade barriers (NTB) from India and greater protection from the ones that will arise. More market access without robust NTB protections is moral hazard. Given how contentious ag discussions remain, it does not appear that NTB protections were on the table.  

An early progress trade agreement is a small, but significant step in a long process. What has been lost is that first step. So, less hyperventilating and tearing of hair. Keep calm and carry on…at least on the trade front, politics is, of course, another story.  

While the risk of direct impact to Canadian trade writ large may not be great, that does not mean it is non-existent. Ag is a perpetually easy target for retaliation given the propensity of countries to use non-tariff barriers to block ag trade for a plethora of reasons from appeasing domestic constituencies to diplomatic retaliation. But India has not signaled that it may do this as China did with its ban of Canadian canola. Prior to its ban, China had established a ‘paper trail of plausible deniability’ that its ban was political by repeatedly warning Canadian exporters Richardson and Vittera of problems with shipments. Whether or not the warnings were based on real evidence, the point here is that there was a signal that a ban might be coming. India has not taken similar action with Canadian ag exports. Countries can, of course, impose bans without warning so lack of an early warning is a hedge, not a guarantee, that this will not happen. An article on Canadian lentil imports and the diplomatic spat in the Economic Times (India) argues that India demand and diversification of its imports makes a ban on Canadian lentils unlikely.

And to top it off, concerns that India may restrict Canadian imports are at odds with the country restricting exports of ag products, especially wheat, from India to shore up domestic supply as charged by the U.S. at the WTO this week and reported by InsideTrade. It’s hard to see a country so worried about having enough food cutting imports from Canada. (See USDA report on the impact of India restricting rice exports.)

For a different analysis that trade will be impacted by the political tensions, see our friends at the Woodrow Wilson Institute who hold that “Trade will likely be the first major casualty of the fallout (sic of the current spat).”   

Other News

The head scratcher of the year, WHEAT PRICES ARE DOWN?: A piece in the NYTimes examines why the Chicago Board of Trade settlement price for wheat is lower now than it was before the start of the Russian invasion of Ukraine. Short answer: speculators, smart money, dumb money and a lot of conventional wisdom. The NYTimes piece is based on an article by Jayati Ghosh, Professor of Economics at the University of Massachusetts, Amherst. The lead of the piece in on-line news source Project Syndicate isContrary to popular belief, the war in Ukraine has not led to a global shortage of wheat. While global hunger has surged in recent years, the way to address the current food crisis is by focusing on its real causes: financial speculation and corporate profiteering.” The NYTimes counters that while largely correct, the story is a bit more complicated.  

The wheat story is also an aviso about accepting assumptions in conventional wisdom, like say a political spat with India impacting Canadian trade.  

Is ASEAN falling apart? More than likely not. But it is a provocative question raised by the Nikkei. For western Canadians following trade negotiations with the bloc and thinking longer-term, the article is well worth a read. Any block with double digit membership or countries rich and poor, including one actively committing genocide, is going to have issues. But the key takeaway from the Nikkei piece, that “ASEAN has lost its much-touted centrality and is frankly on life support as an autonomous multilateral platform,” is more troubling.  

Canada? IPEF? Question marks about sum it up for the prospects of Canada being admitted to the U.S.-led Indo-Pacific framework. When asked by U.S. trade reporters about Canada’s prospects, a Canadian embassy spokesperson respondedThere is currently no timeframe for joining, but we hope to do so as soon as possible. 

IPEF ag chapter close: Speaking of the American trade agreement that’s not a trade agreement (the IPEF), the U.S. chief negotiator for IPEF ag negotiations recently told the International Fresh Produce Association annual conference in Washington D.C. that an agreement on ag is close for the 14 countries that are negotiating. Rather than tariff reductions, talks focus on agreement on regulatory certainty and use of science in decision making. Inside U.S. Trade’s World Trade on-line has details.  

China lifts barley tariffs: A story in CNBC notes that China has lifted three-year-old anti-dumping tariffs on Australian barley. Removal of tariffs imposed mid-2020 at the height of China-Australian trade tensions will ease supply concerns in China now that the Ukraine-Russia Black Sea deal has not been renewed. Australian barley has traditionally outsold Canadian barley so, we’ll need to wait and see if this leads to a dip in Canadian exports or not. 

New Chinese canal targets ASEAN: China has begun construction for the “first major waterway in 700 years” in the region, the Pinglu Canal – a 135 km-long US$10.1 billion project. This investment will increase Chinese trade with ASEAN, a region of focus for the federal and several western provincial governments. The SCMP has good coverage 

Why did the Popeyes chicken cross the road?: To get back into China. Japan Times makes a point that China and the west are drifting apart more than they are decoupling. The story looks at the U.S. and, interestingly, Germany. But then there’s Popeyes, which announced a massive expansion of 1,700 stores over the next decade in China. This is Popeyes’ second foray into China. This story has some interesting insights. Popeyes’ first foray ran into COVID and franchise issues. The relaunch is being led by the team responsible for Tim Horton’s success in China. The relaunch may also focus on 3rd and 4th tier cities given that KFC and other western brands are saturating 1st and 2nd tier cities. With 1,700 stores there will be five times as many Popeyes in China as in Canada and twice as many in Shanghai as in all of Saskatchewan. 

– Carlo Dade, Director of the Centre for Trade and Investment 

The China Brief is a compilation of stories and links related to China, the Indo-Pacific and relationships 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.