A strategic framework for Mr. Harper’s visit to China

When Prime Minister Harper visits China to warm up the political relationship he will have much to build on. Business ties are still warm despite the official coolness of the past few years. Canada’s brand has a high profile due to the popularity of Cirque de Soleil and Mandarin-speaking Canadian entertainer Mark Roswell, known in China as Dashan and regarded as one of the most country’s most famous foreigners. Both will be prominent at Canada’s imaginative Expo 2010 pavilion in Shanghai which will be visited by tens of millions of Chinese. Less well known but also significant, Chinese officials have learned from Canada’s model of financial regulation, credited with helping avoid the global financial crisis, and its system of fiscal federalism.

Yet the Prime Minister’s visit seems to lack a strategic framework. As with India, an implicit goal is to diversify Canada’s economic ties beyond its unchangeable proximity to the US market. Canada will deepen its trade and investment ties with India, but free trade agreements are not an option with China whose FTAs are largely motivated by foreign policy considerations to be friendly to its Asian neighbors.

Canada should identify goals, say within a 2030 time frame, to reshape and redevelop the relationship. By 2030, barring a catastrophe, the Chinese economy will be the world’s largest. But it is approaching physical and demographic limits to the industrial growth that has fueled its rise. The population will be more middle class and urban than today, but it is aging fast and income inequality has reached US levels.

Canadian exporters have benefited from the demand for natural resources generated by China’s industrial machine. Rising interest in the oil sands will bring a higher investor profile in production and transportation. But China’s industrial machine is losing importance as the economy is rebalanced to reverse the side effects of its thirty-year dash for growth. Current strategies will phase out subsidies for land, energy and capital and step up enforcement of environmental regulations already on the books to raise the costs of water and air. As these input prices rise manufacturers’ razor-thin margins will decline and creative destruction will ensue: industry will gradually shift towards less materials-intensive and more knowledge-intensive manufacturing and into services. Education standards will rise; renewable energy will be more prominent in China’s supply profile (targeted to provide as much as 20 percent of total energy needs by 2020).

China’s aging population will concentrate among the rural poor who lack access to financial instruments and institutions to support their financial needs. Public spending on health, education and social security tripled between 2002 and 2008 as the government moved to repair the social safety net which disintegrated in the 1990s. Banks still dominate finance, however; bond and equity markets are under-developed and dominated by favored state enterprises. The heavily managed exchange rate and controls on capital flows will have to be eased if Shanghai is to become an international financial center by 2020 as the central government has decreed.

Canada’s framework should anticipate these shifts. While Canadian financial institutions are not big players we have brand in entertainment and business services; our expertise in pension design, environmental equipment and services can leverage these successes. Canada’s large research universities are second to none yet Australia, Japan and the United States are far ahead in exporting education services.

China will loom large in the political and economic future of Canada’s youth. Despite a diaspora of nearly a million Chinese most Canadians have not focused on the shift in economic gravity to Asia. The headline for Canada’s long term strategy should be a large scale youth exchange program that replaces the European grand tour in the minds of students and their parents with opportunities to spend summers or gap years in China, and vice versa. Expanded twinning arrangements between cities and towns – or even provinces – would facilitate citizen exchanges. The opportunities are there. The Prime Minister’s visit should be the first step in a longer journey.