Beijing Offers Olive Branch Amid U.S. Tariff Strike
IPD assesses the economic outlook and the data under the fallout of the White House's far-reaching tariffs on Canada as Beijing has weighed in.
This week's edition of IPD's Canada-China Brief covers the China factor in U.S. tariffs on Canada and offers a deep dive into the data on the U.S.-China-Canada trade nexus.
From the Experts
On Canada’s options vis-à-vis China and U.S. tariffs:
Hugh Stephens
Advisor, Institute for Peace & Diplomacy
Canada is in a particularly vulnerable position owing to its high dependence on trade with the U.S. and the close integration of the two economies. It is because of this vulnerability that Canada, going back to the original Canada-U.S. FTA in 1989, sought to increase predictability and transparency in trade relations with the U.S. by agreeing on a set of rules, with mechanisms to settle disputes. The mistake seems to have been to believe that the U.S. government would respect negotiated and signed commitments and not resort to unilateral threats to achieve objectives, both trade and non-trade related. While trade with Asia is important, it cannot at this stage or at any stage in the foreseeable future replace trade with the United States, owing to the pull of geography, the existence of established infrastructure and historical trading patterns. That is not to say that there is not a strong case to be made to try to increase diversification of Canada's trade relations with Asia and other partners, but this will be an uphill struggle.
While Canada remains interested in greater diversification to the Asia Pacific, it has recognized the realities of its current integration as part of the North American market. The knee jerk imposition of 100% tariffs on Chinese EVs, to match those imposed by the U.S., is a good example of this. Despite this attempt to demonstrate solidarity with the U.S., the Trump administration appears to have made a decision to punish Canada for having followed an integration strategy with the U.S. market for the past several decades. Canada has the opportunity to redirect some exports to the Asia region (e.g. agrifood products) but this takes time, development of markets, creation of infrastructure etc. At the present time we do not know the depth or duration of U.S. tariffs, making such investments in pursuing alternative markets uncertain.
Canada has the opportunity to be a secure source of critical minerals and other commodities for the U.S., reducing exposure to China, but whether this is apparent to the current U.S. administration is not apparent to me. There is no reason Canada should not be able to expand trade with China — in non-sensitive areas — (after all the U.S. is doing so) although if the U.S. follows through on threats to impose high tariffs on Chinese goods, Canada will need to be alert not to be seen or become a back door to the North American market for Chinese goods. This would provide the Trump administration with yet one more excuse (although it seems as if they can already find plenty) to impede trade with Canada. As we have already seen in the case of countries threatened by U.S. tariffs, China has been quick to offer itself as an alternative, although in Canada's case how realistic this is as an option is questionable. A better alternative is to pursue a global diversification, of which China can be a part, while strengthening Canada's internal economy including tackling the longstanding issues of interprovincial trade barriers and marketing boards.
Wenran Jiang
Advisor, Institute for Peace & Diplomacy
The assumption that Canada and the United States share identical national interests is both misleading and dangerous. To safeguard its independence, Canada must address the most pressing threat to its sovereignty: the overreliance on the U.S. market. Long-term resilience requires a fundamental restructuring of Canada’s trade and economic relationships.
Efforts to diversify Canada’s economy are not new. Former Prime Minister Jean Chrétien pursued the “Team Canada” approach to increase trade ties with the Asia-Pacific region. Paul Martin continued this momentum by establishing a strategic partnership with China. Under Stephen Harper, Canada sought investment from China and other Asian nations, particularly after delays by Obama’s approval of the Keystone XL pipeline. More recently, Prime Minister Trudeau’s early attempt to forge a free trade agreement with China was curtailed by U.S. pressure during the renegotiation of NAFTA.
The need for a national economic diversification strategy has never been more urgent. The incoming prime minister must prioritize this task, ensuring that Canada’s economic policies are guided by its own national interests rather than dictated by external pressures. By building stronger trade and investment ties with Asia, Europe, and emerging markets, Canada can mitigate the risks of overdependence on the U.S. and enhance its sovereignty on the global stage.
Yanling Wang
Professor, Norman Paterson School of International Affairs, Carleton University
Two factors will make Canada very vulnerable to U.S. tariffs and Canada’s tariff retaliation less effective: the overwhelming importance of the U.S. market for Canadian exports (about 75%), and the much smaller Canadian economy. It will be especially hard for the much-integrated auto industry since the implementation of the Auto Pact, which employs 128,000 Canadians. The fact that some auto components might travel between Canada and the U.S. as many as six times on their journey toward a finished vehicle, and getting slapped each time with a 25 percent tariff, will makes their cost prohibitive.
