Canada-China Session 1: Setting the stage, public opinion trends, approaches to trade

Recap of the first meeting of PPF’s Canada-China Forum on June 21, 2017 includes presentations on public opinion by Bruce Anderson of Abacus Data and sectoral trade by Wendy Dobson of University of Toronto

Note: // indicates a new speaker. Chatham House rules were used for this discussion.

OPENING DISCUSSION: SETTING THE STAGE

// What success looks like for this forum: A broadening and deepening of the dialogue about Canada’s relationship with China and a better understanding among Canadians of both the opportunities and the challenges.

// This is a relationship of critical importance. There’s an economic imperative here, of course, but there are other imperatives as well. China is:

• an inevitable interlocutor — it is on an expansionary trajectory, including in terms of security, military, development;
• taking leadership on the environment, e.g. carbon-reduced economy;
• providing leadership in peacekeeping and infrastructure development in Africa — deliberate and strategic presence and investment in Africa that is stunning in its scale and clear in its intentions; and
• in the context of real and perceived withdrawal of leadership by the United States, President Xi Jinping made this clear in his recent speech at Davos in January 2017 that China is happy to step up and be a global leader defending the liberal world order.

Is China the only interlocutor? No. There is also the G7 partners, Japan, with whom we have a long relationship of, some say, insufficient depth. Japan has not given up on the Trans-Pacific Partnership (TPP); it has plans to keep it alive, in part as a counterweight to China, but also as portal to the U.S. and the Americas. The TPP is ‘quasi-moribund’ but not yet dead. We also have a free-trade agreement with South Korea that is not fully exploited; there remains significant untapped potential. ASEAN also has a significant and growing economic presence in Southeast Asia. China is interested in ASEAN and focused on cultivating this relationship through projects such as the One Belt, One Road Initiative.

Human rights

While the degree of regression in human rights is debatable, it is clear that, from any perspective, the situation is not getting any better in China. Treatment of dissent is problematic. The legal system is a serious concern. These issues cannot be downplayed.

North Korea and South Korea

China is in a delicate position vis-à-vis North Korea. There is potential for huge and problematic migration of people if North Korea collapses. There is ambiguity regarding how much leverage China actually has there. It’s a highly complex environment on the peninsula. China has a desire for deeper relations with South Korea.

Trade

The Canada-China posture vis-à-vis trade will be of intense interest to the U.S. Canada should do what is in its interest. Either the U.S. will be rational and will not particularly care, or it will pay attention. And the greater our determination, the more the U.S. will take notice. The U.S. has significant security concerns: export of sensitive technology, intellectual property (IP), etc. There are different views within the U.S. administration about China.

India will potentially surpass China over time, though there is debate over this. Either way, Canada is looking to deepen ties with India at the same time.

In order to have a deeper relationship with China, Canada will have to be present in the world where China is present and actively engage (e.g. Africa).

// China is too large and growing too fast to ignore. For example, China is already the largest trading partner for most South American countries. There is huge opportunity for Canada. Of course, China is not a western country and it does not have a market economy. There has been considerable liberalization, which is part of a broader plan to turn China into an advanced economy. It wants to be a world leader in many areas. China does not envision itself becoming a low- or middle-value-added economy. The vision is certainly there even if it might not be achieved. There are areas where foreigners are not allowed in; sometimes they push others out to avoid competition (e.g. aircraft manufacturing).

The Chinese are free traders in principle, but not always in practice. China also sees itself as a developing country when it suits.

Canada can look for certain niches:

• Where are we strong?
• What are specific opportunities in China that we need to go after?
• What is our whole-of-government, economic strategy to go after those areas?

We need a united government and business strategy because that is how China works. This is an opportunity that is much too large to ignore.

As Canada goes into NAFTA renegotiations, it is not a bad thing for China to be a dance partner for us. The U.S. will always be our biggest trading partner, but we should talk about diversity. For China, it would be useful to get a foothold in North America, too.

