The Past Speaks

I’ve finally had the chance to sit down and collect my thoughts about the place of Canada in the ongoing trade war between China and the United States. I haven’t had much time to blog in the last few weeks, as I’ve been busy with article revisions. Moreover, Brexit-related news has occupied a large proportion of my media diet since I live in the UK. However, as someone who has a Canadian passport and still identifies with Canada, I feel obliged to share my ideas as a business historian and management academic about the ways in which Canada has been caught between China and the U.S., or to personalize the dispute, between Xi and Trump.

Unlike the so-called trade wars of the 1980s and 1990s, which were simple commercial disputes between nations that were military allies (e.g., West Germans complaining about alleged Japanese steel dumping), the ongoing dispute between China and the US is reminiscent of the Anglo-German trade dispute of the early twentieth century. That trade dispute was connected to geopolitical and naval rivalry between two great powers that later boiled over into an actual war.  In a sense, the current trade war is far more serious than the trade disputes of living memory, such as the 1970s complaints about Japanese industrial policy or the 1960s “chicken war” between the US and the EEC.

I’ve had a chance to review the coverage in the financial press of the case of  (I found particularly good analysis here, here, here, here, and here).

It seems to me that Canada’s leaders face some very difficult decisions right now. It also appears that certain features of the Canadian academic system mean that Canadian academe has a limited capacity to provide advice to Canadian policymakers. Let me explain what I mean by both of these statements.

Doug Bandow, a Washington-based China policy analyst sums up the case of Meng Wanzhou quite nicely here.

Amid controversy over a maybe yes/maybe no ceasefire in Donald Trump’s trade war with China, the United States engineered the arrest by Canada of a top Chinese executive for allegedly busting U.S. sanctions on Iran. The detention sparked outrage in Beijing, which threatened Canada with “grave consequences” if Meng Wanzhou is not released.

In essence, the US government wants to destroy Huawei Technologies Co Ltd. The American government’s motives for doing so likely include a mixture of genuine fear that some of the firm’s products constitute a security threat and special pleading/lobbying by the non-US firms that are losing market share to Huawei. The basic story goes like this: a top Huawei executive made the mistake of assuming that she could safely travel through Canada since it’s an independent country with a flag and its own currency and other markers of sovereignty. She was arrested in Vancouver airport by the Canadian police at the behest of the US authorities, who have requested her extradition to the US.  The Canadian Prime Minister has loudly and implausibly denied that her arrest had any sort of political motivation. He has asserted that Canada’s legal system is “independent” of that of the United States.  This assertion is risible in light of President Trump’s own (ill-advised) statement that the arrest of the executive gives him more leverage over the Chinese in his ongoing trade talks with the US. The Guardian and the South China Morning Post have recently reported  that the arrest may “dash” Canada’s hopes of a bilateral trade deal with China. The reality is that achieving such a trade deal became a remote possibility the moment the Canada signed the revised NAFTA agreement (USMCA), which effectively gives the US the right to veto future Canadian trade agreements with countries the US deems to be “non-market economies”, which effectively means China.

As Paul Krugman has observed, the US has legitimate concerns about China over trade issue. Any US president, including Hillary Clinton, would likely be pressuring Beijing right now to address the concerns of US investors in China about forced technology transfer. Any US president would be speaking up on behalf of domestic producers who allege dumping by state-supported Chinese competitors. There are many issues that should have been addressed before 2001, when China joined the WTO but which the Clinton and Bush administrations opted to ignore in the interests of getting China engaged into the Bretton Woods institutions. Trump’s concerns about China are thus not entirely with foundation.  However, under Trump trade policy has become closely connected to a geopolitical strategy that rest on the idea that China is the main antagonist, even the enemy of the United States.  Steve Bannon, who was formerly Trump’s chief strategist and a leading Sinophobe, continues to praise Trump’s grand strategy for encircling China and waging economic warfare with it. One can well understand why so many US and now Chinese academics are worried that the US and China are falling into the so-called Thucydides Trap.

