As Canadian exports to China continue to grow, is the diversification strategy working?

Though the Liberal government reset its relationship with China, arguing that Beijing had made it more difficult to engage, Canadian businesses have doubled down on the Chinese market as exports continue to rise. Many observers viewed the feds' 2022 Indo-Pacific strategy as a long-awaited pivot away from China, with trade missions and offices created in nearby Asian markets as the plan described Beijing as “an increasingly disruptive global power.” But as Canada’s goods exports declined overall by 1.4 per cent from 2022 to 2023, merchandise trade heading to China grew by six per cent to $31-billion. China, along with Hong Kong (up 44 per cent), and the Netherlands (up 14.5 per cent) were the only ones out of Canada’s top 10 export markets with positive growth, according to a recently released Global Affairs Canada (GAC) report. Canada’s exports have more than recovered since the economic hit associated with the nadir in Canada-China diplomatic relations amid the Two Michaels affair. At the time, Canada’s exports to China dropped to $24.1-billion in 2019 from $28-billion in 2018. They have since increased to $26.1-billion in 2020, $28.6-billion in 2021, and $29.2-billion in 2022. In 2023, Prime Minister Justin Trudeau said that China had made it difficult for countries to engage. The Hill Times photograph by Andrew Meade On the flip side, the 2024 State of Trade report, which was released in late June, notes that Chinese imports to Canada declined 13.6 per cent to $60.2-billion. Services exports to China grew by 17.6 per cent, and service imports went up 4.4 per cent. In 2023, Prime Minister Justin Trudeau (Papineau, Que.) said that China had “made decisions over the past years” that made it increasingly difficult for countries to engage. Gordon Houlden, director emeritus of the University of Alberta’s China Institute, said despite the political challenges in Canada’s relationship with China, businesses here still see opportunities in the growing power. “At the end of the day … government isn’t the primary driver of trade. The primary driver of trade is individual businesses making decisions based on a variety of factors; political risk may be one of them—but primary is profit, and market availability and market attractiveness,” he said. He said the business community may be wary of travelling to China, but otherwise their links with the country carry on. “These are very long-established trading partners that go back decades,” he said. “The government can pick up a flag and march over to country X, but it’s the business community that does the purchasing or the sales and the marketing,” he said. Houlden said the Asian markets are “fiercely competitive,” and it isn’t a small thing to break into a new market. “I don’t disagree with the general focus of the government in trying to have an Indo-Pacific strategy, and try to do more with South Asia, Southeast Asia, Eastern Asian with the exception of China, but you can’t ignore the primacy of the Chinese economy in the region,” he said. Carlo Dade, director of trade and trade infrastructure at the Canada West Foundation, echoed Houlden that business isn’t following the direction of the federal government in its relationship with China. He said the effort to generate opportunities in other Asian countries through trade missions has led to a lot of rhetoric about the benefits, but the complexity remains. “Why would you go to Vietnam to work three times as hard for half the money in the U.S.? Or, you know China, and you know the cost of dealing with China,” he said. “I think the diversification stuff is an emperor with no clothes.” Dade said due to the current Canada-China relationship—which sees businesses struggling to gain access to officials, and processing and documentation delays—Canadian business interests are still suffering. “The private sector suffers, and the private sector would love to see the relationship improve, so that they’re not at the back of the line behind the Aussies, the Kiwis, the Americans, and everyone else. That being said, China is going to really have to kick them out to them out. They’re not going to leave, they can wait this out,” he said. While Canadian exports to China continue to increase, Chinese goods coming to Canada are dropping off. The Hill Times photograph by Andrew Meade The GAC report also noted that the U.S. trend of reshoring—to reintegrate supply chains domestically to avoid trade disruptions—hasn’t been matched in Canada. “There is little evidence of Canadian firms reshoring,” reads the report, but notes that there is “some indication that international supply chains are restructuring and changing the locations of some input sources,” which is a known as nearshoring or— as was dubbed by U.S. Treasury Secretary Janet Yellen—as “friend-shoring.” In a major foreign policy speech in Washington, D.C. in October 2022, Finance Minister Chrystia Freeland (University-Rosedale, Ont.) trumpeted the benefits of friend-shoring in an October 2022 speech that became known as the “Freeland Doctrine.” The State of Trade report observes that relocation may be more beneficial for companies looking to reshore as they can “mitigate their vulnerabilities while simultaneously leveraging other countries’ comparative advantages.” Former Canadian ambassador Guy Saint-Jacques, who served as Canada’s envoy in Beijing from 2012-2016, said what is being realized is that it isn’t easy to move away or decouple from China. He said the Indo-Pacific strategy is the right approach, but it will take time to develop new markets. In the meantime, Canada will face uncertainty when dealing with China, he said. “There is some vulnerability because I wouldn’t expect major improvements in bilateral relations until after the next federal elections,” he said. “China doesn’t hesitate in using coercive measures,” he said, noting that in 2019, Canadian exporters faced restrictions in canola and pork exports to China amid a worsening relationship. The Asia Pacific Foundation of Canada’s Vina Nadjibulla, vice-president of research and strategy, said the decrease in China’s imports to Canada is a sign that the diversification approach in the Indo-Pacific strategy is working. “Those numbers have gone down because now companies are diversifying from China, and basing themselves in Vietnam and other places in southeast Asia,” she said. She said that aside from the trade in goods, there are signs that the economic relationship is slowing, such as in services trade, and in direct investment. Nadjibulla said trade with China will never be nonexistent, but the government should find other markets to reduce Canada’s dependence on China with commodity exports, and to increase its overall exports. “There will still be a market in China for this. That is just the fact of the matter—China is a large market. Selling commodities in and of itself is fine as long as we have strategies for economic resilience, and are not overly dependent on a single market, like for instance we were for canola in 2019,” she said. nmoss@hilltimes.com The Hill Times

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As Canadian exports to China continue to grow, is the diversification strategy working?

Canadian goods exports to China reached $31-billion in 2023, a jump of six per cent from 2022, according to a new report.

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