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Digitization: China created its own domestic industry by not allowing Apple in. This is a key area of opportunity for Canada; for example, we can foster a closer relationship with Alibaba, etc.

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Chinese view of Canada: they wonder whether we are serious. They have not completely figured us out particularly vis-à-vis the U.S., in part because we haven’t figured ourselves out vis-à-vis China. They are waiting. We have a good global brand, as a country that has human rights and liberal values, and as a G7 partner. We have advantages in terms of our university system, our mixed economy, our track record as a decent environmental performer. But it is important to keep in mind that China is a bit python-esque compared to the Canadian rabbit.

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We are a “big-small” country. We are rising up the scale that they are interested in.

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In terms of those around the G20 table, we are friendly with almost everyone. China is not. They look around the table and see potential competitors, have-been rivals, not many friends, and then they see Canada. We can be helpful to them. Canada can be a go-between, with the U.S., for example.

They have positive memories of us. We sold them wheat in their time of need. They still honour the memory of Norman Bethune and others during the Cultural Revolution.

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China doesn’t change course; their approach is additive. They have a base and build from there. It started as a resource base, but now the degree of infrastructure that is Chinese is stunning. As Africa develops, it will become more a strategy of investment and co-ventures, etc. It will take on new dimensions.

THE PUBLIC OPINION ENVIRONMENT

Presentation by Bruce Anderson, Chairman, Abacus Data

Before free trade agreements were put in place with the U.S. and Mexico, Canadians tended to be apprehensive about free trade. Years later, people are more open to the idea and are willing to look at each deal on its merits, rather than imagine we would always lose in a trade arrangement with a stronger economy or a lower wage market.

Canadians have grown more aware of Canada’s economic relationship with China.

According to Abacus, a majority (56 percent) consider it to be very important to Canada or one of the most important relationships. Another 39 percent say it is important but not more than our relationship with other countries.

Canadians recognize that China has become one of the world’s most important economic players, and when it comes to trade and investment, far more Canadians would rather see the economic trade relationship with China grow. Fifty-two percent of respondents indicated that they want to see the economic and trade relationship grow, versus 16 percent of respondents who said that they want to see it shrink.

The image that Canadians have of China is in flux, mostly changing for the better.

There is an increasing attitude of ‘Is there even a choice?’ If you tell Canadians that there is change in the world, Canadians are showing the reaction that “it is what it is, let’s see what the opportunities are.”

There are questions of “if we had a free trade agreement, would we win?” People used to think that we would lose. But that is changing. Can we win? The poll shows people believe the odds are fifty-fifty.

More people think now that Canada should put the same emphasis on China as the U.S. — this reflects a big change. In fact, many Canadians now think China is better than the U.S. in lots of ways.

People are saying: negotiate a careful agreement, don’t think that we will always have a knee-jerk reaction, just look out for our sovereignty, etc. Most people are open-minded.

For those who advocate an FTA, here’s some advice:

• Be pragmatic — Canadians are pragmatic.
• Focus on what China can buy from Canada.
• China is changing. Many Canadians recognize this and believe it needs to be given attention.

Remarks by Paul Evans, Professor, School of Public Policy and Global Affairs, University of British Columbia

Are there countries that are still having a debate on whether to deepen relations with China? Everyone else is talking about how to do it, not whether they should, because they recognize that there is no choice.

We have a government that wants to do more with China, in a range of areas.

But in terms of public opinion, it’s a really complex picture and, contrary to the Abacus poll, there is a lot of resistance. Overall assessment: on one side, one third have strong negativity about China, and not just with regard to free trade; on the other side, one third think engaging with China is important; and one third move back and forth. This presents serious headwinds for the government.

There is a recognition of the risks of engaging with China, but there are powerful feelings among many Canadians that China is different. China is not getting better in some areas. It used to be the rationale for liberal countries that as countries become more developed they will democratize, but that is not the case. The primary objective is not to change China anymore.

