Showing face in the midst of trade wars

To crack the ice, what better custom than a chilled, tulip-shaped glass of Icewine? It’s become Canada’s tradition when closing deals in China, the top destination for the dessert wine. Valued at $22 million annually, Icewine serves as a bellwether for trade relationships. And in 2019, trade was as frosty as the grapes that were crushed at minus 8°C.


“Icewine adds value at the end of the season,” says Bill George Jr., Beamsville, Ontario. “It’s very important to my business – it’s about 10 to 15 per cent of our revenue.”


Due to strained diplomatic relations with China during 2019, Canadian growers and agri-businesses have been skittish about visiting the world’s second largest economy. One exception was Richard Slingerland, vice-president of sales for Pillitteri Estates Winery. With 50 per cent of the winery’s Icewine exports destined for China, he travelled to its largest annual wine trade fair in Chengdu, a southwestern city brimming with 15 million people.


“Usually 20 Canadian wineries go to this March event, but only two of us went in 2019,” says Slingerland. “It’s important to show face. It’s a strategy that paid off for us in maintaining export sales.”


Back home, the winery as a tourist destination in Niagara-on-the-Lake, Ontario didn’t fare as well. There was a 35 per cent decrease in traffic in 2019 because China issued fewer visas to its citizens for travel to Canada. As the second-most visited winery in Canada with 250,000 annual guests – many of them Chinese – the bottom line is severely dented.


For 2020, Slingerland remains optimistic and believes that Canada-China trade relations are slowly improving. However, there is still a great deal of political instability and relationship repair is required between the two countries. 


China is not a diversification strategy


This is an example of the real ruts in the trading landscape that Farm Credit Canada (FCC) alludes to in its recent report: Diversifying Canada’s agricultural exports. Specifically, ongoing trade tensions between Canada and China as well as accelerating weather and disease events will test resilience in 2020. The economic analysis casts doubt on how to achieve the Canadian objective of $75 billion in agricultural exports by 2025.   


“It would be a mistake to think that our growing export values to China represent the fulfillment of a diversification strategy,” wrote J.P. Gervais, chief agricultural economist, FCC. Agriculture Canada statistics buttress his point. In 2018, Canada exported $526 million in fruit to the U.S. and $56 million to China. That’s a reliance of 64 per cent of fruit exports to the U.S. and only seven per cent to China. Gervais points out real risks of depending on China for reliable business.


His comment proves prescient on the December 13 news of an American-Chinese phase-one trade deal. The effects on Canada will vary by commodity, whether it’s British Columbia cherries, Ontario ginseng or Nova Scotia wild blueberries. 


What is known is that Robert Lighthizer, U.S. Trade Representative told CBS Face the Nation that the rules have been rewritten in favour of American agriculture on more than half – 56% -- of all exports from agriculture. He was referencing all the deals with Canada, Mexico, Japan and China. 


"Ultimately, whether this whole agreement works is going to be determined by who's making the decisions in China, not in the United States," Lighthizer said. "If the hardliners are making the decisions, we're going to get one outcome. If the reformers are making the decisions, which is what we hope, then we're going to get another outcome."


Disruptive forces


The gorilla-sized clout of China’s state-owned enterprises is not to be dismissed as Al Mussell points out. He’s the lead for Agri-Food Economics Systems, a think-tank in Guelph, Ontario. His example is the largest state-owned enterprise: China Oil and Food Corporation (COFCO). 


“These entities don’t need to make money,” explains Mussell. “Their role is to maintain food security.”  


While the rest of the world has a modus operandiof making profit, China, through its state subsidies, can swing markets based on primary needs for food and social stability. 


There’s more disruption at hand. Lighthizer is touting that the new U.S.-China trade deal has an “enforceable” dispute resolution mechanism. Ironically, the U.S. does not hold the same position regarding the rules-based World Trade Organization (WTO). As of December 15, 2019, the dispute resolution trade panel is no longer operating. That’s because the U.S. refuses to name representatives to the appellate body, rendering it impotent. That’s a blow to a middle power such as Canada, for which dispute settlement is the central pillar of the multilateral trading system. 


Protectionism is negative 


Darci Vetter, the former chief agricultural negotiator for the U.S. Trade Representative under the Obama administration, disagrees with America’s current unilateral approach. Speaking at the Arrell Food Summit in Toronto on December 3, she said, “This fundamental change towards protectionism is negative for world trade. The focus on reciprocity, country to country, disregards the dynamism of worldwide markets. These moves increase risk and volatility at a time when the globe cannot afford to waste time or resources.” 


The United States is actively questioning whether it should be bound by rules of the WTO. 


“Almost 60 per cent of our trade is not covered by bilateral agreements and therefore depends on the rules of the WTO to keep product moving,” says Vetter. “If working outside of the WTO is the strategy of this current administration, it is a strategy that will put a lot of U.S. agriculture at risk.” 


“Other countries are making trade decisions without us,” adds Vetter. “It is costing us more to move less with trade disruptions.” Her example is China turning to Brazil as a source for soybeans and then the U.S. backfilling the Brazilian market at lower prices. These disruptive trade flows are not efficient in terms of transportation costs and the carbon footprint. 


“The U.S. is now less competitive,” says Vetter. “When the trade war with China is over, other country’s assets will be in place around the world.”


Darci Vetter showed face at the Arrell Food Summit at a critical time in trade relations. She could not have known that in days, NAFTA 2.0 would be signed in Mexico or that the U.S. would ink a deal with China. It’s too early to know what’s in store for horticulture in 2020, but there’s one trade wind to track. And that’s the hard trade numbers in dollars and volume.  

Karen Davidson, editor of The Grower,  goes “Behind the Scenes” of this story and connects with Darci Vetter. She shares her view of the recent U.S.-China trade negotiations and looks ahead to the risks for international trade in 2020 and beyond. To listen to the podcast, click here.


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Saturday, December 21, 2019

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