IN THIS EDITION: Subcommittee urges immediate action on genocide policy, how to increase pressure on China, experts weigh in on trade disengagement

We know many of you will be focused on the election south of the border today – so are we! The China Brief remains committed to covering China-Canada relations so that is where the focus of this brief will be. 

If you want more analysis on what the election could mean for Western Canada, CWF will host the Arthur J.E. Child POP UP POLICY on Implications of the U.S. Election for Western Canada over Zoom next Tuesday, November 10 at noon Mountain Time. Register to hear what our President and CEO, Gary Mar, foresees in conversation with University of Calgary Chancellor Deborah Yedlin.

Subcommittee urges immediate action on genocide policy 

The House of Commons Subcommittee on International Human Rights released a report and statement which says “[b]ased on the evidence put forward during the Subcommittee hearings, both in 2018 and 2020, the subcommittee is persuaded that the actions of the Chinese Communist Party constitute genocide as laid out in the Genocide Convention.”  

Zhao Lijian, spokesperson from the Chinese foreign ministry, said the statement is “groundless” and “full of lies and disinformation.” 

How to increase pressure on China? 

With human rights concerns in China taking a primary focus this week, what can Canada do? One argument is to follow Australia’s lead. As China uses less friendly and more chilling language when engaging with Canada, particularly in terms of the Hong Kong asylum and Uighur Muslim or Taiwan issues, Canada must be equally clear that it will stand for human rights. 

Others argue that Canada can make its position clear while allowing current tensions to cool and business to continue to avoid the repercussions in trade that Australia has felt. This argument sees Canada continuing as a reliable trade partner with China and other countries in the region and building relationships through trade. 

A report from the U.K. based China Research Group, comprised of a group of conservative members of Parliament, says that western democracies, such as Canada, are in a values war with China. Recommendations on how to navigate this conflict include disengagement rather than de-coupling relations completely, with countries working with China when values align and disengaging when they do not. The report also argues for an office to counter foreign influence operations. 

B.C. Election and China 

British Columbia is the only Canadian province to have a memorandum of understanding (MOU) with China related to China’s Belt and Road Initiative (BRI), which was signed during the last B.C. Liberal government and continued under the B.C. NDP government. B.C. joined the Australian state of Victoria as sub-national governments that have signed BRI MOUs without – or in the case of Victoria, against – their federal government’s consent. 

That relationship has drawn scrutiny from the federal opposition critic for International Development and Human Rights who says that provincial and municipal governments must also be aware of the human rights implications of agreements they sign. During the recent B.C. election campaign, both NDP leader John Horgan and Liberal leader Andrew Wilkinson said that human rights are under the federal government’s purview. British Columbians of Hong Kong descent expressed concern over the politicians’ silence. With the subcommittee’s finding of genocide and Premier Horgan gaining a majority government, it is unclear how British Columbia will navigate its relationship with China. 

Given that energy is a stated focus of the BRI and given the significant $55 billion total investment by China in energy in Alberta, our trade and investment director wonders if Alberta is not a de facto BRI partner?  

Path forward with the U.S. on China 

There are a few key points to consider in terms of China-Canada relations in light of the U.S. election from this op-ed by Roland Paris, professor of public and international affairs at the University of Ottawa:   

• Canada could work with either Trump or Biden to develop policy on how to move forward as both candidates similarly view China as strategic rival and possibly even adversary. 

• If Trump wins, many allies find him unreliable but would have manage those concerns to work with the U.S. to build a co-ordinated response to China. 

• Biden may be easier to work with in terms of China but his domestic economic commitments to “Buy America” could present other challenges. 

Politico takes a deeper look at what the U.S. election could mean for Canada-China relations here. 

Mongolia Beef has Canadian Roots 

Mongolian-based beef company Xanadu Razorback has a Canadian owner and operator, Jeremy Thiessen. Thiessen grew up on a ranch near Fort St. John B.C. and relocated to Mongolia following a mission trip. The company primarily produces beef cuts for the expat community in Mongolia but the Mongolian government is interested in the opportunities the company presents for export to China and Japan. 

