Canada–China Free Trade Part 1: Business before Politics

Canada–China Free Trade Part 1: Business before Politics
Workers perform final testing and QA before sending drives off to customers on its 2.5-inch notebook lines at the Seagate Wuxi factory.Robert Scoble

by John Gruetzner and Phil Calvert

Canada and China have begun exploratory discussions on a possible free trade agreement (FTA). Expanding Canada’s economic ties with China and moving the commercial relationship forward is a positive step. If it is properly titled, conceived, and well negotiated, a new binding contract that reduce barriers to trade could have benefits for the people of both countries.

The decision to move forward with exploratory discussions was originally politically driven, encouraged by key elements of Canadian exporters to China and prominent academics, and announced in the wake of an exchange of back-to-back visits by Prime Minister Justin Trudeau and Chinese Premier Li Keqiang to each other’s country. Such an expression of political will is often necessary to launch an ambitious initiative like an FTA but also risks fostering a do or die attitude at the negotiating table.

The key driver for a successful agreement must be commercial results and not politics. Negotiators must seek facts from facts. The primary focus of the negotiations must be on improving the environment and actual commercial opportunities for the private sector, based on the concrete obstacles they actually encounter in China. An FTA would strengthen the economic foundation of the political relationship, but it must avoid compromises made for the sake of the political relationship if they do not adequately support the fundamental purpose of the exercise.

The two sides must also take into account the global context, particularly growing protectionism and antipathy to free trade agreements, and should be prepared to move beyond old FTA models and be creative in crafting an agreement that works for both sides.

Many outstanding barriers to Canadian goods and services could be lowered through an FTA. That said, reaching an agreement that provides real, fair, and equitable market access will be a particular challenge with China. China has been undergoing dramatic reform of its economy since the late 1970s, and more were promised at the last Communist Party Congress in 2012. Many of these seem to have stalled, and although further reforms are anticipated at the Congress later this year, it is difficult at this point to determine how far and how fast they will go, and how they will be implemented. As negotiations unfold, it will be important to track these shifts in policies and adjust negotiating positions and expectations accordingly.

China’s regulatory and administrative system can create disadvantages for Canadian companies for non-commercial reasons. For Canada, an effective, equitable, and fair agreement must also address these significant systemic obstacles, some of which may fall outside the usual parameters of traditional FTA terms and conditions. For example, recently foreign exchange remittances above $5 million USD must be approved by a central government agency (the State Administration for Foreign Exchange or SAFE), whose current approval process is slow and non-transparent.

Lack of full currency convertibility also inhibits Canadian capital from entering freely into Chinese markets. Full convertibility would permit Canada’s equity markets and its domestic resource projects to compete based on rates of return for Chinese capital. Exploration and mining companies face frequent difficulties with the central and provincial approval processes needed to develop mining projects. China’s often overlooked VAT and export rebate systems are not widely understood as a form of export subsidy. These are some examples of a system that cannot consistently be relied upon to operate in a fair and transparent manner, and to treat foreign companies equally in accordance to international obligations.

A free trade agreement in theory can position companies to gain significant short-term advantage in the market, but these systemic factors can limit the impact of a standard FTA. Canada should therefore consider a broader framework for negotiations beyond that of the standard FTA. An economic partnership agreement (EPA) that focuses on these systemic issues within a broader economic co-operation program could provide free trade results that bring substantial benefits to both sides and support China’s reform program. This might take longer to finalize than a standard FTA, and might even be done in stages, but it would allow each side to address systemic issues, and to build confidence in each other’s system, thus having greater impact. It would probably also be more acceptable to the Canadian public and would mitigate the relationship with China from becoming compromised by partisanship prior to the next election.

An EPA that includes an element of economic and trade co-operation would also benefit the global trading system. Globalization is increasingly under attack and protectionist, nationalistic, inward-looking policies are becoming more prominent elements of political agendas. Part of the EPA framework could expand bilateral co-operation to support globalism and a progressive global trade agenda, including the World Trade Organization’s role in supporting developing countries in the global rules-based system. This would be in keeping with publicly stated priorities of both Prime Minister Trudeau and Chinese President Xi Jinping. As part of this partnership, for example, Canada might work with China to improve its adherence to Equator Principles for financing, offshore corruption practices, and an extractive industry transparency initiative for offshore resource investment.

Is Canada ready for an agreement with China? Canada will need sufficient capacity and focus at the corporate level to take advantage of the new opportunities presented by a new economic agreement. An important starting point would be a detailed and objective assessment of Canada’s commercial performance in China, benchmarked not just relative to our own history of bilateral trade, but against global competitors, and taking into account the growth of the Chinese market.

John Gruetzner is the Managing Director of Intercedent, a Canadian international business advisory firm with offices in Asia.

Phil Calvert is a Senior Fellow at the University of Alberta’s China Institute and an Associate at the Centre for Asia-Pacific Initiatives at the University of Victoria. He has served as Canada’s ambassador to Thailand, Cambodia, and Laos (2012–2016), as Director-General for North Asia in Global Affairs Canada, and as Deputy Head of Mission at the Canadian Embassy in Beijing.

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