A Made-in-Canada China Strategy for 2018?

China is destined to become a major Asian power regardless if Canada prepares for that eventuality. A well-designed China strategy that transcends a transactional trade-based foreign policy would go a long way to protecting Canada’s hard-won status as a global middle-power.

by | Sep 10, 2018

The recent federal cabinet shuffle in Ottawa was undertaken amidst an emerging trade dispute between the United States and China, Canada’s largest and second-largest economic and trade partners respectively. The mid-July, pre-election cabinet shuffle is a clear signal that the 2019 federal election is rapidly approaching. Before too long, the Canadian electorate will cast its vote, creating a political and economic legacy for future generations.

There are two important lessons for Canadians to consider between now and the 2019 federal election. The first lesson is that there are historic occasions when countries face political dilemmas and difficult choices that cannot be avoided. As a middle-power and a member of several international decision-making bodies, Canada has an opportunity to create the conditions for a more secure and sustainable future as well as a leadership responsibility to improve human security conditions beyond its own borders. A second lesson is that strategic decisions – including those taken and ones not taken – always have long-term consequences, including outcomes which are often unforeseen and unintended.

In today’s complex world, the early identification of political risks and economic opportunities is a strategic imperative, not merely an academic or a think-tank exercise.

Canada’s Mini-Pivot to China

Canada’s future will largely be determined by its geo-political and geo-economic relationship with two powerful rivals: The United States and the People’s Republic of China. Few Canadians would doubt the strategic importance of Canada’s relationship with the United States since we tend to cluster in cities dotted along the Canada-US border. Alternatively, most Canadians have been slow to appreciate China’s near-term impact on Canada’s domestic and foreign policy.

With a population of about 1.3 billion, China is projected to overtake the United States as the world’s largest economy within a decade. In 2016, the World Bank estimated the size of its GDP at US$11.2 trillion, exceeding the size of all the other Asian economies combined. [i] China has become an indispensable economic partner for more than 100 countries around the world and is evolving into a global hub of research, manufacturing, and technical innovation. Last year, annual investments in research and development (R&D) climbed to about $279 billion, or 2.1% of China’s GDP[ii] Between 2006 and 2017, China negotiated free trade agreements with 11 countries and the Association of South East Asian Nations (ASEAN), a consortium of 10 nations. It also aims to become an international education hub, with ambitious designs of attracting 500,000 foreign students by 2020.[iii] Sustaining these diplomatic, trade, and cultural relationships are critical if China is to avoid the “middle-income trap,” the purported barrier inhibiting developing countries from maturing into more developed ones.

Canada has struggled to define its relationship with China, and its role in Asia more generally, despite having established diplomatic relations with China in 1970 – a watershed moment which paved the way for US President Nixon’s visit to China in 1972.[iv] Canada still enjoys considerable respect within China, but restoring the positive image that it once had will take a considerable amount of strategic focus, ambition, dynamic capability, and creative thinking. The strategic partnership between Canada and China that was negotiated by former Prime Minister Paul Martin, has been allowed to languish. Notwithstanding the recent addition of overseas missions in Asia and partnerships formed with regional organizations,[v] Canada’s capacity to shape the evolving security architecture and other norm-building processes is suboptimal given its leadership potential.

In that regard, Prime Minister Trudeau has taken a more confident and forward-looking approach towards China. For example, the joint statement released following Premier Li Keqiang’s visit to Ottawa from 21-24 September 2016, listed a total of 29 developments and commitments for improved bilateral cooperation.[vi] Canada-China diplomatic engagements also included exploratory discussions on the feasibility of a comprehensive free trade agreement (FTA). In 2017, Canada-China bilateral trade was about $94.5 billion, up from $85 billion a year earlier. At the same time, two-way foreign direct investment dropped from $34.7 billion to $27 billion between 2016 and 2017.[vii]  

While high-level discussions seem to have stalled, due in part to Canada’s ambition to inject human rights, gender, and environmental issues into the exploratory trade discussions,[viii] a formal trade arrangement with China would still be mutually beneficial. Canada is a trade-based nation that relies predominantly on US exports to sustain its high standard of living and social programs. In 2015, international trade accounted for 31% of its gross domestic production (GDP) and 16.7% of all employment.[ix] By negotiating an FTA with China, Canada would reduce its economic dependence on the United States which is adopting a more protectionist and transactional attitude towards both of its North American trade partners. For Beijing, a Canada-China FTA could provide greater access to North America’s world-class knowledge economy and supply chains. A negotiated rules-based framework would allow Canada to expand the products and services it exports to less saturated markets in China, especially education, agricultural products, and health care services which may be less susceptible to retaliatory measures by the US (assuming current US-China trade tensions do not escalate into a trade war).

