Ron MacIntosh Senior Fellow CIUA with appreciation for notes provided by Research Associates Marija Pavleska and Chistopher LaRoche.
At a time of uncertainty surrounding NAFTA’s future and elevated tensions in US-China economic relations, Canada finds itself in a particularly challenging setting in charting a way forward in our relationship with China. To build our trade and investment ties with China to their full potential, Canada has many advantages yet is beset by issues of competitiveness, logistics, and uneven levels of support at home as well as a number of barriers and complications in doing business with China. Consensus has been elusive on which approaches best advance Canada’s and Alberta’s interests and, indeed, on how deeply engaged with China we wish to be in policy terms.
To examine our options going forward and the opportunities and risks that are evident, the China Institute of the University of Alberta assembled a group of approximately 100 individuals from the federal and provincial government, from the private sector and from the academic community. The Forum was also joined by Mr. Dave Murphy, Minister, Canadian Embassy in Beijing, who provided an overview of the opportunities available to Canadian firms in the changing China market, and efforts being made to assist them in a range of traditional and emerging sectors in both policy advocacy and promotional support.
The Forum benefited from a scene-setting address by Professor Se Yan of Peking University. In the wake of some recent rating agency downgrades, Prof. Yan gave an overview of the near to medium term outlook for China’s economy. While acknowledging frankly that China faces problems ahead, notably in the financial area, Prof. Yan felt the pessimism was unwarranted sustainable growth in the mid 6 percent range. The case is strong for continued strong growth. He was confident that restructuring and reform initiatives under way, along with stronger financial sector oversight and prudent fiscal and monetary policy, will address questions of overleveraged assets and misallocation of resources. Demographic pressures, including aging and labour force shortages will complicate the bid to move up global value chains and to meet quality of life expectations for 8 million college grads/year. The persistence of US/China disputes are and will be a risk factor in China’s outlook, particularly given the in-built competitive dimension in US-China, which will compound as China moves up-market in the tech field. This compares to the relative complementarity of the Canada-China situation. These issues notwithstanding, there is no substantial risk of a “hard landing” in the immediate future.
The first panel Canada-China Trade: Closing In on Free Trade Talks considered the outlook for an FTA between Canada and China, notably given the setback last December in moving to full negotiations and the risks of an extended delay. Noting the “system docking” potential of an FTA as well as lessons of the Australia experience, panelists considered options for progress including
- the possibility of a more staged, sector-and-issue targeted approach to an eventual negotiation rather than a big all-at-once accord, with issues tackled in order of priority and feasibility;
- how and whether investment-related issues should be linked to the process, both to reflect realities of current economic relations as well as questions of leverage;
- a note that the foregoing requires a more rigorous discussion of SOEs than we have had till now;
- with tariffs not very high to begin with in most areas, the importance of addressing“behind-the-border” regulatory issues such as mutual recognition, labour mobility and intellectual property – this in order to ensure sustainable access and greater reciprocity;
- “values” are important to Canadians yet requires careful management as unrealistic “preconditions”, by either side, risk delaying engagement further; and
- any accord will need a workable dispute settlement mechanism to secure business confidence.
For Canada and particularly for Alberta, no issue is more consequential and urgent than getting product to market. This was explored by the second panel Bringing Energy to Asia Markets: Pipelines and Investment. Progress on this file, and particularly on pipelines and related infrastructure, had emerged as a key marker of our likely success in booming Asian energy markets including China, and of how much, in Asian eyes, Canada is committed to and indeed relevant to these markets. The issues as viewed by the panel are multi-dimensional, among them
- while Canada is not alone in this conundrum, delays and unresolved hurdles have weakened confidence over Canada’s viability and long-term role in the world’s largest energy market;
- risks are already compounding in the energy sector - climate, takeovers, but become more acute as in Canada when we self-create them through weakness in governance, planning and vision;
- as patterns of trade evolve, the costs of non-diversification are becoming more severe; a decade ago the US imported 10 m bbl/day – now 2; for China, it was 4 m bbl/day, now 10 – and a 17% increase in natural gas demand in 2017 alone;
- considering the impact of clean tech on demand where China outspends us tenfold and indeed leads the world in renewables investment;
- The difficulties encountered have emerged as a key measure of investor confidence in Canada; a compelling case was made for a less process-focused approach with attention to longer views than can be accommodated within short-term investment windows or commodity cycles.
