Standing up to China would be costly

Few farmers had heard of Dominic Barton before this week, but he should be in their prayers because as the new Canadian ambassador to China he has an almost impossible job.

Canadian-Chinese relations are the worst in decades, mostly because Canada is holding a top officer of China technology giant Huawei, Meng Wanzhou, on an American extradition request. Farmers here are feeling the brunt of China’s economic reprisal.

Just last week, the Canadian Meat Council said the cost of China’s meat import suspension since June 25 is nearing $100 million.

The council called on the federal government to make clear its strategy to reopen the Chinese market, compensate the industry for the current market loss and plan for export diversification. It wants all political parties to explain how they would resolve these issues.

Most canola producers would want the same thing.

This is the complex environment that Barton is stepping into. He is someone with much China experience, described in the Globe and Mail as a “globe-trotting consultancy chieftain” in his former job as managing partner with McKinsey and Co., an international firm with consultancy relationships with many top Chinese companies.

His appointment signals that the Liberal government wants to re-engage with China, somehow miraculously settling the complaint over Meng, and get back to expanding trade. But also, the government showed some backbone Sept. 6, taking the first step in a trade complaint, requesting a Canada-China meeting before the World Trade Organization.

Barton will be working within a context where an increasing majority of Canadians have a negative view of China because of its bullying and coercive economic policies. Also, there is a growing international belief that China must be confronted for its unfair trade practices, the flexing of its military might in Southeast Asia and its human rights abuses.

Conservative leader Andrew Scheer is among those who believe Canada must take a more wary approach to China and that likely means less trade with the Asian giant, not more.

He has urged the government to increase inspections of Chinese imports, launch a WTO trade complaint, withdraw from Canada’s $256 million investment in the Beijing-led Asian Infrastructure Investment Bank and examine possible tariffs on Chinese imports.

A paper from the MacDonald-Laurier Institute, a non-partisan public policy think-tank in Ottawa, backs Canada taking a harder stand against China.

The paper, written by Duanjie Chen, an economist and senior fellow with the institute, argues that to capitulate to China would only embolden it to be more confrontational and to further ignore international norms.

Canada has more leverage than it might think, Chen argues. Most of what Canada buys from China can be supplied by other countries. The commodities that we ship to China, mostly agricultural products, can find other markets.

If Canada refuses China’s demands and takes firm counter measures, China might permanently ban Canadian food goods. If so, it would result in a period of painful readjustment for the industry requiring federal financial assistance, but in the long term, Chen argues, it would be better for Canada, its farmers and the world in general.

Canada can help to force a change in China because its economic strength is more tenuous and unsustainable than might appear, Chen says. Its domestic resources are limited and degraded and it has inadequate agricultural land. It will eventually have to face the fact that it cannot go forever without the commodities and goods that countries such as Canada can supply and will have to modify its behaviour to rejoin the international rules-based order.

Many of these arguments have merit and ultimately, I think Canada will take an increasingly firm stance against China.

But I also think Chen too easily dismisses the pain that canola farmers will have to bear under this strategy.

Chen follows the idea that there is a global balance in supply and demand for crops and that bans or tariffs cause only a disruptive shuffle between buyers and sellers, not an actual reduction in total demand.

That may be true in major global commodities such as wheat or pork where there are dozens of buyers, but I’m not so sure it works in a niche crop such as canola where Canada is such a dominant player in a narrow world market.

Other than China, comparatively few countries are regular canola importers — Japan, Mexico, the United States and Europe. Their needs are fairly stable and they are unlikely to suddenly need the four million tonnes that would have gone to China.

There are few exporters other than Canada and they are much smaller — Ukraine, Australia and Russia. They could redirect product to China, opening up unserved markets that Canada could move into, but I doubt this shuffling will be enough to keep Canadian canola exports at recent levels.

Without China, I fear that weak exports will result in a larger than expected Canadian canola surpluses that will weigh on prices.

If Canada is forced to build large and consistent new canola markets to replace China, it will take years and much money. In the meantime, farmers would likely have to reduce canola acreage and instead plant other crops that do not generate the revenue traditionally provided by canola.

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