Trade promotion with China might be a more appropriate short-term option should formal trade talks get postponed even further by prolonged North American Free Trade Agreement negotiations or in the event of a snap-election in Canada (before 2019). Canada’s largest corporations like Manulife, Sun life, Bombardier, BMO, and Magna International have been operating in China for up to 30 years building global supply chains and leading direct foreign investments.[x] Likewise, the Canadian Standards Association (CSA) has labs in Hong Kong, Shanghai, and Shenzhen where it works collaboratively testing and certifying consumer electronics, motors, and solar products. They are well positioned to take advantage of rising Chinese investments in domestic health care and education sectors. Another key driver of trade promotion is ecommerce. China has 40% of the world’s ecommerce market which is projected to grow to US$1.6-trillion within a couple of years.[xi]

Besides trade talks, Canadian and Chinese leaders have committed to working collaboratively with a view to enhancing cross-cultural exchanges, improving law enforcement cooperation, strengthening intellectual property protection, and firming investment policy. Both countries have also declared 2018 as the “Year of Canada-China Tourism.”[xii]

When it comes to China, Canada must play the long and short game simultaneously.

Moving Beyond a Trade-based Foreign Policy

The United States will always remain Canada’s single most important trading partner and its foremost strategic ally, but China is on the verge of becoming a driver of significant geo-economic and geo-political transformation. As such, it is incumbent on Canadian political and business leaders to familiarize themselves with China’s strategic intent both globally and locally. Canada’s historic ties to the United States (and Europe) should not preclude Canada from exploring options for engaging with China on a strategic level.

In fact, strategic inaction on China is arguably the greatest risk facing Canada. China’s aggressive military posturing in the South China Seas, its demonstrated use of cyber and human espionage tactics to obtain western scientific and business intelligence, and its punitive treatment of the ethnic Uyghur population make it imperative that Canada engage China in a spirit of “responsible competition.”[xiii] In the context of China’s rise as an authoritarian and revisionist global power the strategic question facing Canada – with its limited power-projection capabilities – is not what it can do but what it needs to do.

A productive next step would be to start developing a comprehensive Made-in-Canada China Strategy that articulates Canada’s national interests clearly and which aims to secure those interests beyond the next federal election cycle. At its core, a strategy is a future destination point and a pathway to get there. A well-designed strategy has a clearly-defined intention and is guided by forward-looking analysis that mobilizes relevant policies and programs effectively in response to an identified challenge.[xiv]

A reasonable expectation, based on recent diplomatic exchanges, is that Canada and China will work collaboratively when it is in the interest to do so and compete when their strategic interests collide. As an example, the Chinese ambassador to Canada, Lu Shaye, specified that he did not “want one side to use democracy or human rights to make the other side compromise.”[xv] At the same time, Ottawa has been quick to criticize China for its use of residential surveillance, torture, and intimidation against political dissidents.[xvi] Keeping the diplomatic focus on areas of mutual interest – the global economy, urban sustainability, cyber security, countering narcotics trafficking – while being candid about differences in political values, is key to balancing long-term cooperation and short-term competition.

The Promise and Peril of Engaging with China: A Strategic Rethink 

Given the power imbalance between Canada and China, it is in Ottawa’s interest to adopt a comprehensive engagement approach that works adroitly at multiple scales. For instance, this may entail learning how to use transactional initiatives as “pressure points” and China’s reliance on the global governance institutions as a “strategic lever.” The political leadership in Beijing may sense a strategic if limited timeframe to assert their primacy in Asia, but it is probably disinclined to completely jettison the multi-layered network of rules, norms and institutions that has underwritten China’s so-called “economic miracle.”

