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Why China and Canada are playing economic footsie

In this Sept. 23, 2016, file photo, Chinese Premier Li Keqiang, center left, and Canadian Prime Minister Justin Trudeau, center right, drop the puck for a face-off in a friendly game involving youth hockey players in Montreal. Sparked by China’s interest in learning and improving at hockey, the National Hockey League is making the country of almost 1.4 billion people a priority internationally. (Paul Chiasson/Canadian Press via AP)

President Trump talked a big game about China on the campaign trail, but so far, he and Chinese President Xi Jinping have played nice.

If a U.S.-China trade scrap does erupt though, China may have a backup plan: the United States' neighbor to the north.

At last week's meeting with Xi, Trump — who blamed the Chinese for much of the United States' economic woes and promised to label China a currency manipulator on Day 1 of his administration — struck a much friendlier tone. The two leaders agreed on a 100-day plan to discuss the American trade deficit. China even identified some concessions it was willing to make, the Financial Times reports.

But the Chinese are pointedly exploring other options on trade as well. Canada and China are preparing for negotiations that might result in their first-ever bilateral free-trade agreement, which would likely lower tariffs and boost mutual trade and investment. Such a deal would also bring together two export-reliant nations that have both been threatened by Trump’s volatile criticisms about trade.

“Our priority is the most fair and balanced trade arrangement with the United States — that has always been our priority,” said Jack Austin, a former Canadian senator who was an adviser on China to Canadian Prime Minister Pierre Trudeau. “But the more our trade advantages and our stability are shrunk by U.S. trade policy, the more they force us into the global trade world.”

“If the United States wants to interfere with our core interests as a country, well, we have to look after ourselves,” said Austin, who declined to talk about Trump specifically.

Trump has said that he is not against trade per se, only that he wants to negotiate better deals for the United States. But Trump's pledge to pursue a more combative, protectionist trade strategy has unsettled even close allies such as Canada. One of Trump’s first acts in office was to officially pull out of the Trans-Pacific Partnership, a massive trade agreement involving 12 countries including Canada and Japan. The president said he would rather hammer out many separate trade deals one-on-one. “And believe me, we’re going to have a lot of trade deals,” he promised in January.

On that front, China may already be a step ahead of him. The collapse of the TPP, a U.S.-led effort that pointedly excluded China, opened a window for the Chinese, who are chasing trade talks with many former TPP members — including Canada. In addition to being disappointed at the failure of the TPP, Canada has also been on edge over Trump’s efforts to renegotiate the North American Free Trade Agreement.

Canada, which has a population the size of California, is too small to fully replace trade between China and the United States. But for the Chinese, closer economic ties with Canada could soften the blow of any U.S.-China trade war, or even forestall a trade war altogether, experts say.

There is still no set timeline for the China-Canada talks, but both agreed last year to prepare for trade negotiations, and Canadian officials are currently crisscrossing the country looking for input from citizens and businesses.

The two countries are a good match economically. China is a big importer of agricultural products and natural resources, which are Canada’s biggest exports. The Chinese have also been eager to pour money into Canada’s energy and manufacturing sectors — investment that Canada needs, says Yves Tiberghien, the director of the Institute of Asian Research at the University of British Columbia and a senior fellow at the Asia-Pacific Foundation of Canada. “There are a lot of complementarities here,” he said.

For the Chinese, there are political upsides. Canada’s proximity to the United States might offer leverage in future negotiations between China and the Trump administration. “It would be a good move for China to at least have a deal with a North American country as part of the game between the U.S. and China,” Tiberghien said. “It’s one way for them to deal with the U.S. sideways.”

For the same reason, trade talks might prove tricky for Canada, whose biggest customer by far remains the United States. In 2016, Americans bought more than 75 percent of Canada's exports. For Canada to develop a closer relationship with China risks upsetting the Trump administration, warned Robert Zoellick, a former World Bank president and trade adviser to President George W. Bush.

“Just be careful,” Zoellick said at a panel in January, according to the Canadian Press. “If you’re going to do it, make sure you get something good for it. Otherwise you’re going to pay a big price with this guy if his No. 1 enemy is China.”

Canada has long sought to reduce its economic reliance on the United States, and talks of a trade deal with China, already Canada's second-largest trading partner, have been brewing for years. But Trump has made the matter more urgent.

Recently, Canada had its hopes pinned on the TPP, which would have expanded Canadian exports in a host of other countries — particularly Japan, a market that Canada has been eager to crack. But thanks to Trump, the TPP fell through. “That blew a huge hole in Canada’s trade policy,” Tiberghien said.

Now NAFTA, the free-trade deal involving Canada, the United States and Mexico, is on shaky ground as well. During his campaign, Trump called NAFTA a “disaster” and promised to renegotiate it. Though Trump’s complaints mostly concerned Mexico, there are signs that his administration will also try to overhaul trade between the United States and Canada.

In light of these developments, China — the second-largest economy in the world — has become an increasingly attractive trading partner for Canada, experts say. “Canada has been looking at a deal with China for a long time, but the destabilization of the NAFTA relationship has made it even more important for Canada to look for alternatives to the U.S. market,” said Laura Dawson, director of the Canada Institute at the Wilson Center. In a paper last year, she calculated that a free-trade agreement could boost Canadian exports by $7.7 billion and create 25,000 Canadian jobs.

Dawson said that a trade talks between Canada and China don't have to be seen as a threat to the United States. They may even offer a model for the United States’ own trade negotiations with China. “Canada is well-known to be a middle power, a negotiator, a conciliator, and so we can explore a range of possibilities and negotiating outcomes with China,” Dawson said. “But when the two world leaders, when China and the United States, get into a room, it becomes more of a power negotiation.”

Canadian Prime Minister Justin Trudeau also has a personal interest in China. His father, Pierre, was the first Canadian prime minister to establish diplomatic ties, in the 1970s, with the communist People's Republic of China. The younger Trudeau has been supportive of Donald Trump, Dawson pointed out. “So, maybe this is an opportunity for Trudeau to be Trump’s wingman,” she said.