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Why China and Canada need to get along despite the Huawei dispute

Why China and Canada need to get along despite the Huawei dispute
Business
Cranky with China for detaining a pair of Canadians in apparent retaliation for the arrest of a high-tech executive? Think Canadian companies should boycott Chinese suppliers?

Then you probably don’t run a Canadian company. Or shop in this country, for that matter.

Chinese police patrol in front of the Canadian embassy in Beijing. Security has been stepped up outside the embassy since Meng Wanzhou, CFO of Huawei, was arrested in Canada, at Washington s request.  (GREG BAKER / AFP/GETTY IMAGES)

As Canada’s dispute with China over the arrest of moves into its second week, frustrations are mounting in both countries.

What, however, if the spat turned into a full-blown trade war, aided and abetted by U.S. President Donald Trump and his penchant for inflammatory tweets? Could Canadian businesses survive without China, either as customer or supplier?

It would be a challenging task, according to Fraser Johnson, a professor at the Western University’s Ivey School of Business and the deputy editor of the Journal of Supply Chain Management.

“It would be really tough. There are Chinese parts or labour in everything from your iPhone to your car to the pair of jeans you’re wearing,” said Johnson, who’s optimistic the dispute won’t spiral out of control.

Well, at least not the one between Canada and China.

“I really can’t imagine it happening. There’s just too much at stake. I don’t think either country wants to damage (the relationship),” Johnson said.

Here are some facts and figures that help explain why untangling the business ties between Canada and China would be so difficult and which Canadian sectors would have the most to lose, if a trade war broke out:

BIG ISSUE

China — and smaller neighbouring countries including Myanmar and Vietnam — represent roughly half the world’s manufacturing base. That makes it tough for Canadian companies trying to shop around, either for finished products produced in China or parts to be assembled here, said Johnson.

Everything from high-tech industries such as telecommunications and aerospace, to more traditional manufacturing industries such as the automotive business would be affected. So would retail and consumer products giants, such as Walmart and Loblaws, Johnson added.

If the spat with China lasts longer than a month or two, companies might start to sniff around for other potential suppliers. But it would still be tough, especially for small- and medium-sized firms.

“Companies like GM and Apple? They take time to make decisions, but they’ve got more resources and buying power, and more people to look at things like this. The little guys would have a much harder time,” said Johnson.

In a recent case study he prepared, a company near London, Ont., had to part ways with a Chinese supplier. The owner had to go back to a local supplier the company had previously ditched. “They wanted to charge him nine times what the Chinese company was charging,” said Johnson.

WOOD NOT BE GOOD

China is the second-largest customer of Canada’s lumber industry, representing between 20 and 30 per cent of Canadian softwood exports, says Kevin Mason, managing director of ERA Forest Products Research, in Gibsons, B.C. Losing that chunk of business would be difficult in any circumstance. The biggest problem, however, is that the most logical alternative customer for the extra wood would be our neighbours to the south. You may have heard of the Canada-U.S. softwood lumber dispute.

“We’ve been fighting with the Americans over lumber for two or three centuries. So that’s not an ideal place to turn to for extra business, and it’s not very profitable because of all the tariffs,” Mason explained.

China is an even bigger purchaser of Canadian softwood pulp used in paper manufacturing; it’s the world’s biggest consumer. Part of that is sheer numbers. A billion people use a whole lot of paper in the office and, er, other rooms.

“The biggest end product for pulp is tissue,” said Mason. Demand for the pulp has slumped in recent months as Chinese companies try to use existing inventories — something that predates the current dispute.

“I think the broader question is whether China would be able to do without us. And I don’t think they would,” said Mason. That makes him optimistic that any tit-for-tat retaliation by China won’t be long-lasting. “I think in six months, we’ll look back at this and it will have been a little blip.”

OM(5)G

The highest-profile Chinese product lately is the infrastructure needed for so-called 5G internet. China, and specifically Huawei, is deeply involved in the 5G world, something that has drawn political scrutiny and concern from online security experts around the world.

In Canada, Telus is relying largely upon Huawei to build its 5G network. Bell has also unveiled some commitments. To a much lesser extent, Rogers also has some 5G involvement with Huawei.

MOVING UP

While manufacturers have been outsourcing to China for decades, more recently, higher-value work has been landing in the country. It’s no longer just a place to build, but is increasingly seen as a country where traditionally white-collar roles can be done for Western companies.

Call centres, design work, engineering and other back-office functions are now being done in China for foreign companies.

“If you can do it in China or India for a tenth of the price, why would you do it in Mississauga?” said Johnson.
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