Canada and China: Why is this man frowning?

Three years into his leadership and Prime Minister Stephen Harper still hasn’t made a single trip to China. It’s a known fact that bilateral relations have been frosty, but just where exactly is Canada’s trade policy with China heading? Is change on the horizon?

By Rachel Pulfer

From Canadian Business magazine, January 26, 2009

It’s 7:30 p.m., the Grand Ballroom at New York’s Plaza Hotel. A glittering crowd has gathered for the annual gala dinner of the National Committee on United States–China Relations. A not-for-profit body, it sponsored one of the first moments of détente between Communist China and the United States: the visit of China’s Ping-Pong team to America in 1972. What a difference 40 years makes. Today, the Committee’s guest is Treasury secretary Henry Paulson. He has interrupted one of the busiest schedules on Capitol Hill to speak to an audience that includes China’s ambassador to the United States and the president of a newly minted U.S. division of a Chinese bank.

Why is Paulson here? He can’t afford not to be.

At a time when consumption is slowing worldwide, China represents one of the few growth spots left in the global economy. In November, responding to news that suggests China’s growth slowed to 9% in the third quarter, the Chinese government announced a US$586-billion stimulus package. The goal is to boost domestic demand—making the Chinese market potentially even more attractive for exporters. Meanwhile, Chinese investors continue to invest in U.S. assets and Treasury bills, keeping the greenback strong and the economy liquid.

By the first week of December—six weeks after the Manhattan event—Paulson was over in Beijing, hashing out issues with China’s minister of commerce, Chen Deming. That trip was part of a biannual visit known as the Strategic Economic Dialogue, a special forum set up by presidents George W. Bush and Hu Jintao in September 2006 to keep lines of communication on trade issues open. The Chinese currency has been depreciating of late, making Chinese exports cheaper while rendering U.S. exports more expensive—a major flashpoint at the talks. Yet both officials also stressed their commitment to work together through tough economic times.

Now turn to this humble dominion. With economists revising Canada’s growth prospects steadily downward, you might think engaging China should be high on the to-do list. In a world where few are buying, China represents the market of last resort. But on China—as on everything else of late—Canadian politicians are stubbornly charting their own path.

Three years into his leadership, Prime Minister Stephen Harper has yet to visit Beijing. What’s more, judging from Harper’s comments and actions on the matter at home, the relationship is anything but a priority. That’s why, in an exclusive interview in late November, Canadian Business asked Harper’s new minister of international trade, Stockwell Day, just what, exactly, Canada’s trade policy toward China is.

In reply, Day stressed that trade with all nations is a priority for the Conservatives. “My mandate is to keep as many doors open to trade with Canadians as possible,” Day said. “Now is not a time to be closing off opportunities.”

When pressed for details, Day’s comments on trade with China are most striking for their negative space. Though he says the prime minister “plans” to visit China, echoing comments Harper has also made, it’s unlikely to happen anytime soon. Of course, Harper has his hands full managing the current political crisis. Yet according to Day, who spoke to CB before the constitutional ruckus in Ottawa, neither the PM nor he had scheduled plans to visit China at that time, either.

Harper’s government has announced six new consular bureaus in regional centres in China, and cabinet ministers head over to Beijing with some regularity. But according to China hands, what the prime minister himself says and does carries the most clout in Chinese eyes. And by all accounts, he’s been MIA. Meanwhile, Day says that initiatives to engage the relationship on a higher political level, along the lines of the Strategic Economic Dialogue, are not in the works. “We don’t have a plan to start up a bilateral discussion forum right now. We’re building up the relationship piece by piece,” says Day. There are no plans to run trade missions, either: “We believe in small government.” This contrasts strongly with the Liberal approach, in which the PM led delegations from business and the provinces to meet with Chinese counterparts and, ideally, sign contracts.

Day doesn’t rule out trade missions down the road. “There’s a place for flag-waving,” he goes on. “But we believe in putting resources where they will be most effective: keeping tax levels reasonable, reducing the GST.”

Fair enough. But what reducing the GST has to do with engaging China on trade is anyone’s guess.

Canadians have never been blind to the opportunity China represents. Back in 1961, Prime Minister John Diefenbaker negotiated sales of wheat to China before the rest of the West even acknowledged the Communist country existed. But times have changed. In November, the Canada China Business Council led a delegation of businesses and premiers to Beijing, Shanghai and Chongqing. Notably absent was Stephen Harper.

On China, the signals from Ottawa have been mixed. Even as it’s been refusing to engage China politically, the federal government has led the build-out of the Asia Pacific Gateway and Corridor Initiative, pledging more than $900 million toward infrastructure designed to facilitate the flow of shipping containers entering North America from the Asia-Pacific. The Gateway includes a new port in Prince Rupert and enhanced rail links from B.C. to Chicago. The goal, says Day, is to send China the message that Canada is open for business. It’s the “if you build it, they will come” approach to trade policy.

Paul Evans, one of Canada’s pre-eminent China experts and a professor at the Liu Institute for Global Issues at the University of British Columbia in Vancouver, describes the Harper government’s strategy on China to date as one of “cool politics, warm economics. But by all accounts,” says Evans, “it has reached a dead end.”

So what is the prime minister doing on China? Instead of attending the opening ceremony of the Olympics in Beijing, Harper made statements that suggested he would not sell bitumen-based crude oil to countries with poor environmental records. (That’s politician-speak for China, says Evans.) Harper’s decision to meet with the Dalai Lama in Canada in late 2007 prompted an angry reaction from Lu Shumin, Beijing’s former chief ambassador to Canada. All this, says Evans, has put Canada into a situation where “we are far behind the number of competitive nations that are trying to work with the Chinese. The synapses are just not firing.”