Diversifying in the short- to medium-term amid a U.S. trade war presents challenges, as diversification takes time due to infrastructure, regulatory, and geopolitical hurdles. Reshoring as a strategy after lessons from COVID-19 supply chain disruptions, U.S. protectionism and ‘Buy American’ policies, and geopolitical tensions affecting global trade have been in the works, with the federal government already heavily investing in some key sectors such as battery production and semiconductors. However, reshoring has its unique challenges including insufficient infrastructure, high production costs, skilled labour shortages.
Canada-China trade relations have been strained due to geopolitical disputes, China’s past trade restrictions on certain Canadian goods, and Canada’s increasing alignment with the U.S. and allies against China’s trade practices. Unless a major diplomatic shift occurs — which itself seems unlikely in the near future — the economic relationship between Canada and China won’t significantly improve despite a Canada-U.S. trade war.
Read more commentaries from IPD on Canada’s tariff crisis in our latest symposium, ‘Safeguarding Sovereignty: Canada’s Strategic Responses to Trump’s America‘:
Data Dive
With the Canadian economy at a turning point between the U.S. and China, IPD highlights the numbers that matter.
Relative trade exposure to the Chinese market remains low: Trade data over the last ten years indicate that the United States’ concentrated power over Canadian exports surpasses all other top-ranking export partners including China.
The takeaways:
Canadian exports to China represent approximately 5% of exports to the U.S.
Approximately 77% of Canadian exports are directed to the U.S. economy.
Canadian exports are more concentrated than most global economies and are the most concentrated in the G7.
Canada’s export economy is 4-5 times more concentrated than Australia’s and 7-8 times more than the United States’.
China becomes Canada’s second-largest crude buyer: As recently highlighted by the China Institute of the University of Alberta, U.S. tariffs on Canadian energy come as China became the country’s second-largest crude market after the Trans Mountain Pipeline (TMX) began operations in May of last year.
The takeaways:
TMX nearly tripled crude export capacity from the Pacific coast.
China now purchases 50% or more of all crude exported from TMX.
Pacific pipeline capacity has broken the U.S. monopsony on Canadian energy.
Bank of Canada consultations highlight energy firms achieving better prices with greater market exposure.
China’s CPPTP entry grows Canadian exports: In the absence of a bilateral free trade agreement, calculations by the China Institute highlight that Canada would be the second-biggest beneficiary should members approve Beijing’s application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
The takeaways:
Canadian exports to China would increase by 14.5% or $4.1 billion USD.
China would multiply by tenfold Canada’s CPTPP trade creation than without it.
U.S. trade would be most diverted among Canada’s partners upon China’s entry, representing 42% of the total U.S. trade affected by CPTPP.
The Canada-China trade deficit would shrink by 1.8%.
U.S. tariffs potentially dent Canadian growth permanently: The Bank of Canada projects a long-term hit to domestic productivity with shrinking competitiveness of Canadian exports in its largest market.
Top Story
China Casts Itself as U.S. Alternative as Trump Slaps Tariffs on Ottawa
The imposition of wide-ranging tariffs on Canada this week has shuttered Ottawa’s campaign to convince the White House to back down. As efforts across the government to paint Canada as a U.S. partner against China have failed, Beijing’s diplomats have raised the potential of restoring economic engagement.
Trump threatens further hikes — Signing weekend executive orders to impose tariffs by tomorrow, Trump threatened to raise rates above the 25% already outlined:
The chief order states that “should Canada retaliate against the United States in response to this action through import duties on United States exports to Canada or similar measures, the President may increase or expand in scope the duties imposed.”
Asked if Ottawa, alongside Mexico and China, could do anything to forestall tariffs, Trump earlier said no, listing migration, fentanyl funnelled through Canada, and the 200 billion dollar trade deficit as well as raising the spectre that levies could “possibly very substantially increase.”
Speaking to the World Economic Forum last month, he stated that “if you don’t make your product in America, which is your prerogative, then, very simply, you will have to pay a tariff,” sketching out his motivation to rechannel investment and overseas production towards the United States.