The most sensitive issue is China’s presence in our country.

Vancouver’s housing prices have an effect on public opinion of engagement with China.

Academic freedom is another important issue.

Environment and climate change is a big opportunity. We can make a difference.

Remarks by Edward Greenspon, President and CEO, Public Policy Forum

The skepticism and misgivings out there reflect legitimate grievances; it’s not just a communications problem but a fundamental policy challenge.

There is an openness to discovery. That’s a luxury in public policy — people want to be better informed before making up their minds.

There are new issues, especially the Trump factor and waning confidence in the U.S. relationship.

There remains a negative view of China here in Canada, which sometimes spills over to Chinese Canadians, as we see with real estate in Vancouver.

Where to start? There are a lot of touchpoints, not just human rights and free trade, including a lot of areas where Canada can support China, or cooperate with it. The environment is a good one to start with.

Generational change is an important factor as younger people drive public opinion disproportionate to their voting.

General discussion on public opinion

At the University of Toronto, 10,000 students are from China. China is present on campus. Universities have major stakes in this, startups come out of universities, etc. Universities do not have financial capital but have knowledge and human capital and are creating global talent. Most young people have a more positive view of China because they encounter Chinese students on campus and in classes.

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What is affecting the undecided? Canadians are concerned that closer engagement with China will make us more vulnerable to the ups and downs in China’s economy.

But we also need to be careful about how we use polls to guide policy. Public opinion can also follow government leadership. e.g. With the Korea FTA, there was a better view of Korea after the FTA than before. The same was true for NAFTA; support only picked up once it was implemented. So where is leadership?

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Finding our niche in the Chinese economy is important (i.e. clean technology, water)

There needs to be collaboration between government and business. For Canadian companies to get access there needs to be leadership from the government.

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Need to be more like Australia — they looked at this via white papers a long time ago, and at the highest levels.

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Australia thought about this for some time. But for Australia and New Zealand, the starting point was different: they had to look to China and Asia after the U.K. joined the E.U. They are economically tied to China; they do not have the U.S. on their doorstep as Canada does. There is more concern in Australia about the rise of China than in New Zealand. New Zealanders are more pragmatic; they know where their future lies but also they know that New Zealand commenting on something loudly is not going to make a big difference.

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The Atlantic Canada experience: China is not the biggest market yet for Atlantic lobster and fish, but it will be. A sectoral, regional approach is important. China is investing in Atlantic Canada and providing prosperity and creating jobs. Not just in fish, but in technology, foreign students, etc. And that is how attitudes are changing. We need to change the narrative: what are the stories we are going to tell about China? Yes, we need to keep our eyes open, but stories about Canadian companies doing well, creating prosperity in Canada for Canadians needs to be better told.

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Benefits of university relationships: international students are very important to Canada, more important than softwood.

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In the 1980s, Canada-U.S. negotiations were preceded by the Royal Commission on the Economic Union and Development Prospects for Canada. Maybe we should be looking at a Royal Commission report.

Public opinion: don’t write off people who appear to be against a deeper relationship. Evidence matters.

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The FTA is a non-starter for some, including the steel industry.

As the narrative starts to evolve, this idea of supply chain, impact of export through the supply chain, to different parts of the country needs to be explored. The energy sector moving product from China will have an impact on the supply chain.

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We had a Royal Commission about free trade with the U.S. and it took six years to do CUSTA/NAFTA even after that. We do need some sort of study.

Summary of public opinion session

We want to have a better understanding of why people are undecided. There are lots of different aspects to this. Today we need to find a way to avoid this ‘veto by issue’ rather than taking a portfolio view.

Can we trust them? This is a more general concern today when we can’t even trust our own institutions.

Can we win? The business community can do a good job talking about how it’s going to be good for their growth prospects. Parallels back to the NAFTA, business, especially SMEs.