It is also worth noting that China has arrived at an inflection point. Decades of unprecedented urbanization, intensive industrial activity, and lax enforcement of environmental laws have damaged entire ecosystems. Facing a potential environmental threat of catastrophic proportions, China has made the quest for an “ecological civilization” a top priority, incorporating it into the Chinese Party Constitution in 2012. This dramatic policy shift provides Canadian business and political leaders with lucrative economic opportunities in sustainable development, urban economic innovation, and human security diplomacy. By expanding the definition of human security to include environmental threats (eg. rising sea levels, droughts, floods), Canadian policymakers could establish an inclusive platform for reducing ecological threats while mitigating global risks related to climate change and health pandemics.[xvii] 

Learning to understand China’s strategic advantages and vulnerabilities may also lead to the identification of partnership opportunities which are aligned with Canada’s national interests and future policy aspirations. Cities are where Canadian policy makers will find most of these opportunities, especially with the global shift to a more knowledge-intensive capitalist economy. In China, eight megacities – Shanghai, Beijing, Hong Kong, Guangzhou, Tianjin, Shenzhen, Suzhou, Chongqing – generate 18% of the country’s GDP. These high-performing metropolitan centres also rank among the world’s top 100 economic entities, including national economies and multi-national corporations.[xviii]

Because cities are key drivers of the global economy, Canada’s strategy on China should aim to create the conditions for a functionally integrated mix of city-to-city policy solutions. Not only would this play to Canada’s soft-power advantage, it is likely to increase the long-term dividends of both the federal innovation agenda and the smart city challenge. Municipal diplomacy is an aspect of Canada’s foreign policy that is often overlooked even though city-to-city diplomacy between Canada and China has existed since the early 1980s – when China was just beginning to reform its economy. Prioritizing transformative urban solutions to address protracted environmental, economic, and human security challenges is a strategic way for Canada to foster cultural and commercial relations across a distributed network of trusted partners. In addition to acting as cultural “gateways” to China’s second and third-tier cities, municipal networks could serve as political “shock absorbers” when nation-to-nation tensions run high.

Finally, it would also be important for Ottawa to strengthen the Canada-China bilateral relationship with a strategic narrative that emphasizes the benefits of collaboration and co-design processes. Such a strategy would have to be communicated publicly in a way that is both easily understood and meaningful to Canadians. Recent public opinion polling commissioned by the Vancouver-based Asia Pacific Foundation of Canada found that Canadians harbor considerable reservations about China’s record on human rights and democratic reforms.[xix] A communications plan which articulates Canada’s foreign policy aspirations regarding China would help to individual citizens to better understand Canada’s future place in an increasingly dynamic and uncertain world.

Strategic Choices in a Turbulent Era   

In the next few years, the strategic decisions Canada makes regarding China will have consequential outcomes that may endure for decades. Strategic inaction has resulted in suboptimal two-way trade with China and limited Canada’s effectiveness as a middle-power in Asia. Absent a well-designed China strategy, Canada’s ability to influence regional decision-making processes on a range of geo-political, human security, and environmental sustainability issues could erode even further.

In fact, Canada’s management of its bilateral relationship with China may ultimately prove to be the greatest challenge and opportunity of this half-century.

Notes

[i] World Bank, “China Data: GDP” (2016). http://data.worldbank.org/country/china; Tom Miller, China’s Asian Dream: Empire Building Along the New Silk Road, (2017).  London: Zed Books.

[ii] CNBC, “China Spent an Estimates $279 Billion on R&D Last Year,” (26 February 2018). https://www.cnbc.com/2018/02/26/china-spent-an-estimated-279-billion-on-rd-last-year.html.

[iii] Luke Kelly, “How China is Winning Back More Graduates From Foreign Universities Than Ever Before,” Forbes Magazine (25 January 2018). https://www.forbes.com/sites/ljkelly/2018/01/25/how-china-is-winning-back-more-graduates-from-foreign-universities-than-ever-before/#6948d05b5c1e.

[iv] Jeremy Kinsman, “What Canada Matters to China,” iPolitics Insights (20 August 2016). http://ipolitics.ca/2016/08/20/why-canada-matters-to-china/.

[v] Global Affairs Canada, “Canada and the Asia Pacific,” (2 March 2018). http://www.international.gc.ca/world-monde/international_relations-relations_internationales/asia_pacific-asie_pacifique/index.aspx?pedisable=false&lang=eng.

