12/19/2018 11:48 EST | Updated 12/19/2018 11:49 EST

Dumping The Loonie, And Other Ways China Could Retaliate Against Canada

British Columbia is “particularly exposed” to the fallout from the arrest of Huawei’s CFO, a new analysis finds.

A protester holds a sign outside the B.C. Supreme Court bail hearing of Huawei CFO Meng Wanzhou, Vancouver, B.C., Dec. 11, 2018.

MONTREAL— China has threatened Canada with "severe consequences" over the arrest of Huawei CFO Meng Wanzhou in Vancouver earlier this month.

So far, the country's actions have consisted largely of arresting Canadian nationals on Chinese soil, with the third such arrest reported on Wednesday.

But beyond that, what could China do, if it chose to take action? Experts agree the country, now the world's second-largest economy, has an arsenal of economic weapons at its disposal.

Watch: Third Canadian detained in China. Story continues below.

One thing China could do is try to sink the loonie by selling off its reserves of Canadian dollars, speculated Stephen Brown, chief Canada economist at Capital Economics.

Though China doesn't divulge how much foreign cash it holds, Brown estimates the country has built up a stockpile in the range of $80 billion in Canadian cash, from years of selling more to Canada than it buys. That's enough to wreak a little havoc in the markets.

Brown says China would likely not do something like this to a major power like the U.S., but with Canada, the stakes are lower.

"With a small country like Canada, China could plausibly sell off [the Canadian dollar] if it wanted to cause market volatility," Brown told HuffPost Canada by phone from London, England.

Earlier on HuffPost Canada:

Saudi Arabia tried something like this with Canada during a diplomatic row with the Trudeau government over human rights earlier this year, with the Saudi government apparently dumping Canadian stocks.

But China isn't very likely to try such a brazen maneuver, Brown said, because the country's politicians are trying to position themselves as responsible stewards of the world economy. And in any case, it's easier to "coerce Chinese state-owned companies to stop buying Canadian goods."

Indeed, Chinese state-owned media have already hinted at a boycott of Canadian goods.

Some of China's previous boycotts have had powerful effects.

South Korea's economy took a major hit in 2017 after China launched a boycott over its neighbour's implementation of a U.S. missile shield. Visits by Chinese nationals to South Korea dropped by two-thirds.

Probably couldn't cause a recession

But the impact on Canada would not be that extreme. Canada's trade relationship with China is still small enough that a boycott "would not cause a nationwide economic downturn," Brown wrote in an analysis released this week.

Only five per cent of Canada's goods exports, and three per cent of services exports, go to China.

All the same, certain parts of the country and certain industries would take a hit.

Among provinces, British Columbia would be "particularly exposed. It accounts for 50 per cent of Chinese tourist arrivals and its housing market has been the most influenced by Chinese buyers," Brown wrote.

Besides B.C., Nova Scotia and Saskatchewan would also feel the hit, as 13 per cent of their exports go to China.

If exports to China were to decline by 10 per cent, it would reduce B.C.'s economic output by 0.3 per cent, while Saskatchewan would take a 0.5-per-cent hit, because it's more reliant on exports than B.C., Brown said.

By comparison, central Canada would be left largely unscathed.

Thomson Reuters/Capital Economics
British Columbia has the largest exposure to a trade war with China. Fully 15 per cent of its exports go there.

Broken down by industry, farm and food exports would be at greatest risk, with one-fifth of exports in the sector going to China. Forestry products and metal ores/non-metallic minerals would also be exposed, with 13 per cent of exports bound for China.

Thomson Reuters/Capital Economics
The industries most exposed to a Chinese boycott.

So far, China has only hinted at possible economic action against Canada, but even that has had an impact. Shares of Canada Goose came under heavy pressure last week after the Chinese state-controlled Global Times suggested consumers in the country may boycott the retailer's famed parkas.

Crackdown on Vancouver property?

Some market analysts have argued Vancouver's housing market, already struggling with the lowest sales levels in years, could take a further hit from the fallout over Meng's arrest.

Brown noted that "it's a grey area" for Chinese nationals to be able to buy property abroad. Technically, the practice remains illegal, so "China could crack down on that" in Canada, he said.

And finally, the fallout has put a pause on Canada's plans to pivot away from reliance on the U.S. and shift towards rapidly-growing Asian markets.

B.C.'s government suspended the Chinese leg of a trade trip to Asia to promote the forestry sector. And Destination Canada, a federally-run tourism board, has suspended its winter tourism campaign in China.

Even expanding trade relations with other Asian countries will be difficult for Canada now because "they don't want to run afoul of China," Brown said.

It could be years before things normalize between China and Canada, Brown suggested.

He pointed to a trade war between China and Norway over the issuing of a Nobel Peace Prize to Chinese human rights activist Liu Xiaobo.

After years of tensions, relations between the two countries are now finally returning to normal eight years later.