Canadian Company receives Chinese Cannabidiol (CBD) license 

Despite tensions, Mary Agrotechnologies, which is based in Ontario, has received a license to produce CBD in China, which is the fastest growing emerging market for CBD. Chinese licenses are difficult to get; Mary Agrotechnologies took over a year to receive approval. The company plans to have a 15,000 square foot EU compliant facility constructed within six months. Chinese estimates project that by 2025, industrialized hemp sales will reach US $100 billion and could eventually total in the trillions of dollars. 

Everything Else 

• Ant Group, a Chinese fintech company, holds the record for the world’s largest IPO at $34.4 billion with an initial company valuation at $310 billion. The previous record holder is Saudi Arabia’s Aramco at $29.4 billion with its IPO in December 2019. 

• A judge allows Meng Wanzhou’s lawyers to argue that the United States did mislead Canada. The judge will allow lawyers to present evidence around two slides missing from a PowerPoint presentation given to Canadian authorities and information on HSBC’s management structure. 

• The Mayor of Prague says that China’s power is “overrated” and Canada should not be so concerned about how China reacts. The mayor has extended relations with Taipei and sees the partnership as mutually beneficial; Shanghai ended relations with Prague as a result. 

• China and Jamaica held virtual talks to discuss trade between the two countries; discussion focused on expanding trade from rum, lobster and coffee to include new opportunities in pork and tuna. Jamaica’s Minister of Industry, Investment, and Commerce suggested that Jamaica would have the capacity to ramp up pork production to export to China.

Spotlight 

The Question 

Amongst possible policy responses to China, there has been talk in Canada disengaging or significantly diversifying trade from the country. But there has not been as much discussion of what this means, and this is the question we put to this edition’s experts:

For Canada, what would qualify as diversification from China; is this possible? If so, how could it be achieved? And given the composition of Canada’s exports to China, what are the prospects for success given experience from attempts to get industries like softwood lumber to diversify?

The Insights 

The views expressed in this section are opinions and do not necessarily reflect the views or positions of the Canada West Foundation or the China Brief authors.

For almost a century, the privately owned forests managed by Mosaic supplied timber almost exclusively to the North American market.  That changed with the development of Asian markets (including China, Japan and South Korea), which provided a meaningful diversification opportunity, particularly in the face of the Great Financial Crisis and the ongoing Canada-US softwood lumber dispute. Today, Mosaic sells about half of its production into international markets, with China being its largest export market. Log producers in BC would simply not be viable without continued access to export markets. 

As we confront new global challenges, including trade tensions with China and the COVID-19 pandemic, it remains imperative for companies like Mosaic to continually seek out new markets. However, to enable this, it requires proactive government support in promoting a level playing field by eliminating trade barriers such as export restrictions – both at home and abroad. In this regard, Canada’s leadership in WTO reform through the Ottawa Group should be applauded. But there is still work to be done in assessing our domestic policies to ensure alignment with these goals.  

Ultimately, China is too important and large of a market for Canadian exporters to disengage from. We compete with all four corners of the globe. We must fight to maintain market share, while fulfilling our international trade commitments and enforcing a rules-based system.  If we stick to these convictions, we have a better chance of influencing change among the countries we compete with and with which we seek improved access to.  This starts at home. 

Benjamin Lee, Vice President, Business Development, General Counsel & Corporate Secretary, Mosaic Forests Management 

Adopting government policies to divert Canadian trade away from China towards other (presumably) Asian economies would not only be a waste of time and public resources but it would also lead to higher costs and lost revenues for Canadian producers and consumers. This is because disengaging from China would mean lost exports that could not be replaced; a lost sale to a Chinese firm does not automatically translate into a sale to a Vietnamese firm, whatever the efforts that the Canadian government might be willing to expend to make the Vietnamese sale happen.  

In fact, Canadian producers want both sales to happen! They should want to grow their business. This means that diversification should not be about disengaging from China but seeking new markets in addition to China. As long as Canadian producers will be able to export their goods and services to China and/or source intermediate and final goods from there in a profitable way, they will want to do so. They will only stop when they are no longer allowed to export to or import from China or costs of doing business there have become too high. In the end, it should be left to Canadian firms to assess the costs and benefits as well as the risks of doing business in and with China. Governments can help them, especially SMEs, make that assessment but it should not decide the outcome beforehand (and thereby cause Canadian firms to lose money) by adopting protectionist policies to incentivize them to stop doing business in and with China. This is what the United States is doing with the trade and tech “war” that it has launched against China and, so far, it has not been advantageous to the US economy. 

