Canada Cozies Up to China

August 31, 2012 Topic: EnergyTrade Region: ChinaCanadaUnited States

Canada Cozies Up to China

As tensions between Ottawa and Washington rise, Beijing's reliance on North American oil becomes increasingly important.


American politicians, political activists and special interests have been kicking sand in the eyes of Canada for the past several years. It is a reversal from the days of North American free-trade agreements signed by leaders who sang duets about smiling Irish eyes.

With pressure to secure votes in the November election, President Obama, to the delight of environmental activists, once again halted the TransCanada’s Keystone XL pipeline project, intended to move oil from central Canada to the Gulf. The move, for reasons beyond oil supplies or employment, is costly and hurtful to both U.S. and Canadian national interests. The Canadian angle in American foreign policy has been only a small part of election rhetoric, and the focus has been on energy and employment. But the issue could be of greater significance if voters understand the more important question: Is there a threat to America’s long tradition of easy relations across the forty-fifth parallel?


A shared national interest has always been a "no-brainer" in North American relationships. U.S.-Canadian strategic discussions have not always been easy, but they have been conducted against a backdrop of neighborliness. It helps that cross-border economic relationships are also defined by the rule of law. Not only does Canada supply 25 percent of American energy needs, but there also are treaty-level obligations, binding both sides, ensuring that such essential flows will be maintained even in the face of unexpected surprises. In the North American free-trade arrangements, Canadian energy supplies are specifically singled out in treaty language as secure and guaranteed.

Supporters of the NAFTA treaty claimed that such a binding of the special North American partnership had clear long-run benefits greater than any potential loss of sovereign authority. But this North American tradition of security of supply and a rule-of-law environment is now at risk.

Canadians were surprised by the American reaction to Keystone XL precisely because it was so contrary to the North American tradition of trust and reliability. Truly dependable contractual guarantees must be established once again and made secure if trust and security between Canadian and American economic and political agents are to be restored.

Cozying up to China

The United States buys three-quarters of Canada’s aggregate exports. Thus, the recent U.S. recession so diminished Canada’s cross-border shipments that the smaller northern neighbor also experienced an economic slowdown despite its otherwise solid fundamentals. Canada’s long-time economic integration with the United States began to look like unwise dependence rather than profitable specialization. “We would like to see the trade dependence on the United States fall, and it has been falling gradually,” Canadian prime minister Stephen Harper said. Quebec even wants to reverse the flow in a pipeline connecting Montreal with Maine, changing it from a means of importing foreign oil into an export vehicle for fracked oil and gas intended for overseas buyers.

Canada is opening more discussions with China as Harper assures that there will be more cross-Pacific exports of energy and other products. China has been buying energy operations in Canada for the past six years. Its portion of foreign investment in Canada is relatively small, but the new North American tension makes Chinese expansion easier.

U.S.-Canada relations may now be weakened by the junior partner, with external opportunities both rich and attractive. There are incentives for Canada, which can restore export stability and diversify the source of its overseas profits by pursuing relationships with China. U.S. critics of Canada’s flirtations with China, such as Senator Charles Schumer (D-NY), have discovered that their angry remonstrance does nothing to change Harper’s new strategy.

Unlike past Canadian leaders, Harper can more easily deal with China for the same reason Nixon could go there: Harper has vaccination marks to prove he is an authentic conservative who is not carrying water (though Canada even has export potential in bulk water) for the Left. A stable and diversified export earnings stream is in Canada’s national interest. And China has a fundamental interest in a diverse collection of economic links with G7-level nations.

A Three-Nation Partnership

Canada can both expand business relationships with China and maintain a strong relationship with the United States. In fact, it is in the long-term interest of the United States to encourage Canada to do more business with this emerging economic power in the East.

With the lightning speed of economic developments in China in recent decades, Beijing needs to increase its energy imports from more diverse sources. Chinese reliance on North American resources—north of the border or otherwise—will ultimately mean more leverage for Washington. As a world leader, the United States sometimes needs to play hardball and be the tough guy; meanwhile, it can have its little brother play the nice guy while achieving common goals.

Washington and Ottawa should come together and offer to help China develop the rule of law while insisting that it promise to behave better on questions such as intellectual property. There are rewards for all sides. For China, an internal move toward rule-of-law habits will serve its true national interest by making future domestic instability less likely. For the North American partners, oil exports will stabilize domestic needs and accelerate internal evolution in China.

Chinese involvement in North America will only grow over the next fifty years. Private players already see angles. Bechtel and Rio Tinto, U.S. and Canadian corporate powerhouses, are revamping British Columbia’s Pacific port facilities in Kitimat to better enable exports of oil sands bitumen that is soon to be directed away from the Keystone route.

Therefore a three-nation partnership, consisting of mutual promises to apply rule of law, will serve the long-term national interest of each partner. Mutual interdependence, a recognition of each other’s property rights, secure contract conditions and equal treatment under shared rules for business deals would provide economic and political dividends for all.

The U.S. presidential campaign has been focused on domestic issues: jobs, energy and personality factors. Foreign-policy questions, to the extent they play a role, are confined to the war with radical Islam and other problems in the Middle East. But the rise of Asia, and restoration of trust and good feelings with America’s most important trading partner, are every bit as important—even more so for the long run. Let us hope someone stumbles over this reality before the electoral contest ends.

Tom Velk is an economist and director of the North American Studies program at McGill University. Olivia Gong is a research assistant at McGill University with experience in Chinese banking and finance.

Image: K. Annoyomous24