The U.S.-led trade war with China is jeopardizing the Chinese economy’s illegitimate house of cards. In a desperate move, Beijing is now trying to revive free trade talks with Canada even after one of its state-owned construction firms was barred from acquiring Aecon, one of Canada’s largest infrastructure companies.

The ruling communist regime is facing a crisis.

In a surprising move, Chinese ambassador Lu Shaye said China “sincerely hopes” to hasten bilateral trade talks with Canada as tariffs escalate with the United States, The Canadian Press reported on Aug. 20.

Just last December, Prime Minister Justin Trudeau was more or less given the cold shoulder during failed trade talks in Beijing.

In another new development, the Chinese Consulate in Toronto just hired its first professional lobbyist to promote greater ties like agriculture and tourism between Canada and China, according to iPolitics.

But China business expert Frank Xie has a warning for Canada. The business professor at the University of South Carolina–Aiken advises Ottawa not to get comfortable with China and end up being used as a bargaining chip against the United States.

“China has certainly tried to alienate Canada from the United States so as to use this divide-and-conquer strategy,” Xie said in an interview.

China wants greater ties with Canada as part of its growing influence in a world where it views itself as an alternative to the United States. It’s a strategy that China is also using to undermine the European Union.

China has had to turn to other countries for imports after slapping retaliatory tariffs on U.S. goods, which include pork, soybeans, wheat, corn, and poultry. It has started buying more soybeans from South America and pork from Russia.

China is already Canada’s second-largest trading partner, but it’s a drop in the ocean compared to trade with the United States. In 2017, 6.4 percent of Canada’s imports came from China and 4.3 percent of its exports went there. The United States is where 62.7 percent of Canada’s imports come from and where 71.3 percent of exports go.

Cracks in the Foundation

The three pillars used by the communist regime to boost China’s economy—infrastructure investment, domestic consumption, and exports—are all wobbling, according to Xie.

“The Chinese economy is really in deep, deep trouble,” he said.

As the United States and China slap each other with tariffs, it’s China that’s losing. The Chinese currency and its stock market are being punished. Firms are moving their production out of China to avoid tariffs or are going bankrupt, and inflation pressures are insidiously rising.

In a typical example of Chinese overproduction, exporting to the United States, and getting nailed by tariffs, Shandong Yongtai Group Co.—China’s 10th-largest tire maker—declared bankruptcy in early August. Tire imports have been hit with a 25 percent tariff by the United States since early July.

Construction workers take their lunch break at a construction site in Beijing on July 19. Overbuilding of infrastructure is one way the communist regime has boosted China’s economy. (AP Photo/Mark Schiefelbein)

Xie explains that China is printing money to stimulate the economy, but it’s not working. Money gets tied up in the real estate bubble and rents are soaring—rising annually by 20 percent in 11 Chinese cities. Business investment is at the lowest level since 1999.

Xie said the Chinese regime is under-reporting the true inflation in the economy as imported goods rise in price and the currency depreciates. It spells a policy nightmare for the Chinese authorities and China’s central bank.

“The treasury is blaming the central bank for issuing too much money. And the central bank is blaming the treasury for not controlling the debt,” Xie said.

To counter rising inflation, a central bank raises its key short-term interest rate. However, that slows economic growth, something Beijing certainly doesn’t want.

But the Chinese population can’t be too pleased with a “negative wealth effect” brought on by the tariffs. China’s stock market is the big laggard in Asia, with the Shanghai Composite down over 17 percent. Meanwhile in the United States, stock markets are at or near record highs.

Nuclear Option

China’s economic rise is due to its duplicitous behaviour as part of the World Trade Organization (WTO)—being able to export to open markets without reciprocating. Beijing won’t permit its darlings—its state-owned enterprises—to face international competition domestically.

“We need reciprocal trade and these are issues that our allies in the G7 agree with us on. … This can’t be a one-way transaction where they [China] have free trade here and we have no trade there,” U.S Treasury Secretary Steven Mnuchin said in an interview with CNBC.

China under the communist regime only operates in one way, said Xie. “They never really wanted to play fair.”

“Their innovation system relies on copying … theft,” said Derek Scissors, Asia economist at the American Enterprise Institute, in an interview with CNBC.

“Why not wait until we see a better China before making a deal?” Scissors added. Chinese theft of intellectual property is among the foremost issues the United States wants stopped.

If Canada is seriously considering renewing free-trade talks with China, Xie advises the Canadian government to examine China’s record in the WTO and warns that the regime relies on treachery to sustain its economic growth, which ultimately leads to preserving its authority.

Since China joined the WTO in 2001, Canadian imports from China have rapidly risen. But there are undesirable consequences to this.

The Centre for the Study of Living Standards said the overall loss in manufacturing employment in Canada from 2001 to 2011 amounted to 506,000 jobs with 114,000 directly attributable to Chinese imports.

The “nuclear option” is to kick China out of the WTO; being barred from its honey hole would be a huge embarrassment for Beijing. While complicated to pull off, the United States is aligning itself with Japan and the EU to deal with China’s trade infringements together.

“I believe active efforts to threaten China’s detachment from the WTO trading alliance would mark a powerful realignment of international order towards the rule of law,” wrote Tom Rogan, commentary writer at the Washington Examiner.

Turning up the Heat

The United States is in an even stronger bargaining position now that it has struck a bilateral trade agreement with Mexico. Many expect another $200 billion in U.S. tariffs against Chinese imports to come in early September.

More pain appears to be on the way for the Chinese economy, and Canada’s trade negotiators now have their hands full dealing anew with the United States, something far more important to them than China.

Leland Miller, China Beige Book International CEO, told CNBC that the Chinese have to understand that there are consequences for their bad behaviour.
“China understands strength, they understand pain,” he said.

Xie said the only way to have China change its behaviour in international trade is if the communist regime is extricated from China.

“Everything the government is doing now is really just for one purpose and one purpose only: to preserve their own power,” he said. “The Chinese people, they don’t want to have all these trade barriers. They want to buy American products.”

The same can be said for the Chinese people’s appetite for Canadian natural resources and agriculture.

The U.S.-led trade war against China threatens the very foundation on which the Chinese Communist Party has maintained its authority over its people.

A wounded animal is reaching out for a Canadian lifeline.

Follow Rahul on Twitter @RV_ETBiz