Trade with China amid NAFTA friction

Canadian Prime Minister Justin Trudeau will start a trade and tourism dialogue with Chinese officials during his ongoing visit to China. Canada and China began to discuss a free trade agreement more than a year ago, following back-to-back meetings between Trudeau and Chinese Premier Li Keqiang in Beijing and Ottawa. And from February to August, three rounds of exploratory talks were held between the two sides.

Trudeau's visit to China takes place after the fifth round of talks on the North American Free Trade Agreement ended in Mexico City amid simmering tensions.

Last year, the United States accounted for about three-fourths of Canada's exports, while Canada sourced almost two-thirds of its imports from the US. And while US direct investment in Canada amounts to some $306 billion, Canada's investment in the US is almost $370 billion. But US direct investment in Canada represents almost 20 percent of the latter's GDP, while Canada's direct investment in the US adds up to only 2 percent of the US' GDP. The outcome of the NAFTA talks is thus far more important to Canada than to the US.

If the US withdraws from NAFTA, that would start a six-month legal process before official termination. While the Donald Trump-led US administration may see this as a negotiating tool to force Canada and Mexico to accept its demands, the latter could use the time to complete trade talks with Brazil and the European Union.

Canada and Mexico are hedging their bets against a potential NAFTA collapse by pushing for deals with new partners, particularly China and some other Asian countries. In 2015, China bought 12 percent of Canadian exports, whereas Chinese exports accounted for 4 percent of Canada's total. An FTA between China and Canada could strengthen bilateral trade and investment by a great deal over time.

Last year, the combined investment from the Chinese mainland and Hong Kong in Canada soared to $26.4 billion, which is almost half of Asia-Pacific investment in the country. But since the starting point is low, China was only the eighth-largest investor in Canada.

Canada's former ambassador to China Howard Balloch believes Ottawa "should be able to negotiate with China" during the NAFTA talks. Canada has a "huge interest" in China and trade diversification whatever the outcome of the NAFTA talks. Intriguingly, the NAFTA talks are likely to coincide with the period Canada and China would need to finalize an FTA agreement.

With a population of more than 1.3 billion, China is perceived as a lucrative market for Canada's agriculture and natural resources sectors. Last year, the Canadian Cabinet approved the plan to expand the Trans Mountain pipeline mainly to improve Canada's ability to get oil to China.

However, there is an intense debate over the proposed FTA with China. While Trudeau's Liberal Party supports greater bilateral trade, Conservative Party leader Andrew Scheer opposes a bilateral FTA. Using the "China threat" card, Conservatives have criticized the Liberals for allowing Chinese takeovers of Canadian businesses, while taking advantage of Canadian concerns about human rights and environmental standards.

What about ordinary Canadians? A recent poll conducted by Asia Pacific Foundation of Canada shows a slight majority of 55 percent might support a Canadian-Chinese FTA, but UBC's recent poll indicates that 70 percent of Canadians support the idea and only 20 percent are against it. Such a shift would reflect greater economic interest in a bilateral trade deal－but also growing concern over the Trump administration, rising US protectionism and the potential NAFTA collapse.

While US officials have sought to subdue NAFTA tensions by extending the timetable for renegotiations, that may only end up pouring oil on the simmering fire. In Mexico, tight elections in mid-2018 will complicate the NAFTA talks; in Canada, Conservatives are positioning for the 2019 elections.

Nevertheless, Canada is losing faith in the US. According to UBC, 36 percent of Canadians believe the US is a "more responsible global leader" than China (28 percent). Yet 37 percent of Canadian citizens are "uncertain" about the matter. Moreover, China is seen as doing more to "maintain peace" than the US and two-thirds of Canadians believe China will be the "largest economic power" by the 2020s.

Amid the new uncertainty, Canada is likely to do what it can to sustain NAFTA over time, while－at least under Trudeau－it is likely to seek a trade deal with China that would foster diversification, new investment at home and greater presence in Asia.

From China's standpoint, a bilateral deal with Canada would open new doors to North America and pave the way to the Free Trade Agreement of Asia Pacific, which would be broader and more inclusive than the current trade pact efforts.

The author is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Centre (Singapore).