Canada decides: Trudeau faces heat over handling of China and trade war

This report is part of a series analyzing the top issues that will affect voter choices in the 2019 Canadian federal elections.

Two major trade deals to boost Canadian exports took effect during Prime Minister Justin Trudeau's tenure, and NAFTA was also renegotiated. But troubles with China could give Conservatives an opening to hammer Liberals on the question of whether Ottawa has done enough to shield Canadian businesses from trade war fallout.

Conservatives see advantage in arguing that Trudeau's Liberal government got Canada caught in the middle of the tariff battle between the world's two largest economies — a problem that threatens to get worse for Canada as the U.S.-China trade war increasingly affects global economic momentum.

China’s block of important Canadian exports like canola, soybeans and pork — widely viewed as retaliation for Ottawa's arrest of Huawei CFO Meng Wanzhou — has prompted Trudeau's main challenger, Conservative Leader Andrew Scheer, to accuse the prime minister of standing idly by while Canada's second-largest trading partner exacted economic revenge.

“Canada is being bullied by the Chinese government, and you have done nothing to stand up for Canada in response,” Scheer wrote to Trudeau. He made the accusation in a letter in early July, seven months after Canadian authorities detained the Chinese telecommunications executive based on a U.S. extradition request.

The Liberals are expected to counter Scheer's argument by pointing to the new North American trade deal as evidence of Trudeau's deft handling of a rocky negotiation with an unpredictable head of state — U.S. President Donald Trump.

The background

Trudeau has sought to diversify Canadian exports beyond the U.S. market, a goal Canadian leaders have failed to achieve for decades. That economic objective was rendered more urgent by Trump's aggressive trade policies.

Trudeau's trade agenda got an early boost from a deal with the European Union that was nearly complete before he took office. He negotiated final changes to the agreement, known as the Comprehensive Economic and Trade Agreement. The pact has yet to be ratified by all EU member-states, but it took effect provisionally in September 2017 and most of its trade-liberalizing provisions are now in force.

Canada was forced to grapple with Trump's protectionist bent from the moment the U.S. president took office in January 2017. Trump had blasted NAFTA on the campaign trail and quickly pushed for renegotiation once ensconced in the White House. The renegotiation posed a big test for Trudeau's leadership: Trade with the U.S. is vital to the Canadian economy, given that three-quarters of all Canadian exports go right across the border.

Despite the longstanding alliance between Canada and the U.S., Trump angered many in Canada by imposing national-security tariffs on Canadian steel and aluminum in May 2018.

While the steel and aluminum duties were still in place, the U.S. and Mexico signed a deal in August 2018 to update NAFTA, leaving Canada in limbo. Tense negotiations over the next few weeks ended with Canada joining the pact, and the U.S.-Mexico-Canada Agreement was signed at the end of November last year.

Trudeau's government can also claim credit for signing onto a resurrected Trans-Pacific Partnership after Trump withdrew the United States from the deal during his first week in office. The reworked 11-nation pact, signed in March 2018 and dubbed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, gave Canadian exporters preferential access to key markets in Asia and Latin America, like Japan, Malaysia, Vietnam, Chile and Peru.

Showdown with China

Trudeau looked to China in his efforts to open new markets for Canadian businesses. That was perhaps a natural approach for the Liberal prime minister, given that his father reopened diplomatic relations with Beijing when he held the post.

Trudeau had hoped to open formal trade talks with Beijing, and, as recently as late last year, his government envisioned reaching sector-specific deals with China, starting with agriculture.

But everything changed with the arrest of Meng in December 2018. The U.S. government accuses Meng, the daughter of Huawei founder Ren Zhengfei, of fraudulently representing the company to skirt U.S. and EU sanctions on Iran.

Her extradition hearing is set for January, but her prosecution has taken on larger significance: Trump has put Huawei on a trade blacklist and expressed a willingness to ease up on the company as part of a potential U.S.-China trade deal — in effect, linking Huawei to the trade talks.

China reacted quickly to Meng's arrest, unloading on Canada. Within days Beijing arrested two Canadian citizens and later prosecuted them for espionage — charges that Trudeau has called "arbitrary."

It closed its ports to imports of Canadian canola, saying pests were found in shipments, and did the same to Canadian pork and beef, claiming it spotted falsified export permits. Those moves have shaken farmers on the prairies, where Trudeau's Liberals already face a frosty reception.

Beijing also froze out Canadian officials for months and thwarted the Trudeau government's efforts to broker a meeting, which forced Trudeau to ask Trump to help plead Canada's case.

The Conservatives say Trudeau needs to get tougher on China. They criticized Trudeau's government for going without an ambassador to China as relations deteriorated this year, and then blasted him earlier this month for filling the vacancy by appointing Dominic Barton, a former McKinsey & Company managing director seen as being friendly with Beijing.

