Our so-called “stubborn fixation" on the US isn’t a centrally planned decision, but is rather the sum of millions of choices made by firms, markets and individuals every day. Ottawa cannot turn it on and off like a light bulb, write Brian Lee Crowley and Sean Speer. 

By Brian Lee Crowley and Sean Speer, July 20, 2018

The deterioration of Canada-U.S. relations has provoked renewed calls for Ottawa to reduce its trade dependence on the United States, with the appointment of a Minister for International Trade Diversification just the latest manifestation of this political trend.

China is often touted as a trade partner who can rescue us from reliance on the U.S. market, including most recently by China’s ambassador to Canada. Proponents of this strategy call for Canada to abandon “its stubborn fixation on the U.S. market” and focus instead on China, which is described as global trade’s “adult in the room.”

This thinking overlooks many inconvenient facts about the continental structure of the Canadian economy, the sheer size of Canada-U.S. trade and the basic problems of trade with China. The reality is a sizable diversification of Canadian trade is highly improbable and free trade with China is fraught with serious economic and security problems. For Canada, there’s no credible substitute for secure and stable access to the U.S. market.

Concerns about uncertainty over the North American free-trade agreement are fully justified. Twenty per cent of our economy and roughly two million jobs come from exports to the United States. Estimates of the magnitude of diminished investment and job losses vary, but the cost of NAFTA’s disappearance would be heavy – particularly for trade-sensitive sectors. And these assessments likely underestimate the further harm that post-NAFTA uncertainty would do to business investment.

But that doesn’t make China the answer to our U.S. problem. The underlying assumptions of the “China solution” are two: first, the Chinese market can take Canadian exports previously destined for the United States; and second, free trade with China can be rules-based, reliable and ultimately in Canada’s interests. Both are false.

The idea that we can replace the Canada-U.S. trade relationship with others neglects the integration of industries and supply chains within North America.

The idea that we can replace the Canada-U.S. trade relationship with others neglects the integration of industries and supply chains within North America. Canadian auto-part suppliers, agricultural exporters, financial and legal-service firms, energy infrastructure and so on, are deeply tied into our shared continental economy. Politicians can speculate about trade diversification, but government strategies cannot counteract centuries-old insights about specialization and the division of labour, nor the business decisions of countless Canadian enterprises.

Claims about Canada’s “over-reliance” on the United States ignore that most global trade is regional, especially in intermediate goods (as opposed to finished products), such as those Canada does well in. This is intuitive: Proximity has various advantages, including transportation costs and common standards, interests and practices. Yet Canada’s trade is less concentrated than Australia’s and more diversified than many European Union member states. The United States, the world’s largest economy, is right next door while other markets are literally oceans away.

Nor can China substitute for the United States. It takes in less than 5 per cent of total Canadian exports (the United States takes more than 70 per cent) and that number will be exceedingly hard to increase substantially.

One of the biggest obstacles is China’s own behaviour. As Duanjie Chen, a Macdonald-Laurier Institute Munk senior fellow, has written, China is a “true outlier” in global trade. Its large trade surpluses – including $40-billion with Canada – are driven at least in part by its denial of reciprocal market access. Indeed, far from becoming more open to trade, Chinese President Xi Jinping’s Made in China 2025 plan will make his country more closed to foreign companies in many key industries. Similarly, China’s track record of using cyber and other forms of espionage, as well as licensing and joint ventures, to gain control of foreign intellectual property inspires no confidence.

But this pales in comparison with the serious national-security challenges associated with unfettered access for Chinese enterprises (whether “private” or state-owned, a largely meaningless distinction when companies must kowtow to their internal cell of the Chinese Communist Party) to our domestic market. Recent international attention to the security risks posed by China’s major wireless firm, Huawei, is only the latest example. China has long been unable to distinguish between commercial and national interests, effectively making its companies agents of the state. As long as this is the case, Ottawa must preserve its ability to protect our national security.

Finally, we cannot ignore that governments have, in recent years, made Canada a high-cost place to do business. We can compete with the United States, barely, often by letting the Canadian dollar fall and lowering our standard of living. But the idea that we would be cost-competitive with China is a pipe dream. There are reasons we have a $40-billion trade deficit with China, and a free-trade agreement won’t make them go away.

Yes, NAFTA uncertainty is a huge headache. But throwing in our lot with China isn’t the solution, even if it were possible.

Our so-called “stubborn fixation on the United States” isn’t a centrally planned decision, but is rather the sum of millions of choices made by firms, markets and individuals every day. Ottawa cannot turn it on and off like a light bulb. Only China’s government can do that, which, incidentally, is reason in itself not to see it as the solution to our momentary woes.

Brian Lee Crowley is the managing director and Sean Speer is a Munk senior fellow at Macdonald-Laurier Institute.