SECTORAL VS. COMPREHENSIVE APPROACH

Presentation by Wendy Dobson, Co-Director, Rotman Institute for International Business, University of Toronto

We can build on the 2012 Complementarities Study flowing from the 2010 bilateral meeting. The seven sectors identified in that study are:

• Agriculture and agri-food;
• Clean tech and environmental goods;
• Machinery and equipment in agriculture and mining;
• Natural resources and related products including pulp and paper;
• Services;
• Textiles and related products; and
• Transportation.

Negotiations could begin with those sectors where each party faces tariff or non-tariff barriers to different goods or services, such as Canada’s interests in the treatment of vegetable oils and seeds in agriculture.

In some sectors both parties could cooperate around common interests, such as by removing intra-sectoral barriers.

In other instances, removal of barriers would have to be addressed through inter-sectoral negotiations as mutual confidence and trust are established in sectors where gains from deeper cooperation are evident. The sequence could be agreed at an appropriate stage by senior officials of both countries at the Financial and Strategic Dialogue that was agreed to in 2016.

China has reluctance and lack of experience with a full-blown modern FTA negotiation that is not just related to goods. China does have experience with living agreements with Australia and New Zealand.

We need a more considered, staged approach than comprehensive, which would take a long time. With sectoral agreements, you can join them up later.

General discussion on sectoral vs. comprehensive

Agriculture: can’t just do one sector; it encroaches on everything. Cross-cutting concerns that require a broader trade agreement and are therefore difficult to do sector by sector. Need a comprehensive approach.

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There is a window of opportunity for Canada; China is keen. We would be the first G7 country to have a FTA with China. It would confirm that China is a new champion of free trade, although take this with a grain of salt that they really are.

What is our trade with China? The same as 35 years ago. It is a problem to figure out. Most SMEs don’t know what services are available or what support is available from the government. A major effort is needed to talk to SMEs.

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If it is a choice of sector FTA vs. global FTA, go for global. If we do sector by sector, low-hanging fruit will be done first, it won’t address non-tariff measures, Sanitary and Phytosanitary Agreement (SPS) issues. We have to deal with this. We will have to deal with investment as China is interested in investing in Canada.

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The Achilles’ heel is human rights. Canadians will expect government to address it. It should not be included in an FTA but it should be addressed in parallel. We have had a lack of consistency in approach of federal government to China. We used to be a lot more important to China. We have not been good at capitalizing on the good work we have done in China. More sustained effort in Canada needed.

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China is playing a different game. When we sign an FTA with any country, Canada is the world’s boy scout. Canada is cautious. China doesn’t necessarily honour the paper on which agreements are written. Signing an FTA will only entrench those realities: Canada will be a boy scout, China may or may not abide by the rules. Encourage us to move forward but we need strong safeguards, snapback provisions (e.g. what is in TPP, Korea FTAs). We can’t wait around for the WTO to adjudicate concerns. Canadian companies do have difficulties; we need our eyes wide open, and with a lens to the future economy, not just today.

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Healthcare: huge ageing population in China — look at future sectors.

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We can’t do sectoral because of the Most Favored Nation (MFN) principle in the WTO rules (have to treat everyone the same, only exception is for FTAs, which cover substantially all trade).

They want an FTA. They want investment, but they want tariffs to come down. We want rules around SOEs etc. We want dispute settlement. There will be a lot of tradeoffs between rules and tariffs. A policy option is to use the sectoral approach without bringing tariffs down (because of WTO rules) but discussions, cooperation, etc. can take place. If we do the FTA without addressing environment, human rights etc., there will be backlash from the Canadian public.

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Need to look at China’s five-year plan. It says that China will do an FTA with Canada. And we need to take that five-year plan seriously. This is an important year in China. A lot will happen behind closed doors, but a work report will come out of that and we need to look at it closely.

Australia and New Zealand have been building relationships with the key people who will emerge as new Chinese leaders this year; that is important for Canada to get onto as well.

