Amid Tense Relations with China, Canada Should Seek Opportunities in ASEAN

John Evans

By John Evans, Managing Director, ([email protected]) and Hank Hulick, Consultant, ([email protected])

At the onset of the US-China trade war in July 2018, Canada seemed well-positioned to benefit from increased trade with China. But one year on and a high-profile extradition case later, Canada and China find themselves in a tense diplomatic conflict that has tainted trade relations and taken two Canadian citizens and a number of agricultural goods as collateral damage. While a modest increase in exports is possible as Chinese importers seek substitutes for certain US goods, any significant decrease to Canada’s trade deficit with China is unlikely given the current diplomatic dispute. Instead, Canadian companies should look to ASEAN markets where more attractive trade opportunities exist for them to capitalize on.

To date, the Trump administration has imposed 25% tariffs on $250 billion in Chinese goods and is now threatening tariffs on $325

Hank Hulick

billion more. China’s Ministry of Commerce has imposed retaliatory tariffs between 5-25% on $110 billion in US goods and is preparing non-tariff measures that would affect American businesses operating in China. Bilateral trade negotiations between the US and China have thus far come up short, only resulting in finger-pointing and further barriers to trade.

By tying any future resolution to China’s abandonment of its domestic industrial policies and current trade practices, the Trump administration is pressuring China to agree to a suboptimal deal that threatens its domestic competitiveness in key industries. The US is seeking near-term commitments which contradict China’s long-term approach to policymaking, as evident by its five-year plans, Made in China 2025, and Belt & Road Initiative. China’s backtracking during the latest round of negotiations in May was an indication of its unwillingness to agree to such a deal. Unless President Trump is forced to concede some of his demands due to overwhelming opposition from American companies and lobby groups, it’s likely that the conflict will continue into the coming election year.

The trade war has created some opportunities for Canadian exporters, particularly those that can substitute US commodities now subject to higher tariffs. Wheat farmers, for example, exported 1.5 million tonnes to China from August 2018 through April 2019, a 14-year high, thanks to China’s 25% tariff on US wheat. Similarly, Canadian lobster farmers have seen their exports to China double since July 2018 after China imposed 25% tariffs on US lobsters. US lobster farmers have watched their exports to China plummet 70% during the same period, and China recently cut tariffs on Canadian lobsters by 3% to fill the void left by US exporters. Other major exports such as chemical wood pulp, lumber, and motor vehicles may also benefit if they are deemed suitable alternatives to tariff-ridden American products.

But with the exception of the aforementioned products, the potential for Canadian companies to become beneficiaries in the trade war has been stifled by the detainment of Huawei CFO, Meng Wanzhou, in Vancouver on December 1, 2018. Following this event, a number of Canadian agricultural exports have since been either restricted or heavily scrutinized by China Customs.

For example, Canadian soybean exports to China dropped to 3,282 tonnes between January and March 2019, compared to 72,806 tonnes during the same period in 2018. Canola seed exports also fell by 14.7% in April after China suspended import permits for Viterra and Richardson, two of Canada’s largest exporters, citing concerns over quarantine pests, which the Canadian Food Inspection refutes. Chinese importers are currently unwilling to purchase Canadian canola seeds, effectively barring Canadian companies from the market that previously accounted for 40% of Canadian seed, oil, and meal exports globally.

Canadian pork is the latest victim. China Customs has blocked pork imports from three Canadian exporters after shipments were found to contain ractopamine – a banned feed additive in China. China Customs has said it will increase non-compliance inspections for Canadian meat products as a result, potentially jeopardizing Canada’s pork exports to China, which in Q1 2019 was Canada’s third-largest market. Other agricultural exports such as peas, flaxseed, and rapeseed meal have reportedly all encountered challenges at Customs. By restricting these goods in the wake of the Meng’s detainment, China has shown its willingness to use economic bargaining chips to serve political interests.

Canadian exporters should and need to seek out alternative markets while the Canadian government attempts to resolve the current diplomatic and economic disputes with China. Canadian soy exporters, for example, upped shipments to ASEAN in recent months after increased Customs inspections have deterred Chinese importers from buying Canadian. More Canadian companies would be wise to follow suit.

ASEAN and its increasing integration present promising trade opportunities for Canadian exports not only because of Canada’s existing trade relations in the region but also due to the likelihood of an ASEAN-Canada free trade agreement. ASEAN is Canada’s sixth-largest trading partner, with $7.8 billion worth of exports to the region in 2017. Wheat, chemical wood pulp, and non-metallic minerals are the top exports to the region by volume. Food products collectively account for 25% of total annual exports, and although commodities comprise the majority of exports, other goods including machinery and pharmaceuticals comprise 14% and have room to grow. The region’s “Fast-4” economies – Vietnam, Philippines, Cambodia, and Myanmar – enjoy 32% of total Canadian exports to ASEAN and have experienced average annual export growth of 15%, the fastest in the region, over the past four years. Further liberalizing bilateral trade in goods and services will have a tremendous impact on economic development in the region.

Canadian and other foreign direct investment into ASEAN will also contribute to stronger economic ties and generate new opportunities for exporters. A growing number of companies are shifting supply chains away from China to take advantage of ASEAN’s lower costs and to avoid the impact of US tariffs. Magna International is one Canadian manufacturer who is poised to benefit from re-investing in ASEAN. Magna – a leading global auto parts supplier – recently relocated manufacturing capacity from China to Thailand. The growing presence of MNCs like Magna with manufacturing operations in the region will create export opportunities for companies to tap these supply chains, specifically in select industries like auto manufacturing and agriculture where Canadian exporters have a competitive advantage.

An ASEAN-Canada free trade agreement would allow for even greater Canadian trade and investment into the region. ASEAN already has existing FTAs with other developed trading partners such as Australia, New Zealand, China, India, Japan, and South Korea. The ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) has contributed significantly to these two countries’ exports to ASEAN since it was implemented in 2010. Bilateral trade between ASEAN and Australia increased from $76.5 billion in 2010 to $89.5 billion in 2016; trade between ASEAN and New Zealand rose from $9.5 billion to $13.1 billion over the same period. Moreover, an ASEAN-Canada FTA would build on Canada’s existing trade agreements with Brunei, Malaysia, Singapore, and Vietnam under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). A 2017 report from the University of British Columbia’s Institute of Asian Research projected an ASEAN-Canada FTA would generate $11 billion in bilateral trade and $1.2 billion in Canadian GDP growth by 2027. Such a trade agreement will allow far greater access for Canadian exporters looking to profit from ASEAN’s economic resurgence.

China’s vast market potential is irrefutable, but so are its discretionary trade practices. While Canada’s bilateral trading relationship with China remains as profitable as it does promising, the current diplomatic crisis underscores the importance of trade diversification in Asia. The fast-growing economies in ASEAN offer an attractive and large market of more than 620-plus million consumers for Canadian products and services. Exporters should read the tea leaves and consider other regional prospects amid the US-China trade war, but more importantly for the decade ahead.

Tractus Asia Ltd. (www.tractus-asia.com) is a pan-Asian strategic advisory firm providing guidance to multinational companies on investing in and doing business in Asia’s emerging economies.