The Chinese have manufactured an issue out of thin air over concern about Canadian canola, writes Brian Lee Crowley in the Globe and Mail. Far from succumbing to their demands, Ottawa should turn the tables on them.
By Brian Lee Crowley, Sept. 1, 2016
To hear the breathless media accounts of the disagreement between Canada and China over canola you’d think that this was an intractable dispute that our prime minister will have to make major concessions to resolve after buying a little time on his current visit.
Don’t believe a word of it. To mangle the bard, “Cry rubbish and let slip the dogs of truth”.
Yes, Canada sells a lot of canola to China, and the trade is worth billions to us. But the Chinese have created a trade issue out of thin air over it, most likely in order to win leverage with Canada on issues that really matter to them, such as having removed restrictions on their investments in Canada’s natural resources. Instead of trading away matters of serious interest to Canada to “resolve” the canola issue, we can and should simply make it go away. Here’s how.
The Chinese have for 15 years or more been accepting shipments of canola from Canada that include two percent “dockage”, or extraneous plant material. This is quite a standard practice. Suddenly, however, China objects that a fungus, known as Blackleg, is present in the dockage and they want it reduced from two percent to one.
Instead of trading away matters of serious interest to Canada to “resolve” the canola issue, we can and should simply make it go away.
Let’s ignore the fact that the Chinese have not adduced one iota of documented scientific evidence establishing that any damage has been done by the Canadian dockage. Let us also not tarry over the fact that if the fungus is present, it will be present too in one percent dockage, with the same effects. Indeed it is present on the seeds themselves, to which the Chinese have raised no objections. Wave aside the fact that Canada is the dominant supplier of canola, which China badly needs, and our seed could not easily be replaced in the marketplace. Finally let us not quibble over the fact that Blackleg only matters if the seed is for planting, whereas our canola is crushed, not planted, in China chiefly to extract the oil.
Instead of all that let’s examine the idea, usually implied rather than stated, that removing the Chinese objection to the dockage is somehow a deal-breaker for a huge but weak Canadian industry and that the barriers to doing what China wants are huge and extravagantly expensive.
According to knowledgeable grain industry observers I have spoken to, the situation in Canada is roughly this: a grain trading company in Canada buys canola from the prairie farmer with at least three percent dockage and usually higher in it.
Companies maximise their margins by cleaning the seed to around one percent dockage so they don't have to pay to transport that dockage to the Port of Vancouver.
But the shipper's contract only requires its shipment to China to be 98 percent canola. At one percent dockage they would be shipping 99 percent. That one percent difference is worth money when you’re shipping thousands of metric tonnes. So the grain companies actually add back another one percent of dockage, which they purchase locally.
Yes folks you read that right. Much of the seed arrives in Vancouver ready to ship to China to the specifications that have now been inflated into some sort of huge and insurmountable trade barrier.
Moreover I am reliably informed that the canola buyers in China understand that if the shipments they receive are going to be 99 percent (rather than the current 98 percent) canola that they will need to pay another one percent on the price. They are fine with it.
Are there higher costs and lost efficiencies as a result of the grain companies having to transport and dispose of dockage they don’t need? Sure. But the margins on the canola trade in China have been strong; more than enough, according to my sources, to cover the reduced dockage and lost efficiencies.
The proof of the pudding is in the eating. While industry is putting about the idea that they couldn’t possibly ship to China at one percent dockage, the margins are so good that several major industry players are doing precisely that right now, albeit in limited volumes. The largest exporters are holding out hoping that the Canadian government will be able to negotiate to protect their current handsome margins, but if that is the objective it is a far cry from the unjustified alarmism that has become the staple of the narrative around this issue.
So rather than allow the Chinese to panic us into making trade concessions on other vital issues based on a fictitious problem of dockage and fungus, we should turn the tables on them. They’re the ones who’ve made this an important matter of principle. The prime minister should tell them we’re perfectly willing to go to one percent dockage, but we want to know what we will get in return. Turnabout, as the English say, is fair play.
Brian Lee Crowley is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.