Prime Minister Justin Trudeau's trip to China prompted speculation that the visit may be a first step toward a free-trade agreement.
The basic principle of free trade is clear. Imagine two neighbouring islands. One island is green and fertile, capable of producing more food than it can consume. The other, while dry and barren, possesses the natural resources needed to manufacture consumer goods. Farmers in the fertile island sell food to the other in return for the raw materials needed to manufacture consumer products.
Over time, factories on each island become more efficient, providing consumers with access to the lowest cost supplier. It's easy to see the benefits of free trade between these two islands.
But what if one island is a free-market democracy and the other a socialist aristocracy? What if one island has a culture of fair dealing enforced by the rule of law through an independent judiciary, while the other has a judiciary that is influenced by the government's agenda, and often acts as an instrument of repression rather than justice?
What if one island respects international intellectual property laws, while the other facilitates industrial espionage and the production of cheap knockoffs?
What if one island's economy is driven by private enterprise, while businesses in the other gain advantage from government loans and subsidies facilitated by corrupt officials? Moreover, what if one island has a free and open media, while the other blocks international media and has only state-controlled media that publish only regime-friendly stories? And what if one island protects human rights, while the other throws those critics in jail for "treason"?
Finally, what if one island holds industries to strong environmental standards, while citizens in the other choke on smog and drink toxic water? In such circumstances, wouldn't the leader of the first island be extremely unwise to consider entering into free trade with the other?
Of course, the "other" island I'm describing is China, and there are even more reasons for Canada to stay away from free trade with the great dragon. Firstly, what do we have to sell them? Certainly not manufactured goods. There are very few that China can't produce more cheaply. The crux of the Canada/China trade relationship has always been that we send them raw materials and they ship consumer goods back to us. Since natural resources are globally traded commodities that already move without tariffs, free trade would provide no benefit to resource exporters. On other hand, removing tariff barriers on manufactured goods would put our manufacturers at even greater disadvantage.
My six years on the board of HSBC, the largest foreign bank operating in China, provided insights that make free trade with that country even more unwise. My board stint from 2006 to 2012 coincided with a period of supercharged GDP growth for China, which was dominated by what bankers call "capital account" – that is, massive government infrastructure programs and equally massive loans from government banks to underpin the building of every kind of industrial and manufacturing facility.
The result was a huge surplus of capacity in industrial facilities such as cement plants and consumer goods factories. That enormous surplus will hang over the global processing and manufacturing sectors for decades to come.
Then there's the contrast in environmental enforcement between Canada and China. While Beijing touts toughened environmental laws, the situation on the ground tells a starkly different story. Despite all of the rhetoric about renewable energy by Chinese officials at the recent Paris COP 21 climate-change conference, China operates more than 2,300 coal-fired power plants, with hundreds more planned or under construction. That's bad enough, but few of those plants actually meet government emissions standards because corrupt regulatory officials line their pockets by looking the other way. Cheap power, subsidized manufacturing plants and huge overcapacity. Who can compete with that?
Finally, there's China's self-serving track record in trade. Just as the Prime Minister was getting ready to board his plane last week, there was news that after decades of buying Canadian canola, Chinese trade officials had suddenly determined that Canadian canola contained unacceptable "impurities." This $2-billion market is very important to Canadian farmers. Our canola is perfectly fine in other countries, so how could it be unacceptable to China? Could the current enormous stockpile of Chinese canola have anything to do with it?
Message to Mr. Trudeau: Please use your exceptional relationship-building skills to warm relations with China. But studiously avoid any signals that free trade will ever be part of that relationship.
Gwyn Morgan is the retired founder and CEO of Encana Corp. He has been a director of five global corporations.