Trudeau’s China Trade Mission Risks Upending Canadian Alliances

OTTAWA, BEIJING, BLOOMBERG -- Prime Minister Justin Trudeau is visiting China in an effort to boost Canadian trade ties, opening a door his predecessor largely kept shut as a standoff festers with Japan over a rival pact.

Trudeau arrived Sunday for a five-day tour during which he’s expected to launch talks toward a free trade agreement despite unease among Canadian business. He’ll be joined by four cabinet ministers for his second trip in as many years but has stopped short of confirming Canada will begin FTA negotiations.

While a move to deepen ties is an attempt to jump-start the economic relationship between the two countries, it’s also a high-risk strategy for Trudeau that could potentially alienate historical Canadian partners like Japan, open up strategic industries to Chinese ownership and cement a trading relationship that is currently lopsided in the Asian nation’s favor.

China has long pressed Canada for free-trade talks but was rebuffed by former Prime Minister Stephen Harper, whose Conservative government was ousted in 2015. “Our view was that China does not -- and will not -- play by the same rules as everyone else and so free or fair trade is essentially impossible,” Rachel Curran, a former Harper policy director, said by email. “China is not interested in a level playing field.”

Untapped Potential

Canadian government officials briefing journalists ahead of the trip wouldn’t confirm or rule out launching free trade talks, instead referring to comments made earlier by Trade Minister Francois-Philippe Champagne.

“With so much untapped potential -- for both sides -- still remaining, we are looking at whether a framework where issues can be addressed and where the rule of law is paramount is better than the ad hoc approach employed by the previous government,” Champagne said in a Nov. 30 speech. “Should we move forward, this will take time.”

The Liberal prime minister’s visit comes as Canada overhauls the North American Free Trade Agreement with U.S. President Donald Trump and after Trudeau angered Japan’s Shinzo Abe and other Trans Pacific Partnership supporters by balking at a deal. Canada is already moving to mend ties with Japan.

‘Training Wheels’

Free trade talks with Canada would be a test-case and beachhead for China in North America. Observers say Canada would be lured by the opportunity for exports of foods, such as canola and pork, and other products and services to a country whose gross domestic product is more than seven times its own.

China has FTAs with Australia and New Zealand, among other countries. Canada offers a chance to take a crack at a potentially a wider-ranging pact that again tests the ability to weave largely-Western multilateral trade practices with Chinese interests.

“Canada is the training wheels for how to do a deal with a North American economy,” said Laura Dawson, head of the Canada Institute at the Wilson Center think-tank in Washington. “And what’s the North American economy China wants to work with primarily? It’s the United States.”

Regional Politics

Trudeau has wooed both China and Japan. His government highlighted the significance of a 2016 bilateral visit to Japan as his first to Asia, and the Group of Seven meeting that followed angered Beijing. Soon after, China’s foreign minister caused a stir in Ottawa by reportedly demanding a meeting with Trudeau, receiving it and later criticizing Canadian journalists for asking about human rights.

During this visit, China may also seek greater Canadian involvement in Chinese President Xi Jinping’s flagship Belt and Road infrastructure initiative. Aerospace could come up -- Canadian plane-maker Bombardier Inc. continues to hunt for buyers of its C Series aircraft, after partnering with Airbus SE instead of a Chinese consortium. Another priority is Chinese tourism and students in Canada.

“From a Chinese perspective, I think the economic aspect of the bilateral relationship will be the focal point of his visit,” said Wang Dong, secretary general of the Pangoal Institution, a Beijing-based think tank.

Investment will also loom large, both within any trade deal and without. China Communications Construction Co.’s C$1.19 billion ($920 million) purchase of Aecon Group Inc. is a live test case. The Canadian construction company’s shares are trading below the acquisition price, reflecting investor uncertainty over whether the deal will proceed as Trudeau’s government reviews it. Chinese acquisitions of Canadian businesses have slumped since 2012 when Harper allowed the sale of Nexen Inc. but placed new restrictions on Chinese investment.

“China’s leaders will encourage Canada to create a friendly environment for foreign investment, including investment coming from China,” Wang said.

Complex Demands

Xi has also made fighting corruption a top priority. Some 1.5 million officials have been ensnared in a six-year campaign that involves a push to see corruption suspects residing overseas returned to China -- “a matter of life and death for the Communist Party,” Wang said. That will likely spur discussion of an extradition treaty, though Canada has remained cool to the idea and views it as distinct from trade.

A free trade deal with China would boost Canada’s gross domestic product by 0.14 percent by 2030, according to a 2016 report by Dawson and co-author Dan Ciuriak that recommended launching talks. But that may not be the sole motivation. Champagne said recently that “engagement is an imperative” for Canada when it comes to China, and that’s partly a family affair. Trudeau’s father opened ties with China as prime minister, a move Xi singled out for praise. Trudeau’s father and brother have each written books on China and the prime minister himself “wants to do more.”

Canada, however, is a proponent of sprawling, complex trade agreements -- and that may be difficult to reconcile with China’s approach, according to Wendy Dobson, a professor at the University of Toronto’s Rotman Institute for International Business. “We’re at a TPP level of sophistication,” she said, citing Canada’s desire to include state-owned enterprises, competition policy and investment rules in trade deals. “Those are domestic policy areas that the Chinese are still squeamish about negotiating with foreigners.”

Nafta and TPP

A former Canadian minister has warned Trudeau risks angering Trump by courting China. Dawson disagreed, saying the U.S. will view the effort with skepticism and scientific interest.

“It sort of depends on the nature of ultimately what might come out of Canada’s overtures to China,” added Maryscott Greenwood, head of the Canadian American Business Council. “Everyone in the world is trying to figure out what the right balance is in doing business with China.”

Trudeau’s China trip also comes with TPP -- a counterbalance to China now rebranded as the Comprehensive and Progressive Trans Pacific Partnership -- in limbo.

“We’ve already angered Japan,” John Manley, head of the Business Council of Canada representing leading chief executives, said in a recent interview. He urged Trudeau to call Abe before visiting China. “We’ve got uncertainty we can’t control on Nafta, we’ve got uncertainty on TPP and now we’re launching something different with China and we want to call our trade agreements ‘progressive?’ What exactly is our trade policy?”