John Gruetzner begs to differ. Now a consultant based in Beijing, Gruetzner has worked in China for more than 25 years. He insists Harper’s hands-off foreign policy is in keeping with the man’s conservative philosophy. Rather than focusing on the politics, says Gruetzner, it’s more important to look at the relationship statistically. He points to September numbers that show a jump of 21% in our exports to China in the past year. Foreign direct investment from Canada into China is also up 14%. “It’s time for businesses to get beyond the mission stage and engage on the ground,” Gruetzner says.

Government statistics bear Gruetzer’s view out. In 2007, our exports to China were worth $9.3 billion, a 20%-plus increase over 2006. Imports from China were $38.3 billion, an 11% increase. Day is at pains to emphasize the importance of this growth. “Within two years of us being in power, we have seen a 150% increase in Canadian merchandise exports,” he says. “China is our third-largest market.”

Maybe. But according to Statistics Canada, that roaring trade through 2007 was dominated by sales of commodities—metals, potash and chemicals. Between July and November 2008, prices for those goods dropped by as much as 40%. It’s unlikely robust trade growth will continue in 2009.

Furthermore, Evans and Sarah Kutulakos, executive director of the Canada China Business Council, say that Canada has been losing ground to other nations. Back in 2006, Canada was last in a list of Top 10 trading partners put out monthly by China’s ministry of commerce; by 2008, Canada had dropped off the list completely. According to Bob Kwauk, a Canadian tax expert and founding partner of the Beijing branch of Blakes law firm, Harper’s “cool politics, warm economics” strategy is at least partly related. “In the lead-up to the Olympics, former Australian prime minister John Howard came to sell Olympic-related infrastructure, French President Nicolas Sarkozy was here selling Airbuses and nuclear power plant technology—and President Bush has been here several times,” explains Kwauk. “By not having our prime minister here when every other head of government has been—well, it puts us at a disadvantage.”

Heads of government don’t usually come to Canada to promote business, acknowledges Kwauk, but the Chinese system is different: “In China, most of the major purchases are in the infrastructure area. The companies making these purchases are heavily influenced by the state.”

Kwauk says he would not want to see a return to the Team Canada approach taken by Chrétien. “That guy was here way too much. He’d claim he’d signed all these contracts worth billions, but then he’d leave, and nothing would be forthcoming,” says Kwauk. “It ended up tarnishing our credibility.” But in tough times, the Harper government’s alternative—of non-engagement coupled with pot shots from afar on China’s human rights and environmental record—isn’t helping, either.

According to Evans, Harper’s policy toward China isn’t irrational. Instead, he argues, it’s based on domestic political calculations. Opinion polls published by the Asia Pacific Foundation of Canada in April show Canadians harbour negative feelings toward China on human rights, product safety and growing military power. Evans believes that in such a climate, it would be difficult for a Canadian government to get elected while embracing a Team Canada approach to China. In that light, Harper’s reluctance to engage directly with China merely reflects Canadians’ own ambivalence towards the complicated economic giant. Unfortunately, that reluctance could pose problems for our export-driven economy.

Complicating the situation is Harper’s selection of Day for the post of International Trade. Day carries strategically unfortunate baggage from an earlier era. While in Opposition,he became known for his fiery speeches and op-eds decrying the human rights situation in China. He’s acclaimed a hero on blogs linked to the outlawed Chinese group Falun Gong. However, a record of grandstanding on human rights won’t help him at the negotiation table. “Day has said a lot of negative things about China in the past,” says Evans. “It is important that he visit China quickly, to get a sense of its dynamism and complexity.”

Investment banker Bill Majcher, of Hong Kong–based Baron Group, goes further in his criticism of the human-rights-versus-trade school of western thinking on China. “When I see politicians make big bold statements about big bad China, I get angry,” he explains. “I think: You are not speaking for me, and you are also not speaking with authority. You have bought into the views of a number of special interest groups. There’s this fear in the West that China will dominate,” Majcher goes on. “But 120 years ago China and India were the world’s largest economies. This isn’t new. So rather than fear it, try to understand it.”

Even members of Harper’s inner circle are getting impatient. John Reynolds was co-chair of the national Conservative party campaign in 2006 and is now a member of the Queen’s Privy Council. As he points out, “We traded with the United States right throughout the 1950s, before the civil rights movement. At the time, the United States was not a place where human rights were prevalent, either.”

Day insists his views on China have been misrepresented. “At that time, I also commented on the benefits of trade with China, but that hasn’t gotten as much coverage,” he says. As proof he’s up to the job, he points to an 80-minute meeting he had with his Chinese counterpart, Chen Deming, at the recent APEC summit in Lima. “We had good talks,” he says. The week before, Chen and Day signed a memorandum of understanding, ensuring Canadian businesses have free access to financial information while operating in China. Day says: “And we are now in the advanced stages of signing an agreement that enhances protections for Canadian investments within China.”

But a formal mechanism for discussion isn’t on the cards. That’s too bad, in CCBC executive director Kutulakos’s view. “Behind closed doors, the Chinese prefer engagement,” she says. “They can get in a room with their U.S. counterpart and beat each other up with baseball bats—and agree to disagree—but at least they talk and things get resolved.”

All is not lost, however. Evans says putting the Beijing ambassadorial posting on equal footing with the Washington, D.C., mission—and installing someone like former trade minister David Emerson, who, unlike Day, has extensive experience in China—would help repair the relationship. What’s more, there is some evidence that the home audience might still be open to an enhanced economic relationship, if properly sold: APFC opinion polls show Canadians are not equating negative feelings about China with a closed attitude toward trade.

At least, not yet.

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