- Political consensus around major project development enables both initiation and implementation - the lack of it, the opposite.Economics can change over time.The costs of delay more acute, whether for near term business results and for long term positioning.
Clearly the most controversial aspect in developing economic relations with China is the role of state actors. The second panel adopted a practical orientation: Working with Chinese State-Owned Enterprises. Canadians need a thoughtful conversation on SOEs, whether in relation to FTA aspirations or in strengthened investment links. Specifically, it must be recognized
- against images of dominance of SOEs in China, their profile has dropped from 80% of the industrial sector in 1980 to 25% today.Their role in China’s debt and efficiency problems is large, yet they remain critical in strategic sectors and lately high-tech value added industries;
- In Canada, there are both differences and similarities between China’s SOEs and other investors – and even among China’s SOEs – and strategies need to take these into account;
- SOEs continue to reflect Chinese government priorities (for eg, energy security), do benefit from easy access to capital and may pay over-market for some assets. Yet most operate in Canada primarily as commercial entities – focused mainly on creating value, cash flow and profit;
- efforts are made to comply with all local laws, standards and practices; yet it is obvious that concerns do remain in Canada over SOEs, as shown most recently on the AECON case;
- in policy terms, inasmuch as national security is critical, the debate needs a more deliberate, fact-based focus on real issues such as reciprocal treatment of investors in China, issues of competition including subsidies and access to government procurement markets;
- …and efforts to avoid, when approving projects, the perception that concerns over Chinese SOEs are more severe than those of SOEs of other nations doing business in Canada; and
- looking ahead, we might better utilize the links created through SOE investment in Canada in service of broader economic objectives in China and Asia.
Inasmuch as attention is focused on controversies surrounding free trade, pipelines and SOEs, the third panel looked at other compelling and encouraging opportunities in China. The panel surveyed investment and other business development dimensions as part of a discussion entitled Beyond Energy – Investment Diversification: industry Perspectives. In particular given the current international context, “diversifying” by market and by sector is a perennial preoccupation for Canadians and Albertans – and China is part of this story. The key challenge and opportunity of diversification is recognising, understanding and aligning business development activity to emerging trends in the China market – and indeed society. The panel looked at exciting developments in specific sub-sectors including
- Higher value agricultural products such as beef, pork and grains responding to dietary and new attention to food safety are promising growth for Canadians, though regulations and rail logistics in both Canada and China need to be updated to take full advantage;
- a 300 million person China travel market in concert with rising middle classes and millennials with disposable incomes and business emerging for airports, airlines and tourism operators;
- emerging values in today’s China attached to environmental protection - driving new potential for Alberta service providers and technology, for eg, soil remediation;
- with US protectionism, China’s new building codes, standards and styles in place, rapid growing opportunities for engineered wood and other higher value products and related services such as for five storey wood structures and resorts have become a boon for Alberta; and
- an ascending view, reflected by the panel, that diversification is happening and will benefit Alberta and Canada if the right strategies, targeting and coordination of effort are mounted.
Canada’s success in China depends on many moving parts. We will require greater consensus and concertation at home and will need to align effectively with changes unfolding in China and with broader business environment realities of which China is now so much a part. Evidence and analysis rather than emotion are the best informant of ways forward, whether in developing trade, investment, or technology ties or whether on designing policy or promotional strategies. This summary cannot begin to capture or reconcile all the important points and arguments registered over the day but hopefully will serve to highlight the agendas needing most urgent attention. The Forum will reconvene in one year’s time at a location in Canada to be confirmed.