Is Canada Shifting Gears with a New Trade Deal with China?

Canada and China have reached a significant agreement aimed at lowering trade barriers and restoring diplomatic ties, marking a notable shift in Canada's foreign policy away from alignment with former President Donald Trump's trade agenda. The deal, announced by Prime Minister Mark Carney during his recent visit to Beijing, includes tariff reductions on Canadian rapeseed (canola) and Chinese electric vehicles, as well as the introduction of visa-free travel for Canadians. This agreement signals a potential thaw in relations following years of tension between the two nations.

Last updated: 10 October 2023 (BST)

What’s happening now

The recent agreement between Canada and China indicates a strategic pivot for Canada, as it seeks to mend ties with China after a prolonged period of diplomatic and economic strife. Following a meeting between Carney and Chinese leader Xi Jinping, both nations have outlined plans to significantly reduce tariffs on key goods, facilitating trade and investment. This marks the first official visit by a Canadian Prime Minister to China in eight years, suggesting a renewed focus on bilateral relations.

Key takeaways

• Tariffs on Canadian canola are expected to decrease from over 80% to around 15% by 1 March 2024.
• Canada will allow 49,000 Chinese electric vehicles at a reduced tariff rate of 6%, down from 100%.
• Visa-free travel for Canadians to China will begin as part of the new agreement.
• The agreement reflects a significant shift in Canada's foreign policy direction under Prime Minister Carney.
• Concerns regarding job impacts in Canada have been raised following the deal.

Timeline: how we got here

The current agreement is the result of a complex timeline of events that have shaped Canada-China relations over recent years. Key milestones include:

• December 2018: The arrest of Huawei executive Meng Wanzhou in Canada leads to strained relations and the detention of two Canadians in China.
• 2021: Canada implements various trade measures against China, further worsening bilateral ties.
• October 2023: Prime Minister Mark Carney visits China and announces a new trade agreement, signalling a thaw in relations.

What’s new vs what’s known

New today/this week

The most notable developments include the anticipated reduction of tariffs on Canadian canola and the introduction of Chinese electric vehicles into the Canadian market at significantly lower rates. These steps indicate a willingness from both nations to re-establish trade relations that have been strained for years.

What was already established

Prior to this agreement, Canada had been navigating a complex relationship with China, particularly following the 2018 diplomatic crisis. Previous leadership had taken a more confrontational stance, which has now shifted under Carney's administration.

Impact for the UK

Consumers and households

The agreement could lead to lower prices for Canadian canola and potentially Chinese electric vehicles in Canada. While this primarily affects Canadian consumers, it may also have ripple effects within the UK market, particularly in sectors that rely on these products.

Businesses and jobs

Businesses in Canada that rely on canola, as well as those in the electric vehicle sector, might benefit from increased trade and lower costs. However, there are concerns within Canada regarding job security in the automotive sector, with local leaders cautioning against potential negative impacts on Canadian workers.

Policy and regulation

This agreement may prompt the UK to reconsider its own trade strategies and relationships with both Canada and China. As Canada shifts towards a more independent trade stance, it may influence how the UK approaches its own foreign policy and trade negotiations.

Numbers that matter

• 80%: Expected reduction in tariffs on Canadian canola to about 15% by March 2024.
• 49,000: The number of Chinese electric vehicles entering Canada at a reduced tariff rate.
• 6%: New tariff rate for Chinese electric vehicles, down from 100%.
• 2.6%: Increase in canola futures following the announcement, reaching its highest level since December.
• 2026: Duration for the suspension of anti-discrimination duties on other farm products.

Definitions and jargon buster

• Canola: A type of oilseed crop known for its high oil content, commonly used for cooking oil and biofuels.
• EVs: Electric vehicles, which are powered by electricity rather than traditional fuels.
• Tariff: A tax imposed by a government on imported goods to regulate trade.
• One-China Policy: A diplomatic acknowledgment that there is only one sovereign state under the name China, which includes Taiwan.

How to think about the next steps

Near term (0–4 weeks)

In the immediate aftermath of this agreement, Canadian businesses should prepare for the anticipated changes in tariffs and adjust their supply chains accordingly. Monitoring market reactions and adjusting pricing strategies may also be crucial.

Medium term (1–6 months)

As the agreement is implemented, stakeholders should watch for shifts in trade flows and market dynamics. Companies may explore new partnerships or market opportunities in light of the reduced tariffs.

Signals to watch

• Monitoring the implementation timeline for the tariff reductions.
• Reactions from Canadian industries, particularly in agriculture and automotive sectors.
• Responses from the US government regarding Canada's pivot towards China.

Practical guidance

Do

• Stay informed about updates to trade regulations and tariffs as they evolve.
• Evaluate potential impacts on your business or personal finances due to changes in trade policies.
• Engage with industry groups to understand the broader implications of these agreements.

Don’t

• Assume that changes will be immediate; adjustments may take time to manifest.
• Neglect to consider the potential long-term effects of shifting trade relationships.
• Overlook the importance of maintaining robust relationships with other trading partners.

Checklist

• Review your current import/export strategies in relation to Canada and China.
• Prepare to adapt to new tariff rates and regulations as they are enacted.
• Consider diversifying supply chains to mitigate risks associated with reliance on specific markets.
• Evaluate the geopolitical landscape and its potential effects on trade.
• Stay connected with trade associations for timely updates and insights.

Risks, caveats, and uncertainties

While this agreement appears promising, uncertainties remain. Concerns about job impacts in Canada and the long-term sustainability of this new trade relationship are valid. Additionally, there is speculation about how the US will react to Canada's shift, particularly as it relates to ongoing trade negotiations under the USMCA (United States-Mexico-Canada Agreement). The evolving geopolitical landscape may also introduce new risks that could affect the stability of these agreements.

Bottom line

The recent Canada-China trade agreement represents a significant shift in Canada's foreign policy, potentially reshaping its economic landscape and international relations. As Prime Minister Carney seeks to establish a more independent trade agenda, it will be vital for businesses and policymakers to navigate the complexities of this evolving relationship with caution.

FAQs

What are the key components of the Canada-China trade agreement?

The Canada-China trade agreement includes tariff reductions on Canadian canola, reduced tariffs for Chinese electric vehicles, and the introduction of visa-free travel for Canadians.

How will the agreement impact Canadian consumers?

Canadian consumers may benefit from lower prices on canola and access to Chinese electric vehicles, as tariffs on these products are expected to decrease significantly.

What are the potential risks associated with this agreement?

Potential risks include job insecurity in the Canadian automotive sector and uncertainties surrounding the long-term sustainability of the trade relationship amid changing geopolitical dynamics.