Economists worry growing conflict with China will make Canada and the world poorer

Ejection of a Chinese diplomat who interfered in Canada's internal affairs has led to a tit for tat expulsion. It's only the latest skid toward "global fragmentation" that economists fear will damage trade and impede co-operation on important issues including climate and artificial intelligence.

Cold War effect could slow the economy and weaken dialogue on crucial issues

The Chinese Container port of Qingdao in Shandong province last year.
Containers and cargo vessels are pictured in Qingdao, one of China's busiest ports. Despite rocky diplomatic relations, Canada imported about $100 billion worth of goods from China in 2021. (China Daily via Reuters)

Canadian domestic politics have helped magnify the most recent dispute between Beijing and Ottawa into a full blown tit-for-tat expulsion of diplomats.

While some experts who track relations between China and Canada play the spat down — one called it "pretty trivial" — it's one more crack contributing to a far more dangerous long-term rupture.

Labelled "global fragmentation," the issue was raised at a recent International Monetary Fund meeting in Washington, D.C. The current Canadian dispute may represent a further fracturing of the world into competing trade blocs that will not only make us all poorer, but impede crucial talks on shared global threats, including climate change and artificial intelligence.

Diplomacy's economic impact

Critics of the Canadian government's handling of threats against Conservative MP Michael Chong's family in Hong Kong would not see the issue as trivial.

After being pressed by Tory Leader Pierre Poilievre, Foreign Affairs Minister Mélanie Joly cited China's "interference in our internal affairs" in declaring Chinese diplomat Zhao Wei persona non grata. As expected, in reply China expelled a Canadian diplomat, Jennifer Lynn Lalonde.

While far less significant than previous disputes with Beijing that in the past led to the long-term imprisonment of innocent Canadians and may have contributed to persistent trade sanctions, the latest Canada-China spat is only one sign of hostility between the world's free-market democracies and what appears to be an emerging alternative bloc. 

Conservative Foreign Affairs critic Michael Chong rises  during Question Period, in Ottawa, Monday, Nov. 14, 2022.
Conservative foreign affairs critic Michael Chong has pressed the government for action after his relatives were threatened by China, leading to tit-for-tat expulsions by Canada and China. (Adrian Wyld/The Canadian Press)
Just this week, China vowed retaliation against European sanctions on Chinese companies accused of aiding Russia's war in Ukraine. Also this week, the U.S. government announced it had arrested Litang Liang, an American citizen accused of pointing out to China its friends and enemies within the United States.

"Even as we need more international co-operation on multiple fronts, we are facing the spectre of a new Cold War that could see the world fragment into rival economic blocs," warned IMF boss Kristalina Georgieva earlier this year. "This would be a collective policy mistake that would leave everyone poorer and less secure."

Bank of Canada governor Tiff Macklem raised the issue in testimony to the Senate standing committee on banking, commerce and the economy last month after discussions in Washington.

'Cost to global growth'

"The reality is we have all benefited tremendously from an increasingly integrated global trade and investment system and if that goes in reverse, that will certainly have a cost to global growth," Macklem told senators.

As an open trading economy, said Danielle Goldfarb, vice-president of global affairs, economics and public policy at the Toronto-based research company RIWI, a decline in global trade could hit Canada hard.

"From Canada's perspective, as a small open economy and a democracy, we always have had an interest in this rules-based multilateral international order, basically, and that's kind of an imperative for us," said Goldfarb in a phone conversation this week.

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Goldfarb, who is also a fellow with the Vancouver-based Asia Pacific Foundation, said that until a few years ago, Canadian policy on China by both the current governing Liberals and the Conservatives before them assumed that welcoming the growing giant into global networks would make rules-based trade stronger. 

"But we're seeing something different now," said Goldfarb.

As Deputy Prime Minister Chrystia Freeland outlined in a Washington speech last year, the failure of autocracies like Russia and China to follow what western countries considered free and fair trade rules means democracies must reshape their strategies.

The danger of 'decoupling'

Despite a rhetoric of division and some calls for "decoupling," Goldfarb points out that Canada's stated Indo-Pacific strategy specifically includes engagement with China, even as it looks to expand relations with other Asian trade partners, including India.

"You can't simply disengage from the second largest economy in the world," she said, pointing out that China is already beginning to develop policy in the important area of generative artificial intelligence that others, including Canadian AI leader Geoffrey Hinton, say demands global co-operation. 

Canada and its allies know it is essential to keep the door open on "global public goods" including AI policy, climate change and avoiding nuclear conflict, said economist Dane Rowlands at Carleton University's Patterson School of International Affairs in Ottawa. But he said relations with China have never been so bad.

WATCH | Canada braces for retaliation over Chinese diplomat's expulsion:

Canada braces for retaliation over Chinese diplomat's expulsion

11 months ago
Duration 2:36
China expelled Jennifer Lynn Lalonde, a Canadian diplomat in Shanghai, just hours after Canada named Chinese diplomat Zhao Wei persona non grata over allegations he tried to intimidate a Conservative MP's family. Government sources say China could make further retaliatory moves involving trade or security.
"I think it is at a nadir right now; it's at a low point," said Rowlands. "I think the diplomatic fighting is something that's just kind of accompanying the more general bad blood that seems to be out there between different groups of countries in the world."

At the heart of the growing conflict is the expanding clout of China as an economic and military power that inevitably destabilizes the status quo as it challenges the dominance of the United States and its allies.

"It's not that the United States has shrunk dramatically in terms of its share of the global economy," said Rowlands. But the U.S. bloc is no longer able to dictate in world affairs, he added.

Feeling their growing power 

"When they set a policy ... they wouldn't really have to care how much other countries bought into the idea," he said of the U.S. But in their reaction to sanctions on Russia, he said that China and India have shown they can now frustrate U.S. and European policy. That is relatively new and a source of friction.

Goldfarb, Rowlands and many others have said that Canada's ultimate goal must be to use any influence it has to prevent the conflict between China and the U.S. from escalating into war.

But as the IMF's Georgieva has described, disruptions short of war could have a serious effect on the world economy.

It is a position Rowlands accepts even if there little proof of an immediate economic impact, but he thinks the IMF's interests may be different from Canada's.

"The IMF's view is that globalization is great," said Rowlands. "We should just let industries go to wherever they're going to be more efficient." 

Responding to what some see as Chinese bullying in the Chong case may be one way of pushing back on the diplomatic front.

But Rowlands said that as security concerns grow and China threatens to block essential goods such as rare earth minerals, which it has done, it becomes imperative for Canada and its allies to become more self-sufficient, even if that makes us a little poorer in the short run.

"I think it's a fair argument to make that by importing goods from overseas and letting them do all the production, that we are losing certain advantages economically, as well as as I mentioned, strategically in terms of security."


Don Pittis

Business columnist

Based in Toronto, Don Pittis is a business columnist and senior producer for CBC News. Previously, he was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London.