In the short term, there’s no getting away from China as the principal alternative to the U.S. A Chinese flag is illuminated by sunshine in the Hall of Honour on Parliament Hill in Ottawa, on Sept. 22, 2016.Adrian Wyld/The Canadian Press
John Rapley is an author and academic who divides his time among London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).
Faced with a trade war they didn’t want, Canadians have begun looking for ways to diversify export markets to reduce American leverage.
Europe is an obvious partner. But as a future market, Europe’s long-term growth prospects give it limited upside, able to replace perhaps a couple per cent of any trade lost with the United States. Meanwhile any potential from the rapidly growing markets of the developing world will materialize only over the much-longer term.
In the short term, therefore, there’s no getting away from China as the principal alternative to the U.S.
The geopolitics of such a reorientation would be fraught. Not only would Washington look askance at it, but Canada and China would need to warm their frosty relationship. Nevertheless, a middle course may be possible.
Canada has a history of charting its own course over relations with American foes – after all, it recognized the Beijing regime nearly a decade before the U.S. For its part, China has been hinting it would like to mend ties with Canada. And while Canada has legitimate concerns about Chinese meddling in our domestic affairs and its hostage diplomacy, it now faces a U.S. administration which talks openly of colonizing the country. Playing the two superpowers off against one another to secure Canada’s sovereignty would be a delicate business, but it may now be necessary.
There are also limits to what closer ties with China would offer, economically. Geography and economic gravity will ensure that the United States always remains Canada’s biggest trading partner. Though currently Canada’s second-biggest trading partner, China’s total trade is presently only 12 per cent of trade with the U.S. Compounding that is a much smaller internal Chinese market, since Americans consume more than four-fifths of their output whereas the Chinese buy barely half. The rest goes into the investment that has powered the country’s infrastructure and export-manufacturing boom.
But these caveats aside, there is significant upside potential in China, and significant downside risk in the U.S. Although the Chinese economy has settled into something of a funk, with its export-oriented policy reaching the limits of its potential in a world that is both saturated with Chinese products and turning against free trade, its very high savings rate also gives it huge latent potential.
While President Xi Jinping has been reluctant to reorient the domestic economy toward greater consumption, apparently fearing that will soften his compatriots, the country may have no choice but to raise wages and social benefits while reducing the share of investment in the economy. Because the Chinese Communist Party is so preoccupied with its own survival, it’s reasonable to presume that the government will over time reorient toward greater domestic consumption in order to bolster the economy amid the loss of foreign markets, ensuring the Chinese market grows faster than its economy in future years.
Meanwhile, it’s unwise to map the current growth rate of the U.S. economy onto the future. The U.S. boom of the past few years has been fuelled by a massive run-up in debt, and is literally living on borrowed time. Absent this added debt, the U.S. economy would probably mirror the sluggish state of most Western economies.
Paradoxically, the very trade deficit U.S. President Donald Trump wants to reduce is what has made credit so available to the U.S., because countries with trade surpluses have been left with dollars that they then banked in the American financial system. If Mr. Trump succeeds in reducing the trade deficit, he’ll thus reduce this supply of credit, which would accelerate the onset of a slowdown.
Trade with China would prod some alteration in Canada’s industrial structure, away from traditional export industries such as oil and gas – of which China will be reducing its consumption – and toward new industries such as renewable energy and AI. On the plus side, that could help to accelerate the renewal Canada needs to raise its productivity, providing a fillip to its startup ecosystem.
The road ahead won’t be easy and trade with China isn’t a magic bullet. Still, over the long term, any reduction in our export share going south of the border will strengthen the country’s position in an increasingly unfriendly global environment. Canada needs to get bold and creative, and this seems an obvious place to start.