Economic decoupling from China gathered steam during the pandemic when the vulnerability of supply chains came to the fore. But Canada’s economic linkages with China haven’t diminished, despite its closest ally the United States actively doing so.
Whether it’s called decoupling or friendshoring or nearshoring, international trade expert Eric Miller says it’s primarily about reducing risk—de-risking—in trade with China and then adjusting to the impacts.
“The bottom line is there is a process of slow decoupling that’s not being driven by governments. But government policy has tended to be heavy on the rhetoric and light on the implementation,” Mr. Miller, president of Rideau Potomac Strategy Group, said in an Aug. 1 interview.
Some policy-makers and analysts are strong advocates for reducing or cutting ties with China, while others say it’s basically impossible and would be too harmful economically. In an era of elevated inflation, governments recognize that reconfiguring supply chains would further exacerbate cost pressures.
But evidence suggests that decoupling of China from the West is quickening, wrote Adam Slater, lead economist at Oxford Economics (OE), in a July 24 analysis.
“Foreign direct investment (FDI) trends and surveys of China-based Western firms suggest decoupling is likely to be increasingly visible over the coming years,” Mr. Slater said.
“Besides the U.S., evidence of trade decoupling is harder to find.”
An OE chart of imports from China by advanced economies shows a notable drop from 2016 to 2022 by the United States and Japan, while Canada, among others, has either stayed level or gone up.
Canada Structurally Different From United States
The justifications for decoupling from China are compelling, especially for Canada given allegations of foreign interference such as in elections along with irritations like Beijing’s three-year trade ban on Canadian canola.
Canada has severed ties with the Beijing-led Asian Infrastructure Investment Bank and has ordered China to divest from certain critical mineral investments. But in some respects, Canadian economic ties with China are stronger than many other Western democracies.
“Canada could do more if it wanted to. For example, it could look at how it can get more consumer goods from, say, Southeast Asia with Vietnam, where it has a free-trade agreement,” Mr. Miller said.
He added that Canada’s view on decoupling has been to work with allies on select initiatives rather than deal with the bulk of trade.
“Canada, as a country that relies much more on global supply chains to be traded as a share of GDP [gross domestic product], is much larger than the U.S. And so you have a situation where Canada hasn’t developed a strategy to really make more at home,” Mr. Miller said.
He gave the example that Canada has not seen an appreciable decline in imports of consumer goods from China, due to lack of an alternate source, and that the United States doesn’t really have this problem.
Canadian Linkages to China
In 2022, China was Canada’s second-largest trading partner, after the United States. Imports from China ($73.9 billion) made up 7.9 percent of total imports, and 3.9 percent ($36.9 billion) of exports went to China, according to Statistics Canada.
From 2016 to 2018, Canada imported over $40 billion more than it exported to China. This figure rose to over $50 billion from 2019 to 2021, and in 2022, that trade deficit topped $70 billion.
China also made more direct investments in Canada in 2022 than vice versa.
Mr. Miller says decoupling will become a natural phenomenon as companies get increasingly concerned about Beijing’s state-led economic policies and as Chinese growth slows, and with any trade relating to advanced technologies remaining restricted.
Canadian investors, despite having fewer international investments than many other wealthy countries, in general own more assets in China compared to investors in other countries, says a July 23 analysis by The Globe and Mail about major Canadian pension funds pivoting away from China.
Chinese bonds and equities as a share of Canada’s foreign asset position roughly doubled in the past decade, far outpacing other G7 countries such as Japan, France or Germany, the Globe reported.
Range of Views
In an interview with The Epoch Times, former U.S. trade representative ambassador Robert Lighthizer spoke about beating China at its own game via strategic decoupling, something China has been doing to the United States.
“We are getting these T-shirts and our third and fourth televisions cheaper, but we’re paying for it by transferring assets of our country overseas,” he said. Mr. Lighthizer called it a “fool’s bargain.”
But decoupling from China is not a unanimous priority among the G7, and it’s unclear whether it can be done and how far it can be taken.
France is opposed to the idea of decoupling, according to its finance minister Bruno Le Maire, who told reporters on July 30 that it is an “illusion.” Le Maire was speaking at the French Embassy in Beijing during an official visit.
Le Maire focused on de-risking in that France wanted to be more independent and not to incur any risk to its supply chains, according to Reuters.
On a July visit to China, U.S. Treasury Secretary Janet Yellen said Washington isn’t seeking to decouple from China, despite what some Republicans and experts advise, as doing so would be “disastrous for both countries and destabilizing for the world.”
“Janet Yellen rejected the idea of a decoupling because she was in China and her mandate was to try to make nice and figure out a way forward,” Mr. Miller said.
Warning Sign
It has become more difficult to do business in China, as costs are not as low as they used to be, and some business executives are wary of travelling there, Mr. Miller says.
“The era of private-sector-led growth in China is winding down, and companies don’t feel safe in doing business in China.”
Mr. Slater points out that China also appears to be adding to the decoupling momentum by localizing supply chains, “although given the importance of Western markets and technologies, there is a limit to how far this approach can be pushed without incurring substantial costs.”
Mr. Miller sounds a warning for both Canada and the United States about de-risking their supply chains should a clash over Taiwan take place much like Russia’s invasion of Ukraine.
“Are there capabilities in North America, in Canada, in the U.S., to be able to sustainably persist through periods of grave uncertainty? I fear that in many areas, the answer is an unabashed no.”
