Tariff wars are a recurring feature in the global trading system, and tensions between China and Canada have been ongoing for years. These tariff wars are largely driven by geopolitical tensions.
Author
Sylvanus Kwaku Afesorgbor
Associate Professor of Agri-Food Trade and Policy, University of Guelph
In 2019, for instance, China banned Canadian meat imports following the detention of Huawei's chief executive officer, Meng Wanzhou. Although China cited the use of banned feed additives in Canadian meat as the reason, many viewed it as a diplomatic response to the rift between Ottawa and Beijing.
Now, China is threatening to investigate Canada for potential dumping of canola into its market. In international trade, dumping is a type of price discrimination where a product is sold at different prices in domestic and export markets. Essentially, it involves selling a product in a foreign market at a price lower than its normal value in the home country.
This decision came after Canada imposed a 100 per cent tariff on electric vehicles and a 25 per cent tariff on steel and aluminium from China effective Oct. 1, 2024. It's clear this move by China is a direct retaliation for the tariffs on electric vehicles.
Trade tensions between countries can severely disrupt international trade. My previous research demonstrated how trade tensions between Canada and the United States during Donald Trump's presidency negatively impacted trade between the two countries, particularly in the agri-food sector.
The mere threat of an anti-dumping duty can discourage imports, making anti-dumping laws a form of non-tariff barrier, even when the duty is not actually imposed. Although China has only announced a dumping investigation, the prices of canola oil futures are already being impacted.
Anti-dumping procedures
As members of the World Trade Organization (WTO), both Canada and China are required to ensure their trade policies comply with its regulations.
Under the WTO framework, members can take action against dumping to protect their domestic markets. However, such actions must follow the established WTO protocols, including filing complaints through the organization's dispute settlement mechanism.
The WTO's Anti-Dumping Agreement outlines how countries can respond to dumping. In this case, China would need to prove that Canada is dumping canola, quantify the extent of the dumping and demonstrate that it is causing or threatening harm to Chinese canola farmers.
If China's investigation uncovers evidence of dumping, it has the right to impose anti-dumping duties. These duties are applied when dumping is proven and shown to have harmed the domestic industry.
The threat or imposition of such duties could significantly disrupt Canada's canola exports to China, which would have serious implications for Canadian farmers who rely heavily on global markets to sell their products.
Canada's canola export to China
Canada exports 90 per cent of its total canola production, with exports of canola seed, oil and meal amounting to $15.8 billion in 2023. China is Canada's second-largest importer of canola, after the U.S., with imports totalling $5 billion in 2023.
This means China accounted for nearly one-third of Canada's total canola export value that year. Notably, China is the largest market for canola seed, while the U.S. is the largest market for canola oil and meal.
Canola is predominantly exported to China in its primary form (seed) rather than as processed products (oil and meal). The data shows there were stable exports to China from 2014 to 2018, but there was a sharp decline in canola seed exports starting in 2019, which persisted until 2023.
This drop coincides with a period of diplomatic tension between Canada and China, suggesting that trade disputes can have a significant negative impact on bilateral trade. Thus, signalling the current trade war could have devastating effect for canola farmers, especially as China accounts for about 65 per cent of Canada's canola seed export.
Additionally, Canada's canola exports have shown limited diversification, relying heavily on just four countries: the U.S., China, Mexico and Japan. Together, these countries accounted for 98 per cent of Canada's total export value in 2023.
The U.S. led with imports worth $8.6 billion, representing 54 per cent of Canada's total exports, followed by China with $5 billion (32 per cent), Mexico with $1 billion (six per cent), and Japan with $883 million (5.6 per cent).
This heavy reliance on few markets heightens Canada's vulnerability to trade disruptions. If China imposes anti-dumping tariffs, this could make Canadian canola not competitive in the Chinese market, Canada could risk losing 30 per cent of its canola export value to other potential suppliers. The Canola Council of Canada has acknowledged China as an important and valued market for Canada's canola.
What's the way forward?
Like many advanced economies, Canada seeks to shield its domestic market from the influx of low-cost Chinese products, such as electric vehicles. However, Canada must exercise caution, particularly when adopting trade policies from larger economies like the U.S. and the European Union.
These larger economies hold greater leverage in international trade negotiations, unlike Canada, a small open economy that faces greater risks in engaging in a trade war with China.
Moreover, to support a swift transition to a green economy and help Canada meet its climate target of achieving 100 per cent zero-emission vehicle sales by 2035, it is essential that electric vehicles become more affordable for the average Canadian.
Instead of escalating trade tensions with China, Canada should explore alternative measures such as safeguards or tariff rate quotas on Chinese electric cars. Those approaches could be mutually beneficial and less likely to provoke a tit-for-tat retaliation.
Imposing a prohibitive tariff on electric vehicles from China would come at the expense of other Canadian sectors that rely on Chinese buyers. Canada must tread carefully to avoid sacrificing jobs in the agricultural sector while trying to protect those in the automobile industry.
Canola farmers, in particular, would likely bear the cost of Canada's unilateral tariff on China. Numerous other sectors could also be targeted, as China would likely retaliate by matching the impact on its own exports.
Canada must strive to minimize diplomatic tensions and avoid trade wars with major global market players, as such conflicts are becoming increasingly frequent. Recent trade disputes, including those with the U.S. during the NAFTA renegotiation, Saudi Arabia over human rights issues and China following the detention of a Huawei executive, can significantly undermine Canada's export competitiveness.
Sylvanus Kwaku Afesorgbor receives funding from Ontario's Ministry of Agriculture, Food and Rural Affairs. He is affiliated with the Centre for Trade Analysis and Development Africa.
