Chinese and Canadian flags hang in the Hall of Honour in the Canadian parliament in Ottawa.Adrian Wyld/The Canadian Press
Jeff Mahon is director of geopolitical and international business advisory at consulting firm StrategyCorp. He previously served as deputy director at Global Affairs Canada’s China Division.
Geopolitics is complicated. China’s retaliatory tariffs against Canada, which took effect on Thursday, exacerbate the American-wrought trade crisis facing this country. Paradoxically, the Chinese tariffs also hint at a solution, a path for further engagement between Ottawa and Beijing, that could benefit not only Canada but the entire world.
Of course, Canada will first need to reconcile an internal values-based conflict to achieve this outcome, especially as news this week of China’s execution of Canadians over drug offences has shocked and disappointed us. The Canadian government has a policy of seeking clemency for citizens facing capital punishment abroad, reflecting our deeply held values on the sanctity of life. China’s unwillingness to show mercy here will stain the public’s already-stained opinion on a country with which we have long had friction.
But new geopolitical circumstances brought by U.S. President Donald Trump require Canada to respond to China with perspicacity and recall that diplomatic engagement is not congruent with complete agreement or alignment. Indeed, diplomacy is needed precisely because of the inevitability of differences in perspectives. Canada and China will not see eye-to-eye on human-rights issues any time soon. However, this should not stop Canada from trying to improve matters in the economic domain.
In concrete terms, the current trade dispute between Beijing and Ottawa is about Canada’s tariff slap on Chinese electric vehicles, steel and aluminum, which our country imposed before Mr. Trump began his second term. China has retaliated with tariffs on peas, canola products and seafood. At a higher level, this conflict results from the interaction of different economic systems and is thus a microcosm of the fundamental clash driving today’s geopolitical cataclysm.
The long-standing, though crumbling, institutional structures governing world trade are premised on assumptions that participants would ascribe or, at the very least, aspire to liberal norms and market frameworks. That includes limited government intervention, robust competition laws, impartial regulators and independent courts to adjudicate disputes.
The countries that signed onto these arrangements promised to follow prescribed rules and defer to international dispute settlement mechanisms when conflicts arose. While far from perfect, the system worked. Until it didn’t.
Asymmetric market access and evolving grey areas not covered by agreements were tolerable for a while. But eventually, the global economy morphed in ways that became increasingly intolerable for the system’s underwriter, the United States.
China is the chief beneficiary from this system. It was most successful in harnessing it to spur its remarkable development that lifted hundreds of millions out of poverty and launched it into the first class of global powers. Its growth also served as an economic engine for countless countries, including Canada.
But the dark side to this Cinderella story is that it also hastened deindustrialization outside China, as businesses from liberal market democracies sought to arbitrage production cost differentials through an open global economic policy. This offshoring had a real impact on jobs and communities, all while intensifying income inequality.
The first Trump administration was a political reaction to the cumulated toll of asymmetric economic interaction. It was only then that the world truly started to focus on Chinese non-market practices and its unwillingness to adjust its socialist-market economy to play by liberal-market rules. The Biden administration followed Mr. Trump’s lead, and tensions with China have been taut ever since.
Mr. Trump’s current tariff tantrum is another reaction to the failures of global economic institutions to reconcile these contradictions. However, his approach looks less like a thoughtful strategy from the world’s most powerful country, and more like what happens when a superpower suffers from dementia. He’s extending his sights beyond China to incorporate many of his other grievances and real or perceived free-riding (with Canada implicated here), but with tactics that are confounding and disproportionate to the extreme.
With tariffs, the U.S. is now wielding a blunt instrument in a haphazard and indiscriminate manner that’s more likely to undermine its own stated goals than achieve them. We need to recognize, too, that this approach is not limited to Mr. Trump or the United States. Canada followed suit when it sassed off while applying its own tariffs against China.
The problems emanating from commercial interaction with China governed by the prevailing rules need to be addressed. But we need to find more constructive ways of settling our differences. It’s a trade war today, but if the two global superpowers continue down this primitive path, a much more perilous future awaits.
Mr. Trump may be able to break the status quo, but there is little faith that he’ll design a new system capable of fostering equitable peace and prosperity. Here’s where the Canada-China trade spat has opened a window for institutional entrepreneurship.
Buried away in China’s Ministry of Commerce “anti-discrimination investigation” report is an invitation to negotiate a new consensus. Section III “Adjustment of Measures” outlines that the retaliatory tariffs will be removed when “[Canada] and China have reached a consensus solution through consultation or other means.”
The Canadian government should accept China’s invitation. A mature and clear-eyed negotiation needs to recognize the higher-level problem that this specific instance exemplifies. The two countries should seek to establish a framework for settling disputes that arise from the interaction of unique economic development models.
From Canada’s perspective, the tariffs were about protecting jobs and Canadian hubs in continental industrial supply chains from a tide of cheap Chinese EVs, steel and aluminum. In China, these sectors have benefited from myriad forms of subsidies and market access barriers that put competition on uneven ground. Hence, Canadian tariffs sought to fend off zero-sum terms of trade.
From China’s perspective, it is also seeking to foster economic development and provide jobs for its people, all while trying to protect its own economy from being dominated by the incumbent Western powers. Canada’s rollout and rhetoric added insult to trade injury, so China retaliated – but by hitting non-sensitive food sectors that have positive-sum terms of trade, particularly as they contribute to Chinese food security.
What’s clear is that both countries are pursuing similar economic goals, but frictions arise owing to very different means pursuing them.
To reconcile this and future disputes, negotiations with China should start by identifying three categories of sectoral trade:
- Those where security and dual-use concerns effectively prohibit trade;
- sectors strategically important for economic development where uninhibited trade flows create or approach zero-sum circumstances;
- and non-sensitive sectors where trade is mutually beneficial because of positive-sum terms of trade.
Canada and China must agree to not link retaliatory actions between these categories, as is the case with the current predicament. Agriculture has traditionally been exposed to retaliation, even when tariffs aren’t involved, as it’s convenient to feign phytosanitary concerns to block shipments. A negotiated outcome should include new mechanisms to prevent this in the name of food security.
Negotiating these lists and transparently broadcasting them would also provide needed certainty for both Canadian and Chinese businesses to make economically meaningful investments, thereby aligning co-operative incentives and supporting Canada’s diversification ambitions.
Economic security shouldn’t just be about building fences around important sectors, either. It should also seek new mechanisms to move zero-sum trade conflicts to positive-sum arrangements.
Whoever emerges from the imminent Canadian federal election should seize this moment and rediscover the country’s forgotten traditions of “punching above our weight” to build strong foundations for peace and prosperity – and show our neighbours to the south what real leadership looks like.