02/10/2012 02:51 EST | Updated 04/11/2012 05:12 EDT

Foolish to dismiss free trade talks with China out of hand, says think-tank

OTTAWA - The Harper government would be "foolish" not to pursue a free trade agreement with China, despite the political differences between the two countries, says the head of the Asia Pacific Foundation of Canada.

Yuen Pau Woo said Friday the overture from the Chinese premier during his meeting with Harper earlier this week was somewhat of a surprise, but should not be dismissed.

On the surface, the two countries would seem unlikely economic partners. One is a democracy, the other a Communist dictatorship. One has a floating currency; the other manipulates its currency to boost exports and dampen imports; one is moving slowly to open markets, the other is among the most open in the world.

Yet the two can move to deepen their economic partnership, Woo said, as several limited trade deals penned this week shows, including a long-sought investment protection deal or FIPA.

Canada shouldn't hesitate to go as fast as China wants in pursuing a comprehensive trade deal, said Woo, president of the Vancouver-based think tank on Canada-Asia relations.

"There are two big prizes in the world when it comes to market access — we've got the United States, but we don't have China," he said in an interview. He noted Canada currently has no free trade agreements in Asia, and has no guarantees it will be accepted in the transpacific partnership block it is seeking to join.

"Look, many western countries would die to be in this position. The FIPA is peanuts compared to what might transpire through a broad-based free trade agreement."

When the idea of exploratory talks was floated earlier this week, Canadian officials sought to downplay the proposal as premature.

"We’re not going to get ahead of ourselves," reacted International Trade Minister Ed Fast.

Woo said he hoped the soft pose was for public consumption only and that officials are busy at work probing China's seriousness. He said Canada has more to gain than lose in pursuing free-trade talks with a country that will have the world's biggest economy within a decade.

Canada already has an open trading regime in manufactured goods, so a trade deal would not be overly negative to the factory sector. But Canada has a lot to gain from obtaining access to China's protected agriculture and services sector, particularly financial services, professional and business services and telecommunications.

"We have a huge untapped expertise in services and that could be a very big win for Canada," Woo said. "And I haven't even talked about resources. I'm surprised we're not jumping up and down about this."

Trade lawyer Lawrence Herman of the Cassels Brock legal firm said he sees no obvious impediments to a free trade deal, not even the currency situation, He noted that China already has a trade deal with New Zealand and is close to signing a pact with Australia, a major coal, mineral and grain supplier to China.

"I think for China it's just part of their natural evolution as a world economy." But Canada would need to get in line, he said — there are plenty of countries that want a free deal with the world's fastest growing economy.

A recent report by University of Toronto's Rotman School of Management said a free trade agreement would be beneficial but difficult to negotiate, particularly as China has shown reluctance to liberalize its services sector.

Export Development Canada chief economist Peter Hall says just engaging in the process of talks may bring benefits to Canada because it offers both sides an opportunity to discuss their differences.

Canada ships minerals, coal, potash, uranium and other resources to China and buys back electronics, machinery and other finished goods.

Many big Canadian companies — from Bombardier Inc. to Teck Resources and CAE — do business with China. Meanwhile, insurance giants such as Manulife and Sun Life do joint venture business there and the large Canadian banks are also growing operations in the country.

China is thirsty for Canadian oil and Harper has said he is anxious to build a pipeline through British Columbia that would make it possible to ship Alberta oilsands crude via tankers across the Pacific.

But launching talks would likely also face stiff opposition in Canada, both from the usual critics of free trade and some new ones.

Currently, China enjoys a three-to-one advantage in the trade flow. Chinese exports to Canada in 2011 are projected to have hit $50 billion, much in manufactured goods, while Canada's exports were expected to total about $17 billion, with resource exports quadrupling in the last five years.

A free trade deal would only worsen the trade deficit, said Jim Stanford, chief economist with the Canadian Auto Workers union.

"The thing to keep in mind with China is they have a very state-directed development program, using state money to build national champion companies that go out and conquer world markets," he said.

"I think the status quo is going to see increasing harm, but a free trade agreement on the NAFTA model would accelerate that harm."

And Harper might face a political backlash, even from inside his own ranks, given that only five years ago he and members of his government were openly criticizing China's human rights record.