Scheer has called for closer inspection of Chinese imports and consideration of punitive tariffs. He's also said he’d pull Canadian funding from China’s multilateral development bank — a $256 million commitment made in 2017 — and focus on striking trade deals with Asia’s democracies.

What's happening now

Canadian Foreign Minister Chrystia Freeland succeeded this summer in getting a sitdown with her Chinese counterpart, to discuss the case of the two detained Canadians. But efforts to produce a breakthrough have failed — and seem to be dependent on the outcome of the U.S.-China talks, which deteriorated in recent months into a new round of tit-for-tat tariffs.

Before the latest U.S.-China duties took effect on Sept. 1, a Scotiabank analysis predicted Canada would suffer almost as much economic pain as the U.S. if the duties took effect. The forecast determined the tariffs would shave 0.11 percent off Canada’s GDP in 2020, versus 0.14 percent from the U.S. economy.

Economic downturns are generally bad news for incumbents. Right now, the economic landscape in Canada is mixed. After a solid start to the year for the nation's economy, including historically low unemployment and strong job creation, Canada in August experienced its most significant yield-curve inversion in two decades. Seen by many market experts as a sign of coming recession, an inversion happens when the yields on long-term bonds drop below those on short-term options.

In early September Canada's central bank chose not to cut interest rates, but warned that "escalating trade conflicts and related uncertainty are taking a toll on the global and Canadian economies," and pledged to monitor the situation closely.

But Canada also just posted some of its biggest jobs gains in years. And some parts of the country's economy can benefit from interruptions in U.S.-China trade. Several Canadian agricultural sectors prospered in 2018, as Trump launched his tariff attack against Beijing. Even this year, despite a drop-off in certain exports to China, Canadian wheat producers say their exports to the Asian economic powerhouse have risen as competitors in Australia deal with drought and U.S. producers face barriers. Canadian lobster exporters are also reporting huge gains.

What about the USMCA?

Trudeau's government initially faced criticism at home for signing the new USMCA without getting relief from Trump's steel and aluminum duties. A tariff-relief deal was finally reached in May, and Trudeau's negotiators managed to avoid a quota on Canadian exports, as well.

Liberals have heralded USMCA as a win for all three countries, specifically pointing to the preservation of NAFTA's dispute-settlement mechanisms — which the U.S. had opposed — and the inclusion of bolstered labor and environmental standards. The deal included concessions that will cut into the bottom lines of Canadian dairy producers, a reality that could hurt Trudeau in Quebec, an important campaign battleground.

Trudeau has readied Canada's ratification bill but held off on a formal vote until it's clear the agreement can be approved in the U.S. Congress. A vote in Canada won't happen until after the Oct. 21 election. That's because U.S. House Speaker Nancy Pelosi has said she will not allow a vote on a U.S. implementing bill until the Trump administration resolves concerns House Democrats have with the deal's enforcement, labor, environmental and prescription drug provisions. Trudeau's Liberals have said they’re opposed to reopening the agreement.

It's possible the USMCA ratification process in Washington could affect the Canadian campaign. U.S. Trade Representative Robert Lighthizer hopes to lock down an agreement with congressional Democrats this fall, before 2020 presidential politics take over and make a deal nearly impossible. But it's hard to predict how those negotiations will play out.

If Trump can't reach a resolution with Pelosi's top negotiators, he could revive his threat to pull out of NAFTA to force Congress to take up the USMCA. Trump has kept that threat holstered in recent months, but acting on it during the Canadian campaign — however unlikely — would rattle the North American economy and upend Canada's political debate, not to mention create danger for Trump's own reelection prospects next year.

If USMCA gets ratified in Washington this fall, both of Canada’s main parties, the Liberals and the Conservatives, have said they would push it through Parliament, too. Scheer, after helping Trudeau to present a united front during the fraught USMCA negotiations last year, initially accused Trudeau of giving up too much to Trump, before saying he'd support ratification to preserve trade stability for Canadian businesses.

But Canada's business lobby has expressed concern that campaign politics could eventually derail that bipartisan consensus. While Scheer hasn't made the USMCA a focus of his recent public statements, his party last month renewed its criticism of Trudeau's stewardship of the renegotiation.

“Trudeau cratered to Donald Trump and gave concession after concession on a number of key areas while punishing, job-killing steel and aluminum tariffs remained in place long after an agreement was reached,” Conservatives said in August.

But the party's talking point took a hit that same month when former interim Conservative Party Leader Rona Ambrose said in an interview that she doesn’t think Trump bested Trudeau at the USMCA bargaining table. “I think at the end of the day, there’s three parties, everyone gained a little and everyone gave up a little,” she said.

When the new Parliament convenes after the election, the chances of the USMCA stalling — assuming ratification in the U.S. — are low. The debate in Canada would have to take a wild, unexpected turn for the next batch of legislators to block the deal.