In my view, the fact that Canada’s government has opted to side with the US in its dispute with China is hardly unsurprising. Many Canadians, especially English-speaking Canadians and those on the right of the political spectrum, identify closely with the US. Such Canadians do not regard the US as just another foreign country, or even a foreign country at all. Those who have an ideologically- or emotionally-driven preference for aligning Canada closely with the US have various data points that can use, such as the fact that most of Canada’s exports still go to the US. Moreover, the text of the USMCA agreement essentially commits Canada to giving the US a veto over future commercial agreements with China.

At the time the text of the USMCA agreement was signed,  Michael Chong, who is an uncharacteristically intelligent and well-read member of the Canadian parliament, attacked the veto provision on the grounds that it made Canada a “vassal state” to the United States. In October, Chong, who is, we should note, of partly Chinese ancestry, was scathing in his denunciation of the now notorious Article 32.10  of USMCA. His words were:

Mr. Speaker, 100 years ago, 60,000 Canadians died in the Great War. Their sacrifice and bloodshed is full of the remembrance of that war. Parliament is full of reminders of that sacrifice. Their bloodshed paid for an independent Canadian foreign policy. It paid for our signature on the Treaty of Versailles. It paid for the Statute of Westminster, but the current government was so desperate for a deal that we now have to ask Washington for permission to negotiate free trade with certain countries. Article 32 makes us a vassal state. Is this restoring Canadian leadership in the world? Is this standing up for Canada?

Chong’s remarks, which show that he thinks historically about Canada’s place in the world, effectively suggest that Canada, which was formerly a British colony, has allowed itself drift into being a colony of the US. As every Canadian schoolchild knows, Canada’s colonial status resulted in it being sucked into the “vortex of European militarism” and the carnage of the First World War. Chong is intimating that Canada may inadvertently be signing itself up to Trump’s zero-sum worldview.

In accepting the USMCA agreement, Canada’s current government was making a judgement call that many, particularly those who work in the complex value chains that criss-cross the Canadian border, will probably regard as correct. After all, cancellation of NAFTA, as Trump had threatened, would likely have devastated these value chains. Clearly some difficult trade-offs between sovereignty and prosperity were made by the Canadian politicians who ultimately designed to consent to Article 32.10.

I’m uncertain on whether this judgement call was correct. What I do know is that the Canadian academic system is ill equipped to provide advice to policymakers who face this type of dilemma. This dilemma (trade-off between sovereignty and prosperity) is one that every small and medium sized country, particularly one that is caught between two great powers, faces. Just ask any historian in Luxembourg of Switzerland.

One of the tasks of a country’s universities is to supply advice to policymakers. The provision of such advice is one of the arguments for public funding of universities. Now the US universities have a considerable capacity to  provide advice to US policymakers dealing with the grand challenges associated with the rise of China. Graham Allison of Harvard is an outstanding example of such a public intellectual. I could provide other examples, such as Phil Tetlock of Wharton Business School, whose research on forecasting can help US policymakers to make better judgement calls. Whether or not the current inhabitant of the White House is listening to such advice, the fact remains that US universities are attempt to provide such advice to the leaders of the US.

The situation in Canada is quite different. Diplomatic history (e.g., studies of the rise and fall of great powers) is noticeably weak in Canadian universities, even though such research would appear to be helpful for thinking about Canada’s current policy dilemmas. Moreover, Canada’s political science and IR departments are filled with scholars who are from the US and whose frame of reference is totally American. These are academics who may live in Canada and draw a salary in Canadian dollars, but when they refer to “the country”, they are talking about the US. Such academics are neither socialized nor incentivized to think about Canada’s distinct national interests, let alone to invest time in speaking to Canadian policymakers.

I also think that the quality of the advice that the Canadian university system can supply to policymakers is reduced by the fact that economic history and business history are underdeveloped subjects in Canadian universities, especially in contrast to the UK. I think that these disciplines have something useful to say to policymakers attempting to chart an independent path between these two great powers. First, business historians have published extensively on how great power rivalries have created both threats and opportunities for firms in smaller economies, such as Switzerland, the Netherlands, Sweden, etc. My friend Pierre-Yves Donzé at the University of Osaka has published such research, as have other top business historians (see here, here, and here). In theory, there is nothing to stop a Canadian business historian from drawing on the research of these European business historians  in trying to figure out what sort of geopolitical stance relative to China and the US Canada could take that would maximize opportunities for Canadian firms. In practice, however, policymakers are more likely to listen to academics in the same country. Since Canadian universities employ few business historians, there is nobody in Canada who can draw on the research of these historians and explain in an “elevator pitch” why it is relevant to Canada’s current policy dilemma.

