Canada has had the good fortune in recent years to be one of the ready suppliers of the raw materials feeding China’s enormous economic appetite. This has helped Canada weather the economic fallout from the 2008 recession better than many economies, but the looming slowdown in China will have important implications for Sino-Canadian relations going forward. However, while Canada will have to get used to a softening of prices and demand for many of its commodities, the longer term prospects for closer economic relations with China look decidedly positive.
As has been pointed out by the Conference Board of Canada, traditional Canadian dependency on the US market peaked in 2001 and since that time the US share of Canada’s merchandise exports has dropped from 87 percent to 74 percent of total exports. On the import side, only half of Canada’s merchandise imports came from the US in 2011 as opposed to 64 percent ten years earlier. A key element in this shift is China; the value of Chinese exports to Canada tripled over this period and Canadian exports to China, while still small relative to exports to the US, have grown steadily in value driven by commodity exports which have been buoyed by high prices and huge demand in China for key Canadian exports such as minerals (nickel, coking coal, potash, copper and iron ore), pulp and lumber. Even though China has consistently run significant trade surpluses with Canada, it has acted as a shock absorber for Canada during and after the 2008 recession. According to Yuen Pau Woo, CEO of the Asia Pacific Foundation of Canada and Prof. Chen Bo from the Shanghai University of Finance and Economics, China’s relative importance for Canadian exports was greater in value-added terms than if measured by gross value. They have pointed out that while China’s share of Canadian trade is still very small, exports to China have been growing fast where it matters – in the creation of domestic value.
Now that China is restructuring its economy to focus more on domestic demand and to move to more sustainable single-digit growth, some are predicting that the honeymoon with Canada is over. There is no question that the slowdown will hurt certain sectors of the economy, such as the forest industry in BC, but the good news is that the US economy is showing signs of picking up some of the slack. While there is no doubt that a cooling of Chinese demand for commodities over the next few years will have an impact on Canada (as well as other resource exporting countries like Australia), China always takes the long term view and so should Canada. Canada remains an important partner for China in the oil and gas field, despite the “mixed” decision on CNOOC’s $15 billion takeover of the Canadian energy company Nexen. That decision by the Canadian government allowed the takeover but indicated that future acquisitions in the petroleum sector by State Owned Enterprises would not be approved, barring unspecified exceptional circumstances. However, there is still plenty of scope for minority Chinese investment in the Canadian energy sector and Chinese companies have not been sitting on their hands. For example, CNOC, PetroChina and Nexen have all indicated interest in participating in infrastructure projects to bring Canadian LNG to tidewater. This investment interest, put together with expressions of interest about laying the groundwork for free trade talks, indicates that Sino-Canadian relations are more broadly based and do not depend exclusively on commodity surges. Canada has yet to fully reciprocate the Chinese overtures regarding an agreement for closer economic partnership, (it has many other uncompleted trade negotiations on its “to do” list) but as Canadian business interests in China grow the prospects remain good for movement in this area. Canada would be well advised to seize the opening China has offered, as New Zealand did in 2008. New Zealand’s Trade Minister Tim Groser recently pointed out that New Zealand has traded more with China in the past five years than the combined value of all previous New Zealand-China trade.
As China moves to grow its domestic consumer economy, this can only be good news for countries like Canada which has always aspired to move beyond the export of “rocks and logs”. There will be growing specialty markets in China for Canadian products and services, ranging from consumer food products to specialized manufactured goods to financial services. Chinese tourists and students will continue to redistribute their accumulated wealth through travel and purchase of services. There may even be another indirect benefit for Canada assuming that part of the shift in China’s economic policy will be to de-emphasize export-led growth. China has been taking market share from Canada in its largest market, the US, and in 2007 surpassed Canada as the largest source of merchandise exports to the US. While Canada does not compete directly with China in many areas, the relative reorientation of the Chinese economy may give Canada more scope to compete in the US market.
So as the economic slowdown in China inevitably starts to bite and impacts resource-intensive sectors in Canada, Canadians should not panic. Instead they should focus on laying the foundation for a more diversified, interdependent and long-term economic (and political) relationship with China, a relationship where Canada will almost always have the advantage in production of resource commodities but where China will become a more sustainable and predictable economic partner allowing Canada to deepen and broaden its economic ties with Asia’s new superpower.
Hugh Stephens is Principal of TransPacific Connections. He is currently a Senior Advisor of Public Policy to Time Warner Inc. and serves as Executive-in-Residence at the Asia Pacific Foundation of Canada.