Three things for Canada to consider as trade talks with China move forward

As Canada looks to increase ties with China and explore the possibility of a free trade agreement, here are three things Canadians should keep in mind.

By: /
23 February, 2017
Chinese President Xi Jinping (R) shakes hands with Canadian Prime Minister Justin Trudeau ahead of their meeting at the Diaoyutai State Guesthouse in Beijing, China August 31, 2016. REUTERS/Wu Hong/Pool
By: Jennifer Ferreira

Editorial Assistant, OpenCanada

With the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) now a fait accompli, Canada is pushing forward on another big trade file — its first bilateral trade agreement with China. 

Canadian Trade Minister François-Philippe Champagne is expected to travel to Chile mid-March for a meeting between Pacific trading nations, where he told the Canadian Press his focus would be to move forward on deals with China, India and Japan.

Newly appointed Canadian ambassador to China John McCallum also recently told the CBC the trade deal was a priority for Canada. “[Trudeau] is very clear that we want to pursue stronger ties with China,” he said. “We think that in the medium-term this will lead to more Canadian jobs.”

While reaching an actual deal could take years, recent world events have made the deepening of relations with China an attractive option for Canada. Calls from United States President Donald Trump to re-negotiate the terms of the North American Free Trade Agreement (NAFTA) have left Canadians unsure of the future of trade with what has long been the country’s number one trading partner. While Trump reassured Prime Minister Justin Trudeau last week in DC that re-negotiations are likely to focus more on trade with Mexico, until discussions begin, it will remain difficult to be sure of Trump’s intentions. 

China, for its part, seems to be taking Trump’s protectionist views as an opportunity to pursue its own goal of establishing a “global network of free trade arrangements.” 

“China stands for concluding open, transparent and win-win regional free trade arrangements and opposes forming exclusive groups that are fragmented in nature,” said Chinese President Xi Jinping in a speech at the World Economic Forum in Davos, Switzerland, last month.

As with any free trade agreement, there are a myriad of concerns that need to be addressed for the deal to be palatable to both countries. But given previous disagreements on important areas, such as China’s human rights record, it is unlikely that both parties will agree on everything brought to the table in preliminary meetings. 

Here are three things Canadians should be keeping in mind as talks move forward.

1. China’s economy is dominated by state-owned enterprises.

Much of China’s economy has long been dominated by the existence and activity of state-owned enterprises — companies created by the government that operate commercially on its behalf. According to a recent report, of the US$9.2 trillion generated by China’s 500 largest firms in 2013, only 14 percent was earned by non-governmental private companies. 

While the total number of Chinese state-owned enterprises has decreased since the 1990s, tens of thousands of these companies are estimated to exist today. If Chinese state-owned enterprises, upon entering Canadian markets, were ever to outnumber local businesses or buy them out in an effort to increase investment as part of a free trade agreement, there is a good chance that they — and by extension, China — could gain significant control over Canadian industries.

This issue came under scrutiny in 2012 after Chinese state-owned oil company CNOOC Ltd. was granted approval from the Canadian government to buy out Calgary-based Nexen Inc. In an attempt to limit investment by foreign state-owned enterprises from that point on, then-prime minister Stephen Harper and his Conservative government made changes to the Investment Canada Act. This was part of a policy statement aiming to limit takeovers of Canadian oil companies by foreign state-owned enterprises, specifically from China.

The Trudeau government has since taken a different approach to Chinese investment in general. In the lead up to the 2015 federal election, the Liberal government expressed intentions of opening up more of Canada’s economy to Chinese investment, including its state-owned enterprises. When asked at a cabinet meeting, prior to last year’s G20 summit, if the Liberals would review the foreign investment restrictions put in place by the previous government, Finance Minister Bill Morneau said he would not rule out the possibility, adding that Canada would “express a continued interest in having a renewed relationship with China.” 

2. There are tough restrictions on foreign investment in China.

Many of China’s industries — most notably its financial and telecommunications sectors — are considered off-limits to foreign investment, leaving other countries around the world unable to gain access to them. It is clear that if Canada is to benefit from a free trade agreement, a number of concessions would have to be made on China’s part.

There has already been some evidence of China looking to ease restrictions on foreign investment. As reported by China Daily, China’s National Development and Reform Commission, along with its ministry of commerce, released in early December a draft of guidelines on foreign investment in China for 2017. According to the draft, China is expected to open up foreign investment to a number of industries that were previously inaccessible later this year, including railway equipment, lithium mining, motorcycle manufacturing and the processing of edible oil.

Even with these anticipated concessions, other important Chinese sectors remain off-limits to foreign investment. The draft mentioned above includes a ‘negative list’ (industries still barred from foreign investment) of 62 entries, with restrictions to China’s financial services sector in particular. Last month, the Chinese State Council released a statement indicating its intention of reducing restrictions on foreign investment in China’s banking, insurance and accounting sectors, among others. Despite this, no details were provided on the extent of these measures or when they would be implemented.

Alex He, a research fellow at the Centre for International Governance Innovation, acknowledges the progress China has made towards opening up investment, but says there is still room for improvement.

“The issues concerning China’s state-owned enterprises and environmental protection — these issues for China are very hard to make concessions on,” He says. “But on bilateral trade or trade of goods and services [with Canada], China can always make [more] concessions.”

3. China may request the ability to bring its labourers to Canada.

Since the early 2000s, China has signed a number of free trade agreements with countries across the world, from New Zealand to Peru to Iceland. As is typical of free trade agreements, these deals have led to severe cuts in tariffs on imports and exports shipped between signatories with the goal of fostering the trade of goods and services.

One element that has increasingly been part of Chinese free trade agreements allows for the use of Chinese workers to complete projects undertaken by Chinese companies in foreign countries. A
memorandum of understanding accompanying the China-Australia Free Trade Agreement (ChAFTA), signed in 2015, for example, allows Chinese-owned companies in Australia to bring in their own workers to help with projects costing over AU$150 million. Additionally, Article 10.4 of the agreement prevents either country from “impos[ing] or maintain[ing] any limitations on the total number of visas to be granted to natural persons of the other Party,” specifically concerning those brought over for work-related purposes.

This leads to the question of whether a similar provision could be part of a free trade agreement between Canada and China, should one be established. The Chinese have expressed an appetite for Canada’s natural resources in particular. Upon his visit to Ottawa last year, Chinese Vice-Minister of Financial and Economic Affairs Han Jun indicated China’s interest in Canadian oil and gas, and said any free trade deal would require Canadian commitment to an energy pipeline that would transport these resources to Canada’s West Coast for easy shipment to China. 

Should an agreement be reached, Charles Burton, a political science professor at Brock University, says it is likely that the Chinese would use Kinder Morgan’s Trans Mountain pipeline for its gas and oil needs, the expansion of which has already received approval from the Canadian government.

Burton, who is an expert on Canada-China relations, says he thinks Chinese companies are likely to use Chinese workers to help with pipeline construction, should its companies get involved. He refers to the use of Chinese labour by Chinese companies in projects across the globe as “normal practice” for the Asian country. 

“It’s not as if [the Chinese] would be asking something of Canada that they don’t expect from other countries,” Burton says. 

This practice has not been without its critics, however, especially in parts of Africa. While investment in a Zimbabwean construction project by Chinese contractor Anhui Foreign Economic Construction Company (AFECC), for instance, may have resulted in the creation of numerous jobs, many of these positions were reportedly filled by Chinese migrant workers. Not only that, but many locals who did end up being hired by the company faced abuse at the hands of their Chinese managers. Similar actions have also been reported in Zambia.

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