[vi] Official website of Justin Trudeau, Prime Minister of Canada.  Joint Statement Between Canada and the People’s Republic of China (23 September 2016). http://pm.gc.ca/eng/news/2016/09/23/joint-statement-between-canada-and-peoples-republic-china/

[vii] Global Affairs Canada, China – Fact Sheet (18 May 2018). http://www.canadainternational.gc.ca/china-chine/bilateral_relations_bilaterales/China-FS-Chine-FD.aspx?lang=eng; Global Affairs Canada, News Release, “Parliamentary Secretary to Minister of International Trade to Attend Belt and Road Forum for International Cooperation in Beijing.” (12 May 2017). https://www.canada.ca/en/global-affairs/news/2017/05/parliamentary_secretarytoministerofinternationaltradetoattendbel.html.

[viii] Randolph Mank, “Thinking Through Our Quest for a China Trade Deal” Policy Options (31 January 2018). http://policyoptions.irpp.org/magazines/january-2018/thinking-through-our-quest-for-a-china-trade-deal/.

[ix] Phillip Cross, The Importance of International Trade to the Canadian Economy: An Overview, The Fraser Institute (October 2016). https://www.fraserinstitute.org/sites/default/files/the-importance-of-international-trade-to-the-canadan-economy-an-overview-post.pdf.

[x] Peter Harder, “Canada-China: Opportunities in Transition An address to the Canadian International Council,” Policy Options, Canadian Defense and Foreign Affairs Institute, Calgary (March 2013). https://d3n8a8pro7vhmx.cloudfront.net/cdfai/pages/387/attachments/original/1414261666/Canada-China_-_Opportunities_in_Transition.pdf?1414261666.

[xi] Bryan Sirois, “China’s e-Commerce market: Where small companies go to think big,” Export Development Canada (EDC) (1 February 2018). https://www.edc.ca/en/blog/china-ecommerce-market.html.

[xii] Innovation, Science and Economic Development Canada, “2018 Will Be the Year of Canada-China Tourism,” (02 September 2016). http://www.marketwired.com/press-release/2018-will-be-the-year-of-canada-china-tourism-2155376.htm.

[xiii] Thomas Wright, All Measures Short of War: The Contest for the Twenty-First Century and the Future of American Power (2017). https://www.huffingtonpost.com/entry/a-timely-call-for-responsible-competition_us_595e546de4b08f5c97d06797.

[xiv] Stuart Craner and Des Dearlove, Strategy: The Art and Science of Strategy Creation and Execution (2014). New York: McGraw Hill Press.

[xv] Robert Hage, “What China and China Can Learn from CETA: Laying the Groundwork, Taking it Slow, and Keeping the Public Informed are Keys to Success.” The Hill Times (24 May 2017). http://www.cgai.ca/opedmay242017b.

[xvi] Nathan Vanderklippe, “Canada, 10 Other Countries Call Out China For Torturing Human Rights Lawyers,” Globe and Mail (20 March 2017). https://www.theglobeandmail.com/news/world/canada-10-other-countries-call-out-china-for-torturing-human-rights-lawyers/article34346186/.

[xvii] Arthur J. Hansen, “China as an Environmentally Responsible Global Citizen,” in Pitman Potter and Thomas Adams eds., Issues and Canada-China Relations, Canadian International Council (2011). http://thecic.org/wp-content/uploads/2017/04/CIC-Issues-in-Canada-China-Relations-2011.pdf.

[xviii] Noah Toly and Sam Tabory, “100 Top Economies: Urban Influence and the Position of World Cities in an Evolving World Order,” Chicago Council on Global Affairs (October 2016).   https://www.thechicagocouncil.org/sites/default/files/report_100-top-economies_revised-20161026.pdf.

[xix] Kiran Alwani, “The Impact of Education on Canadian Attitudes Toward Asia.” Asia Pacific Foundation (10 May 2017). https://www.asiapacific.ca/blog/impact-education-canadian-attitudes-toward-asia.

Author

Grant Duckworth is the President of Vancouver Strategic & Integrated Research as well as the VP of the Canadian International Council (CIC), Vancouver branch. He graduated from UBC with an MA in (Human) Geography.