Economic history is also relatively under-developed in Canadian universities. The Canadian Network in Economic History includes some great scholars, such as David Jacks at SFU, but compared to the UK, Canada’s capacity for economic historical research is weak. I know of some great Canadian citizen economic historians who work outside of the country (Vincent Geloso is one of them) and the fact they don’t work in Canada speaks volumes about how much Canadian universities care about economic history. UK economic historians such a Nick Crafts and Tim Leunig can and do speak to policymakers, but that doesn’t happen in Canada so much.

As a business historian who follows the economic-historical literature closely, I think that economic historical research is highly relevant to thinking about Canada’s current policy dilemma. As I see it, the central policy dilemma facing Canada is this: does Canada want to closely align itself with the US or does it want to distance itself with the US so it can remain on good terms with China?

What does the current state of the art research in economic history say about what Canada should do here? One of the things that research of scholars such as Joel Mokyr and other economic historians has made clear is that unimpeded knowledge flows are so central to improvements in Total Factor Productivity and rising living standards. The sharing of useful knowledge is the key theme in Mokyr’s account of the British industrial revolution. Britain was blessed with a bit of coal, the more important thing was that it had mechanisms for sharing good ideas about how to be more productive. Britain and the Netherlands were the country’s the basically invented economic growth and the next group of countries to steal this precious invention were the ones that were best able to take good ideas that had been invented in the UK and the Netherlands (e.g., steam engines and stock exchanges) and to copy them. These nations were either physically close to the countries at the productivity frontier or linked them by language (e.g., the US).  Due to language barriers and impediments created by governments, it took longer for these good ideas to reach places like Japan, but once the good ideas reached those shores those nations as began to start experiencing economic growth. The key lesson here is that if a nation is going to grow, it needs to be open to good ideas wherever they come from. “Not Invented Here” is a terrible attitude for a nation to have.  The nations that borrow good ideas from other nations without distinction to geography, race, creed, or other extraneous variables are likely to do better than those that only pool knowledge with their kith and kin.

Until generation or so ago, the inhabitants of only handful of nations had the opportunity to make a substantive contribution to the growth of useful knowledge. Most human were mired in poverty or locked behind Berlin Walls, so the rest of the human race couldn’t capture the benefits of their ideas. In the last generation, about two billion people have been lifted out of a poverty and hundreds of millions have escaped from agrarian misery, which means they now have the chance to contribute to humanities stock of knowledge. The internet facilitates the rapid diffusion of good ideas, which is why I am so dismayed to see evidence that the internet is being balkanized into at least two internets, a Chinese-dominated internet and a version of the internet that is dominated by US norms and firms. Splitting the internet up in this fashion is likely to slow down the diffusion of ideas. The efforts of the Trump administration to drive Huawei, an innovative firm whose products are at least as good as those of its American competitors, from the American sphere of influence is another sign that things are moving in the wrong direction. Chinese entrepreneurs, scientists, and engineers have so much to offer to the world right now. According to US venture capitalists who work in China, Chinese start-ups are hotbeds of creativity similar to that witnessed in the golden age of Silicon Valley. That’s why companies like Sequoia Capital are there.  We in the West need access to Chinese ideas if we want to increase our growth rates. If the US wants to shut itself off from Chinese tech companies, and thus Chinese ideas, there isn’t much Canada can do about it. However, Canada should resist all pressure from the US to adopt policies that limit the ability of Canadians to benefit from clever ideas that happened to have been developed by a Chinese rather than an American brain. Canada might want to give into US pressure on other issues, but it needs to ensure that Chinese ideas and Chinese tech firms such as Huawei remain welcome.

If we accept that the free flows of ideas is the foundation of economic growth and that a country will be better off if it accepts good ideas from all directions, we can conclude that Canada ought to release the imprisoned Huawei executive and make it clear that it is open to doing business with China’s best and brightest entrepreneurs and technologists.