New projections by the Bank of Canada forecasted that the most dire impacts from U.S. tariffs would kneecap Canadian growth by as much as 3% from baseline scenarios, with the drag continuing for the next three years but also warning of “permanent decline in GDP.”
The new context compounds a greater decline in Canadian export growth to the U.S., with the Bank reporting last year that “the slowdown is fairly widespread. Production and exports of machinery and equipment, motor vehicles and other non-energy goods have not expanded in more than a decade.”
‘With Washington or Beijing‘ — Leaders from cabinet to provincial premiers have repeatedly tried to highlight Canada’s alignment against China to stave off U.S. tariffs:
Industry Minister François-Philippe Champagne made the case after a cabinet retreat that to “move from a defensive position to offensive” against U.S. tariffs, Ottawa must boast that “Canada is probably being the most aligned country in the world when it comes to protecting our critical supply chain” from Beijing.
In a sitdown with Bloomberg, ex-Deputy PM and Liberal leadership contender Chrystia Freeland said Trump’s tariffs on Canada were a signal to Beijing that “if he can show the rest of the world how mean and tough he can be with his closest partners and allies… how do you think that’s going to make the Chinese feel.”
Freeland positioned herself as the right point woman for the U.S. to take on Beijing, saying that “China over and over again promises and fails to have strong domestic demand” and that “Canada can be a valuable and intelligent partner for the U.S. in the effort to rebalance the global economy.”
Ontario Premier Doug Ford echoed the same tune, pronouncing that “President Trump seems intent on starting a trade war that will create the kind of economic uncertainty that only benefits China. There’s a better way. Let’s beat China with Fortress Am-Can.”
He went further by blaming Mexico for Chinese imports in an op-ed in the Wall Street Journal, saying that “if Mexico doesn’t put a stop to Chinese transshipment, it should lose its seat at the table by being left out of trade agreements… Every country must decide if it stands with Washington or Beijing.”
Beijing offers olive branch — Under the backdrop of the trade war, Chinese diplomats have raised the potential for greater economic openness with Canada:
The Chinese embassy in Ottawa released a statement in recent weeks saying that “China is willing to work with Canada to create a good environment for China-Canada economic and trade co-operation based on the principles of correct understanding, mutual respect, seeking common ground.”
It added that “China has always advocated trade liberalization and facilitation” and opened up the possibility for progress on this front bilaterally, stating that “regarding the negotiation of the China-Canada Free Trade Agreement… it is hoped that the Canadian side will create a good atmosphere for this.”
In a media interview, Minister Counsellor Li Zhongzhou of the Chinese embassy also noted that diplomatic progress required overcoming “setbacks” and that “for the Chinese side, we want to wipe this discord clean” as “we should be friends, not foes. We should be partners, not zero-sum rivals.”
In Beijing, China’s Ministry of Commerce declared it would “file a lawsuit with the WTO and take necessary countermeasures” against the United States’ simultaneous tariff measures, a legal move that Canadian officials stated they would follow days later in their own case against Washington.
What commentators think — Experts have emphasized the power of U.S. pressure and the China factor in Trump’s economic strongarming:
IPD Senior Fellow Jeremy Paltiel stated that “Canada is entirely vulnerable to U.S. trade pressure and will try to preserve a margin of manoeuvre while generally yielding. This is what we saw in the case of EV tariffs and Huawei,” warning that “jumping into bed with China would only inflame trade hawks in Washington.”
Lü Xiang, Research Fellow at the Chinese Academy of Social Sciences, suggested that “Washington is likely to increase pressure on Canada following Trudeau's resignation, and whoever becomes the new leader of Canada would have to face greater pressures from its old neighbor in the south."
Robert Asselin, Senior Vice President at the Business Council of Canada, said Trump’s tariff objectives are centred on China and reshoring American production, adding that “if he can leverage all his strengths to get the maximum for [American] workers, this production agenda I was referring to, he’ll do it.”
Albert Park, Chief Economist at the Asian Development Bank, observed that “it’s ironic, because there was such a response to the first tariffs to restructure supply chains, and now you’re basically punishing the countries that benefited from that adjustment.”
Roland Paris, a former senior foreign policy advisor to the PM, argued that “the real purpose of Trump’s tariffs is: (1) to raise U.S. government revenues, (2) to convince producers and investors to relocate to the U.S., and (3) to use ‘economic force’ to turn Canada into a vassal state.”
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Image Credit: White House