Canada and its business leaders must immediately change their high-risk trade policy.
Unlike other nations and regional blocs, Canada has sleepwalked into a very dependent and dangerous trade relationship with the United States. We have not strategized and developed a diverse portfolio of trading partners. This is particularly true in British Columbia and Alberta.
Nationally, British Columbia is third (14.7 percent) and Alberta fourth (8.4 percent) of the total number of small- and mid-sized businesses in Canada, according to Statistics Canada. Yet, the number of small businesses in British Columbia during 1996-2000 contracted by one percent. This is due in considerable measure because these two provinces export more than 80 percent of their goods and services to their southern neighbor.
The European Union, when reviewing its global distribution of exports, for example, reveals that 20 percent of exports are going to non-EU European countries, 20 percent to NAFTA member states, 20 percent to Asia and the remaining 30 percent to the rest of the world. From a risk-management perspective, this would seem to be a balanced and prudent trade portfolio.
Canada has chosen not to diversify, and exports about 87 percent of its goods and services to the United States. This figure has continuously increased from 73 percent since the free-trade agreement in 1988. The dangers are apparent when issues such as the Lumber Accord arise at the surface of U.S. foreign policy.
The September 11th attacks provoked a global trade “tipping point” with revolutionary implications for Canada. It demonstrated that we are no longer able to chart an autonomous course because of our trade dependency on the United States.
So the question becomes: with whom should we actively seek trade relationships? Most of the world, including the U.S., is racing headfirst toward the perceived opportunities to be found in the Middle Kingdom. This year, for the first time, foreign direct investment sought out China as the No. 1 place to grow a business. The U.S. dropped to second place.
Canadian businesses should be encouraged to diversify their portfolio of trading partners, and it would seem that China is a strong candidate for consideration. There is much positive evidence that China’s economy is taking off. But in crafting your market-entry strategy and your exit plan, you must be aware of these sobering facts and challenges that you and your Chinese partners may soon face.
First, there is rising unemployment in rural China, approaching 28 percent. The rural population is expected to rise to 800 million by 2020. This inflated unemployment is dangerous and there is evidence that unemployment of this magnitude can be socially disruptive.
This problem is becoming exacerbated as China does not have a pension plan to fund retirement for its aging population. Second, China is on the cusp of a domestic financial crisis. China is under pressure from Japan, South Korea, and the U.S. to devalue its currency. Some American companies want 30 to 40 percent devaluation. Currently, it is pegged to the U.S. greenback (8.3 yuan since 1994). The danger for China is that a devaluation could contribute to unemployment and upset the financial stability. The financial system in China is underdeveloped with several non-performing loans and limited capital account convertibility.
Third, China is economically exposed to any sharp increase in the price of oil. Fourth, China is experiencing a growing water shortage, as are other parts of the world. This is particularly true in the north and could severely hamper economic wellbeing.
Fifth, the potential for military conflict with Taiwan is always present. There is no ambiguity in the foreign policy and the view of China’s national security by the leadership: Taiwan is a province of China.
This can be traced back to Mao Zedong. Any indication by the Taiwanese leaders that threatens this relationship between Taiwan and China will lead to armed intervention. The U.S.’s Seventh Fleet patrols offshore. However, the American military under Clinton saw its armed forces dwindle to levels that reveal the U.S. struggling to maintain its current military commitment to the Middle East. The Pentagon’s core strategy has been to maintain forces sufficient to fight on two fronts. I believe most would agree that at this particular moment, there is a strong likelihood that the U.S. would be unwilling or unable to intervene militarily in this scenario. It is therefore imperative that business practitioners watch closely the pronouncements of the Taiwanese leadership.
Sixth, China does not have the infrastructure to contain and control a major epidemic. The evidence of this fact becomes clear when one reviews current initiatives with respect to AIDS and its recent “head-in-the-sand” strategy to combat SARS.
There are other considerations, including the loyalty of the Peoples’ Liberation Army. Any of these events could result in a significant setback to the economic growth of China. It’s likely that at least one of these eventualities will happen over the next decade.
So the point is, Canadian business practitioners have little choice. They must diversify.
However, in doing so, it is imperative they constantly scan the ecosystem for these hidden and emerging risks that can affect their foreign direct investment in China.
Develop your strategies accordingly.
Note: This article was originally published in 2005.
