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With Sino-American trade peace, Canadians stand to lose out because more US exports to China mean fewer from Canada

Canada is better known to readers of the financial pages because that Peaceable Kingdom makes little in the way of calamitous sensational news itself. Yet Canada, a G7 country, is important with its bilateral merchandise trade with China totalling nearly US$100 billion annually, and that having nearly doubled in the last decade, according to Statistics Canada.

Its two top trading partners are the US and China and it lives in dread that its high reputation on the financial pages will diminish if a permanent peace breaks out after the Sino-American trade war, and China is forced to buy so much more from the US that it reduces what it buys from Canada.

Add to that the damage already done to Sino-Canadian relations simply by meeting its legal obligations to arrest Shenzhen's Huawei Technology CFO, Meng Wanzhou, for extradition to face US criminal charges for allegedly trading with Iran.

In apparent retaliation, China has blocked Canadian canola seed imports and thrown obstacles at soybeans and halted meat imports. Chinese fighter jets have buzzed a Canadian warship in the East China Sea. Add to that China has detained two Canadians and sentenced a third to death after the arrest of Ms Meng, who happens to be the daughter of Hauwei's founder.

This upending of trade flows as a result of such commitments stands to make life difficult for Canadian farmers. “The reason Canada should be worried is what China is actually agreeing to do,” said Chad Bown, a senior fellow at the Peterson Institute for International Economics in Washington. “Are they agreeing to open their market for everybody? Or are they agreeing to re-orient their purchases away from everybody else and toward American purchases? That matters.”

Indeed, Canadian canola producers are already experiencing the chill of lost sales to the powerful Chinese market - which once accepted 40 per cent of their exports - after Beijing blocked all purchases of the oilseed. Though officials cited pest concerns, the move was widely viewed as retaliation for the Meng arrest. Meanwhile, Canadian soybean producers, having experienced a brief but dramatic spike in sales after China placed tariffs on US beans, also saw sales to the superpower plunge after the Meng arrest.

 “If China is going to buy northern hemisphere soybeans from the US only, well we’re the only other producer in the northern hemisphere,” said Ron Davidson, executive director of Soy Canada. “We’ve been on the front lines of this from the beginning and we continue to be. So yes, we’re worried.”

Though US Trade Representative Robert Lighthizer said the pact will be compliant with World Trade Organisation rules, the Chinese purchasing commitments have also raised concerns about discrimination against some markets in favour of the US.

The WTO’s “most favoured nation” rule requires all trading partners to be treated equally unless a full free trade agreement is forged. The US-China deal covers only a limited range of goods.

 “It does seem like it undermines the fundamental principles of non-discrimination if it were to work the way the US describes it,” said Simon Lester, a trade policy analyst at Washington’s Cato Institute. “If China is going to stop purchasing from Canada, for instance, and purchase from the US instead, then Canada probably has a WTO complaint because China’s measures are discriminating in favour of the US. So it’s puzzling to understand how it would work in practice.”

While there is some assurance that WTO rules might effectively treat an acute outbreak of Sino-American exceptionalism, the US has already stymied normal WTO dispute resolution measures. Last year, it precipitated the paralysis of the WTO appellate body - which acted as a supreme court - by blocking all nominees to the seven-member panel.

In response, 16 member states, including, Canada, the EU, Australia, China and Brazil are forming an alliance to settle trade disputes using a parallel appeals and arbitration system. Getting around the US veto involves using an existing WTO rule - Article 25 of the Dispute Settlement Understanding - that permits nations to agree to a voluntary form of arbitration.

While this ploy solves some problems, it does not appear to have much application to the situation under the United States Mexico Canada Agreement (USMCA) because arbitration presumes a willingness of the disputing parties to agree on an arbiter. So unless the US is willing to submit to an outside authority, this stratagem is unlikely to resolve this problem.

So, how bad could this spat with China get? The economic hit for Canada would not be total devastation, say experts, but it would certainly offer a painful lesson in how dependent Canada has become on its second biggest trading partner.

The size of the bilateral merchandise trade, totalling nearly $100 billion annually makes China Canada’s largest trading partner after the United States.

But what is different from US trade is that Canada’s relations with China are highly asymmetrical. China sold almost $70 billion worth of goods to Canada in 2017, mostly consumer items, more than three times what Canada sold to China, mostly raw materials. What China makes from Canada is a smaller portion of its $16-trillion economy than vice-versa - Canada’s GDP is seven times smaller.

With canola and then pork, China has been hitting Canada hard on the agriculture front. And it could continue to target that sector, experts say.

China could introduce “more concrete blockage” on soybeans, says Canada West Foundation policy analyst Sarah Pittman. Conference Board of Canada chief economist Pedro Antunes said. “We can only speculate, but if the trend continues, the next big agri-food categories are wheat (exports worth $600 million in 2019), barley (worth $516 million), lobsters ($285 million).”

The big figures are not unique to those industries. Chinese students in Canada bring in $5 billion a year. China’s direct investment in Canada stood at $668 million in the first half of 2018 alone. Chinese tourism accounts for about $1.8 billion annually. Much of this could be easily curtailed by the Chinese government. Canadian tour operators catering to Chinese government visitors say their businesses have already been hurt.

To be sure, Chinese visitors form only seven per cent of Canada’s total tourism revenue. Canadian goods to China comprise only four per cent of total exports. But what’s tolerable for the economy can be devastating for individual sectors like tourism, said Mr Antunes. “If you’re talking about seven per cent or 7.3 per cent of the industry revenue, it’s very important." That fall in income could also ripple into industries that support the tourism sector, such as air travel.

As the Trump administration intended, Canada came out the loser in the USMCA talks in that it had to concede far greater access to its shamelessly protected dairy and poultry markets. It got rid of tariffs on aluminum and steel, but those had been recently imposed so rather than a gain, it merely turned a minus into a zero loss.

The big problem is that imposing trade peace of China, the Americans demand high quantities of what the US exports, which unfortunately is what Canada exports. There was a bit of a boom when the trade war was on full bore because Canada supplied what was wanted. But now that times have changed, prospects are not so pleasing for the True North Strong and Free.

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U.S. Trade Specialists