Canada playing the wrong game when it comes to China

by Neil Desai

The Globe and Mail
November 7, 2014

As Prime Minister Stephen Harper continues on his third official visit to China, the Canadian business community is breathing a collective sigh of relief. Their fear that the terror-related murders of two soldiers last month coupled with the upcoming national Remembrance Day Ceremony would lead the Prime Minister to forgo attending the Asia Pacific Economic Co-operation Summit in China. They believed that such a move would be seen as disrespectful in Beijing and that the opportunity for Mr. Harper to conduct a bilateral program with Chinese President Xi Jinping, other leading Communist Party officials and Chinese business leaders would be lost. That “crisis” was averted with the bilateral program being salvaged in a manner that will allow the PM to return to Ottawa in time to preside over remembrance ceremonies. Mr. Harper seems to have struck a balance on an extremely thin wire.

Bay Street, the Alberta oil patch and other leading Canadian businesses know the stakes of a Prime Ministerial visit to the world’s second largest economy are high. This may be the last opportunity for meaningful engagement at the leader-level in China before the 2015 federal election. Developing relations with the leadership in China often takes time, something the Canadian business community doesn’t feel they have given the state of the global economy and their heavy reliance on the U.S. marketplace.

The challenge Canada has in dealing with China is that the wall between their government and private sector does not exist. Major commercial decisions are often left to China’s political class, and are used to leverage favorable terms on other deals, even non-commercial diplomatic matters like consular cases.

The business community’s taking to the airwaves and calling on the Prime Minister to prioritize business interests over mourning may have been unsavory to some Canadians, but it certainly highlights the competitive challenge for Canada vis-a-vie China. While we know the stakes of the game, but we’re playing the wrong game. China’s playing chess, Canada’s playing checkers.

China’s international relations, both commercial and diplomatic, are seen by its government as a fundamental utility to achieve its five-year plan, which dates back to 1953. Now in its 12th iteration, these plans have outlined China’s national priorities. The hallmark of the modern plans has been maintaining steady GDP growth with the unstated goal of maintaining social and political stability. Much of that growth has been fueled by international investment, on strict terms, and resources that has been leveraged by the Chinese for export-led growth.

China has accessed resources and foreign capital by strategically placing its “pawns”. Chess enthusiasts will know that pawns rarely strike a lethal blow to a king or queen. Their true value is to serve as gambits for greater prizes.

The Chinese government utilizes its pawns, like the export of their globally beloved giant pandas, to receive favorable terms on matters that contribute to its bottom line. The Canadian business community applauded the government of Canada for securing pandas on Mr. Harper’s last visit to China. They saw it as a symbol of warming relations between Ottawa and Beijing. However, their metric of success is not as shrewd as their Chinese counterparts.

While the government announced that it secured the panda’s for ten years, the real commercial opportunity for Canadian businesses announced on the 2012 visit was the signing of a Foreign Investment Protection Agreement. That agreement was only ratified by the Canadian government this fall amid serious questions on the relative benefits Canadians and our businesses will receive under the regime.

The speculation that Toronto will be awarded the opportunity to serve as a hub of trading for the Chinese renminbi on this visit should be received by Canadians with cautious optimism. The estimated $2.5-billion, over ten years, in transaction cost savings for Canadian business is a clear benefit.

It is safe to presume that the Chinese government and businesses are in agreement that they can extract value from having their currency traded by Canadians without having to first exchange it for U.S. or other international currencies.

We’ll never know the maximum benefit Canada could yield from its relations with China unless all of our pieces, diplomatic and commercial, stop acting in isolation and begin a staunchly Canadian, cohesive approach, one that is respectful of our democratic traditions and institutions to managing this increasingly important, but difficult, relationship.

Neil Desai is a fellow with the Munk School of Global Affairs at the University of Toronto and the Canadian Defence and Foreign Affairs Institute. He is a former advisor to Prime Minister Stephen Harper.