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Michael Kovrig: Carney's in big trouble with even a little China 

Trying to hedge an unreasonable Washington by doing deals with Beijing will only make things worse

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As Mark Carney returns home after a critically-important trip across the Indo-Pacific region with stops in Delhi, Canberra and Tokyo, he could have broken the ice with his hosts by quoting Kurt Russell’s trucker hero, Jack Burton, in the film Big Trouble in Little China: “I’m a reasonable guy. But I’ve just experienced some very unreasonable things.”

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His fellow prime ministers — Narendra Modi, Anthony Albanese and Takaichi Sanae — would have no doubt empathized. Faced with two aggressive great powers that can shift the terms of trade, investment, and security at a political whim, they and other middle power leaders have sought to stabilize relations with China, typically by toning down political rhetoric and facilitating more trade and investment without challenging Beijing’s policies.

Michael Kovrig: Carney's in big trouble with even a little China  Back to video

The big trouble is that when dealing with the Chinese Communist Party (CPP), a little “stabilizing” can slide into “normalizing” relations with a state that’s anything but normal or trustworthy. And when the costs of dependence and arbitrary political decisions are calculated, far fewer economic agreements look worthwhile. All four countries have been down that rough road before: Canada (and I) had the ordeal of the Meng-Michaels affair; India got a border war that killed 20 of its soldiers; Australia spent years in the Party’s doghouse losing billions of dollars in trade; and Japan is currently suffering its economic and diplomatic wrath after Takaichi stated publicly what has been longstanding policy on Taiwan. The uncomfortable reality is that accommodating Beijing’s demands at best yields temporary relief, and at worst incentivizes further bullying.

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All four Indo-Pacific prime ministers can see how the CCP is increasingly contesting the balance of power in their region. China seeks not only to supplant the United States, but also to divide, co-opt and weaken any other countries it fears might band together to constrain its ambitions. To that end, and to prop up its own unbalanced economic growth, for the past decade Beijing has been rolling out the biggest industrial policies in history. It wants to seize the commanding heights of advanced technology and manufacturing, make other countries more dependent on China, and reduce China’s reliance on others. Chinese officials insist they support the WTO and free trade and oppose tariffs, but their policies put the lie to this propaganda. Their aggressive mercantilism, which last year generated an unprecedented US $1.2 trillion trade surplus, has played a key role in provoking Trump’s tariffs and now is subjecting the world economy to a Second China Shock.

When democracies like these four provide the market access that sustains China’s overproductive model, they reinforce the industrial scale, technological learning and capital accumulation that underpin the CCP’s geoeconomic leverage, geopolitical influence and military power. That’s why any benefits from doing more business with China need to be weighed against a trifecta of costs: the companies and jobs destroyed by unfair competition; higher spending on defence, security and resilience; and the risks that trade and investment contribute resources that help the CCP achieve goals — like controlling Taiwan and dominating its Asian neighbours — that also threaten Canada and its allies.

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That’s why even as Canadians cheer on their prime minister as he works to forge new agreements with India, Australia and Japan, they should also watch critically how the results of his January visit to Beijing play out. Despite Carney’s optimism about “enormous opportunities” in China, while a few companies may do well, once the costs to Canadian democracy and sovereignty are counted, the net benefit for the country is likely to be minimal.

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First, opportunities to sell more commodities to China are limited. The country is running enormous trade surpluses and investing heavily in self-sufficiency. Imports are stagnant, growth is slowing and the population is aging and shrinking. Selling more oil, gas and agri-food will likely provide at best a modest medium-term boost to Canada’s economy, particularly once the costs of enhanced  transportation infrastructure and economic security measures are factored in.

Second, increasing commodity sales beyond past peaks, as the prime minister proposed in Beijing, would deepen dependence and increase Beijing’s leverage over politically influential constituents such as farmers. So any increases in exports to China ought to be balanced by selling more to other markets, keeping each company’s China revenue at a level it could survive losing the next time the CCP gets angry at Canada.

Third, trying to offset lost manufacturing exports to the U.S. by selling more commodities to China will put Canada on a trajectory of eroding what remains of our manufacturing capacity and moving backwards along the value chain. Why? Because the Party-state doesn’t grant access to China’s consumers for free. It will extract political and economic concessions, including more access to Canada for Chinese manufacturers, particularly batteries and electric vehicles. Exporting more commodities also will push the dollar up, even as China holds the yuan down and incentivizes its own industrial oversupply. Canadian industry won’t be able to compete. That in turn could jeopardize the government’s new defence industrial strategy.

Fourth, Chinese investment also comes with hidden costs to society that can far outweigh the benefits to individual firms. Chinese electric vehicle manufacturers are particularly problematic.

Even if Ottawa can induce them to produce in Canada, they’re likely to build only highly-automated final assembly plants that offer few new jobs. American investment typically comes with access to the U.S. market, but that’s rarely the case with Chinese firms, who are competing for that same access. Expect them to move slowly with investments as long as American policies are unwelcoming.

Fifth, the CCP will likely restrict Chinese companies from transferring their crown jewels of technology and process knowledge. And other aspects of China’s industrial model such as low wages, clustering at scale and enormous state support, can’t be duplicated in Canada. Adopting Chinese technology also embeds these sectors in Chinese supply chains, technical standards, ideology, and political economy pathologies that the CCP is already wielding for geopolitical influence.

Sixth and finally, the hope that Chinese investment can stimulate domestic firms to innovate and increase productivity is probably misplaced. Instead, Canadian enterprises and their suppliers would compete against much larger state-backed corporations that can absorb huge losses, survive for years without profits, and subsidize capturing market share until competitors throw in the towel. The government’s ambitious new automotive strategy looks like a determined attempt to revive the backbone of Canadian industry. But unless it has solutions for the above problems, it should not include Chinese companies.

Without the structural discipline of policies that drive trade and investment toward improving productivity, capability and technology, deeper economic entanglement with China risks relegating Canada to a second-class role as a de-industrialized supplier of commodities to an anti-Western one-party state that it depends on for imports of the critical technologies of the 21st century.

Carney would be wise to draw on the experiences of with the CCP from India, Australia and Japan. Otherwise, by making bilateral deals with Beijing, he risks setting an example that weakens the very alliances and coalitions of like-minded countries that he’s called for modernizing and strengthening. The better strategic response is to weave a thicker web of relations with more reasonable counterparts like them, but to move slowly and carefully with unreasonable ones like China. As Jack Burton said, “Honey, I never drive faster than I can see.”

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