The basic principle of free trade is clear. Imagine two isolated neighbouring islands. One is green and fertile, capable of producing more food than it can consume. The other, while dry and barren, possesses natural resources needed to manufacture consumer goods. Farmers in the fertile island sell food to the other in return for the raw materials needed to manufacture consumer products. Over time, factories on one island become more efficient at making some products while manufacturers on the other island become more efficient at producing others. The result is consumers get access to the lowest cost supplier. The benefits of free trade in this scenario are incontrovertible.
But what if one island is a free-market democracy and the other a socialist aristocracy? What if one has a culture of fair dealing enforced by the rule of law through an independent judiciary, while the other has a judiciary that’s an apparatchik of government, often acting as an instrument of repression rather than justice?
What if one island respects international intellectual property laws, while the other facilitates industrial espionage and the production of cheap knockoffs? What if one economy is driven by private enterprise, while businesses in the other gain advantage from government loans and subsidies facilitated by corrupt officials?
What if one island has a free and open media, while the other blocks international media and has only state-controlled media that just publishes regime-friendly stories? What if one island protects human rights, while the other throws those critics in jail for treason?
Finally, what if one island holds industries to strong environmental standards, while citizens in the other choke on smog and drink toxic water?
In such circumstances, wouldn’t the leader of the first island be extremely unwise to consider entering into free trade with the other?
Of course, the “other” island I’m describing is China.
And there are even more reasons for Canada to stay away from free trade with the great dragon. What do we have to sell them? Certainly not manufactured goods. There are very few that China can’t produce more cheaply. The crux of the Canada-China trade relationship has always been that we send them raw materials and they ship consumer goods back to us. Since natural resources are globally traded commodities that already move tariff free, free trade would provide absolutely no benefit to resource exporters. On other hand, removing tariffs on manufactured goods would put our manufacturers at even greater disadvantage.
My six years on the board of the largest foreign bank operating in China provided insights into why free trade with that country is even more unwise.
My stint coincided with China’s supercharged gross domestic product growth, which was dominated by what bankers call “capital account” – massive government infrastructure programs and equally massive loans from government banks to underpin the building of every kind of industrial facility and manufacturing plant. The result is a mega-capacity surplus of industrial facilities such as cement plants and every kind of consumer goods manufacturing plants. That enormous surplus capacity will hang over the global processing and manufacturing sectors for decades.
Then there’s the contrast in environmental enforcement. While Beijing touts toughened environmental laws, the truth is a starkly different story. Despite all the rhetoric about renewable energy from Chinese officials at the recent Paris COP21 global warming conference, China operates over 2,300 coal-fired power plants with almost 1,400 more planned or under construction. That’s bad enough, but few of those plants actually meet government emission standards.
Cheap power, subsidized manufacturing plants and huge overcapacity. Who can compete with that?
Finally, there’s China’s self-serving track record in trade. Just as Trudeau was heading to China came news that, after decades of buying Canadian canola, Chinese officials had suddenly determined that our canola contained unacceptable “impurities.” This $2-billion market is very important to Canadian farmers. Our canola is perfectly fine in other countries, so how could it be unacceptable to China? Could the enormous stockpile of Chinese canola have anything to do with it?
So Trudeau should use his exceptional relationship building skills to warm relations with China. But he should studiously avoid any signals that free trade will ever be part of that relationship.
Gwyn Morgan is a retired Canadian business leader who has been a director of five global corporations.