Patrick LeBlond, CN-Paul M. Tellier Chair on Business and Public Policy, University of Ottawa; Associate Professor, Public and International Affairs, Faculty of Social Sciences, University of Ottawa; Senior Fellow, Centre for International Governance Innovation. 

Businesses respond to incentives, especially the ability to make a profit or avoid a loss.  Political decisions and the desires of government leaders rarely feature in the decision making of firms, unless these political imperatives translate into policy actions that change the incentives for companies.  Thus, government exhortations to shift supply chains or to diversify based on larger political concerns tend to fall on deaf corporate ears.   

Past efforts by the Canadian government to get companies to diversify have not always been successful because firms were often being asked to forgo revenue in a quest for what might have been a larger public, or at least governmental, objective.  Even if a company wanted to comply, doing so might have been problematic with the firm’s shareholders, employees and others who would have had to accept a likely loss of profits at least in the short run or borne a heavier cost burden of trying to find new pockets of opportunity. 

Getting companies to alter their behavior often requires either making alternatives appear more attractive or to make the status quo less tenable.  Governments have often embarked on plans to subsidize certain types of activities, offering up tax incentives or other types of benefits to nudge behavior, or created penalties like payment of higher taxes or greater scrutiny and paperwork for other types of firm activities.   

The Canadian government could try these alternative approaches to encourage diversification of Canadian firms away from the Chinese market.  If the incentives are powerful enough or the disincentives are strong, firm behavior could be altered. 

However, for many firms, diversification and adjustments in supply chains, sourcing and final markets is already under review even without specific government actions.  Companies grappling with rising trade tensions, direct financial costs driven by certain trade partner behaviors such as higher tariffs on certain products, and the disruption caused by the Covid-19 pandemic has forced companies of all sizes to relook at some or all of their operations.   

The expectation of continued trade tensions between Canada and China and potential future challenges ahead for many foreign firms in China may be sufficient to drive firms to diversify regardless of what the Canadian government intends or which policies the Canadian government puts in place to foster diversification.   

Deborah Elms, Ph.D., Executive Director, Asian Trade Centre; President, Asia Business Trade Association 

Trade is two ways, with end user demand influencing the flow as much as supply influences. This applies to Agri-commodities perhaps more than other commodities, as there are substitutes on what can be consumed as well as what can be grown. Chinese demand for Canadian wheat has historically been for #1 grade high protein CWRS and is reasonably inelastic. This demand strongly influences quality premiums paid to farmers, especially in years when that supply is scarce. Chinese demand for Canadian canola is price driven, with Australia-E.U. a non-GMO trade flow often priced as an island. End user demand for canola seed to crush requires crushing capacity. To diversify demand for canola away from China, crushing capacity needs to be built in other countries that otherwise might today be purchasing oil/meal products in smaller capacities. But it is likely consumer demand for those products not being great enough in other countries to attract companies or governments to integrate up the supply chain, build crushing assets and procure bulk seed.

Chinese demand for malting barley is quality specific, where strong premiums will be paid for Canadian origin malting barley specifically, even in seasons where supply is scarce. This earns farmers premiums versus the world price, specifically due to Chinese demand into specific North American style beers brewed in China. That is a very specific trade flow that is hard to replicate in other countries. Chinese feed barley demand is purely as a substitute feed grain versus corn and barley from other origins. This flow is more easily influenced by policy as there isn’t a premium otherwise. If it weren’t for the ban on Chinese imports of Australian barley, Canada would not be exporting feed barley to China. Chinese demand for peas is predominantly price driven as a protein substitute versus soymeal. This demand can be diversified across a wider range of countries with the right strategy.

So in summary, there are some commodities where more can be done to diversify the demand profile, like yellow peas. Commodities like malting barley and canola are much more difficult to diversify demand away from china as it is very capital intensive and requires consumer demand to lead an investment of that scale. Milling grist’s are a science and can change by country, traditions, consumer led products. Some countries display greater in-elasticities than others, but when strong demand for quality characteristics are found, they play a precious role in bringing value to the industry, especially farmers. Efforts should be made to replicate the quality premiums and demand traits elsewhere, but should not be disengaged from in my view.

 Martin Swinyard, Commercial Manager, GrainsConnect Canada 

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.

 

 

Banner photo by Erik Mclean on Unsplash