China and Canada appear to be considering a free trade deal.
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 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. Consumers get access to the lowest-cost supplier.
But what if one island is a free market democracy and the other a socialist aristocracy? What if one has a culture of rule of law through an independent judiciary, while the other has a judiciary that’s often an instrument of repression?
What if one respects international intellectual property laws, while the other facilitates industrial espionage and cheap knockoffs? What if one economy is driven by private enterprise, while the other gains advantage from government policy and corruption?
What if one island has a free and open media, while the other has only state-controlled media? 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 the 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 build industrial capacity.
The result is a production capacity surplus that will hang over the global processing and manufacturing sectors for decades.
Then there’s the contrast in environmental enforcement. China operates more than 2,300 coal-fired power plants with almost 1,400 more planned or under construction.
Cheap power, subsidized manufacturing plants and huge overcapacity. Who can compete with that?
Finally, there’s China’s self-serving track record in trade, as seen in the recent canola trade spat. Could the enormous stockpile of Chinese canola have anything to do with it?
Gwyn Morgan is a retired Canadian business leader who has been a director of five global corporations.