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Canada prepares for trade retaliation from China

Canada prepares for trade retaliation from China

Canadian businesses and farmers are once again steeling themselves for retaliation from China as Beijing seeks to punish Canada for expelling a Chinese diplomat, raising the spectre of a trade war at a time when the Canadian and global economies are already vulnerable.

On Monday the federal government expelled Chinese diplomat Zhao Wei for interfering in Canadian politics by targeting Conservative MP Michael Chong’s family.

The Chinese embassy condemned Canada’s move and vowed to “take resolute countermeasures and all consequences arising therefrom shall be borne by the Canadian side.”

However, it didn’t say what those retaliatory measures would look like.

Canadian canola farmers are watching to see how Beijing responds, fearful of a repeat of the agricultural import restrictions that followed Canada’s arrest of Huawei Technologies Co. executive Meng Wanzhou on U.S. charges in December, 2018.

“It could be very bad news for us if China decides to target us again,” said Roger Chevraux, chair of the Canadian Canola Growers Association, who operates a farm near Killam, Alta. “We just got over the last ban.”

In the months after Canada’s detention of Ms. Meng on a U.S. extradition request, China first delayed and then banned shipments of Canadian canola. Officially, the action was over concerns that the Canadian crops were contaminated with weeds and fungus; unofficially, the ban was widely seen as a retaliation for Ms. Meng’s arrest.

Not long after, Canadian pork producers were also hit by halts to their Chinese shipments. Other Canadian agricultural exports to China also suffered delays and interruptions, often with little clear explanation.

China’s ban on Canadian canola was only lifted last May.

China is the largest importer of Canadian raw canola seed, accounting for 38 per cent of seed exports last year after China lifted its three-year ban. In 2020, China’s share fell to 22 per cent from nearly half of all Canadian canola seed exports in 2018.

If China does opt to target Canada’s agriculture sector again, the timing would hit farmers particularly hard because of the impact of high inflation and interest rates.

“What’s significant this year is we’re putting in a very expensive crop,” Mr. Chevraux said. “Our fertilizer prices are up, seed prices are up, chemical prices are up, carbon taxes are up, and a lot of people have had to borrow to put this crop in.”

While China has a history of targeting Canadian farm products, some experts believe Beijing may be more hesitant to do that again right now because of the heightened risk of sparking domestic unrest over food prices. China has battled with outbreaks of African swine fever that have decimated its pork supply, while Russia’s invasion of Ukraine has also disrupted the global supply of wheat, which means Beijing will likely leave those products untouched.

That still leaves canola at risk, but “finding something other than food might be a better strategy for the Chinese if they were looking to punish Canada without creating unrest at home,” said Mike von Massow, an assistant professor of food economics at the University of Guelph.

Canada once again finds itself at risk of “severe retaliation” in part because China “likes to use Canada to send a message to all Western allies,” said Stephanie Carvin, an associate professor of international relations at Carleton University. “We’re the low-hanging fruit.”

While Prof. Carvin said she believes China will target some agricultural products again, she said “visible” Canadian companies and their employees in China could also face legal risks under China’s recently broadened national security and counter-espionage laws.

The stricter yet vague new version of China’s anti-espionage law, which covers any “documents, data, materials or items related to national security and interests” comes into effect on July 1, and follows on a wider crackdown on foreign businesses in China. In recent weeks, police in China have raided the local offices of U.S. companies including consulting firm Bain & Co., corporate due diligence company Mintz Group and, on Monday, multiple offices of international consultancy Capvision Partners.

Espionage charges “could be the vector through which China chooses to retaliate” against Canada, Prof. Carvin said.

“Trade-related retaliation is always a possibility when political tensions flare like this,” said Stuart Bergman, chief economist at Export Development Canada.

“Particularly vulnerable are those areas where export sales are highest and where China may have access to alterative supplies, such as in agriculture, metal ores and forestry products,” he said.

He noted that Canada’s merchandise exports to China hit an all-time high in 2022, nearly $28.7-billion, after China lifted a three-year ban on Canadian canola.

Goldy Hyder, president of the Business Council of Canada, called for Ottawa to maintain dialogue with Beijing, pointing to the quick resumption of contact between the U.S. and China after the furious response to the shooting down of a spy balloon earlier this year.

“We need to call out bad behaviour. But the need to keep talking to each other is pretty important,” he said. “We’ve got to find a way to ensure that this doesn’t ripple negatively on the Canadian economy.”

Likewise, some hope the dispute can be managed along diplomatic lines, without spilling over into trade retaliation.

“I would be surprised if it escalates,” former Canadian trade official Robert Wolfe said. “Both sides will know that we had to do this, and that they will have to expel somebody in retaliation. With luck, it will end there.”

He argues that this is a different type of situation from when China took trade-related action after the arrest Ms. Meng in 2018.

“Tit-for-tat expulsions are normal in diplomacy. Arresting Meng was not,” he said.

This article was reported by Globe and Mail