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Supply chain has to be in the conversation for an FTA. They want stability of supply into the future. Are we a serious player?

Summary of comprehensive vs. sectoral

China may play the long game, but how do you keep the focus for eight to nine years on an agreement? We have rampant short-term-ism, amplified by social media, etc. China can take a more long-term view.

Don’t think comprehensive FTA will work. Is there something in between where we make sustained progress?

Why is it in China’s interest? China understands diversification. In a world that has volatility, Canada has certainty and is not a geopolitical player, and increasingly attractive to China. Complementarity — not competitive. Including the agriculture system. We did best when we moved up the value chain.

If we are to succeed in China (and in the European Union), we need develop our brand and market development. Agreement is a means; it is the relationships that develop after an agreement that matters most. There needs to be a public-private partnership to develop Canada’s brand.

We spent 40–50 years building logistics to develop the north-south relationship; if we are going to do Asia we have to build a logistics system. That conversation isn’t as much to the fore. We need other enablers.

NEXT STEPS FOR THE CONSULTATIVE FORUM ON CHINA

For this forum, there is an audience outside the room, including the the business community, SMEs and larger companies and civil society. We have to be cognizant of that. Opinion is divided on merits of this orientation. The question shouldn’t be “should we have a FTA,” despite the legitimate concerns. The focus should be on mitigating risks and finding solutions to problems.

We know there are imbalances in knowledge, time frames, different approaches to seriousness of signatures on documents. We have got to be ready for that. This is a Canadian undertaking. If it all rests on government, it will founder — it is an all-Canadian undertaking.

Suggested next steps

• Next meeting in mid-September and then late November. Possible topics include security. Open for comments from around the table on future topics.
• Do some research into experiential stories of businesses and make those more widely available.
• Look at where environment and climate change connect with our energy sectors.
• Look at potential of university alumni more: Chinese students who have studied in Canada and are leading bi-national lives.
• Look at having thematic presentations. For example, focus on youth (including working and studying in China); labour and employment — organized labour, academics, digital economy — disruptive, important, Canada working a lot in that field.
• There are positive stories. Bring it back to each province, to regular people. There is a significant number of Canadians who depend on trade with China, but that is not well known. There is a need to tell good stories to help explain the benefits to people. Reach out to many sectors and not just big companies.
• Confident that we can achieve the good news story and that business will generally support a FTA. The key issue will be the new parts of FTAs, e.g. environment chapters, human rights etc. They will be the hardest to achieve but necessary. At future sessions, want to look at how we can achieve those, how can we get there.
• A lot of our experiences with NAFTA do not align with China. There is so much we don’t know, and public sentiment is based on lack of knowledge. We need more education. This forum should be neutral: dissect and explore the real value proposition factually. Suggest we do a risk piece exploring human rights, security, China not keeping its side of the bargain and so on. There is a danger in leaving it to anecdotes. What are our red lines?
• The breadth of the conversation and the tension in the room is important. The research relationship is relevant, but there are also concerns and risks, for example, around control of intellectual property.
• Not only interested in Australia and New Zealand. We should also look to Sweden and Germany; they are doing a lot of business in China, they care about human rights, environment etc.
• Interested in foreign direct investment into Canada. China is investing in tech, internet companies, making minority investments and long-term contracts. Keen to see the Canada-China tax treaty updated to help SMEs. We have a lot of Chinese people in Canada, need to tap into that source to do business between Canada and China.
• Have looked at SMEs’ experiences and success stories — see APF website. Have also looked at intellectual property and how we can successfully manage those issues. This could be easily compiled for this forum. Question about how to disseminate info and to whom. How do we access SMEs/involve them?
• Most Canadians will say we should have some sort of relationship with China. It needs to involve trade plus other parts, too. For example, could China and Canada take a lead on climate change? Soft power: China wants to be trusted; Trudeau and Canada could help China show the world that China can be trusted.