Economists worry growing conflict with China will make Canada and the world poorer

Canadian domestic politics have helpedmagnifythe most recent dispute between Beijing and Ottawa into a full blown tit-for-tat expulsion of diplomats.

While someexperts who track relations between China and Canada play the spat down one called it "pretty trivial" it'sone more crack contributing to afar more dangerous long-term rupture.

Labelled"global fragmentation," theissue was raised at a recent International Monetary Fund meeting in Washington, D.C.The currentCanadian dispute may represent a further fracturing ofthe world into competing trade blocs that will not only make us all poorer, but impede crucial talks on shared global threats, including climate change and artificial intelligence.

Diplomacy's economic impact

Critics of the Canadian government's handling of threats against Conservative MP Michael Chong'sfamily in Hong Kong would not see the issue as trivial.

While far less significant than previous disputes with Beijingthat in the past led to the long-term imprisonment of innocent Canadians and may have contributed to persistent trade sanctions, the latest Canada-China spat is only one sign of hostility between the world's free-market democracies and what appears to be an emerging alternativebloc.

"Even as we need more international co-operation on multiple fronts, we are facing the spectre of a new Cold War that could see the world fragment into rival economic blocs," warned IMF bossKristalina Georgievaearlier this year. "This would be a collective policy mistake that would leave everyone poorer and less secure."

Bank of Canada governor Tiff Macklemraised the issue in testimony to the Senate standing committee on banking, commerce and the economy last month after discussions in Washington.

'Cost to global growth'

"The reality is we have all benefited tremendously from an increasingly integrated global trade and investment system and if that goes in reverse, that will certainly have a cost to global growth," Macklem told senators.

"From Canada's perspective, as a small open economy and a democracy, wealways havehad an interest in this rules-based multilateral international order, basically, and that's kind of an imperative for us," said Goldfarb in a phone conversation this week.

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Goldfarb, who is also a fellow with the Vancouver-basedAsia Pacific Foundation, said that until a few years ago, Canadian policy on China by both the current governingLiberals and the Conservatives before them assumed that welcoming the growing giant into global networks would make rules-based trade stronger.

"But we're seeing something different now," said Goldfarb.

As Deputy Prime Minister Chrystia Freelandoutlined in a Washington speech last year, the failure of autocracies like Russia and China to follow what western countries considered free and fair trade rulesmeansdemocracies must reshape their strategies.

The danger of 'decoupling'

"You can't simply disengage from the secondlargest economy in the world," she said, pointing out that China isalready beginning to develop policy in the important area of generative artificial intelligencethat others, including Canadian AI leader Geoffrey Hinton, say demands global co-operation.

Canada and its allies know it is essential to keep the door open on "global public goods" including AI policy, climate change and avoiding nuclear conflict, said economist Dane Rowlandsat Carleton University's Patterson School of International Affairs in Ottawa. But he saidrelations with China have never been so bad.

WATCH |Canada braces for retaliation over Chinese diplomat's expulsion:

Canada braces for retaliation over Chinese diplomat's expulsion

1 year ago

Duration 2:36

China expelled Jennifer Lynn Lalonde, a Canadian diplomat in Shanghai, just hours after Canada named Chinese diplomat Zhao Wei persona non grata over allegations he tried to intimidate a Conservative MP's family. Government sources say China could make further retaliatory moves involving trade or security.

At the heart of the growing conflict is the expandingclout of China as an economic and military power that inevitably destabilizes the status quo as it challenges the dominance of the United States and its allies.

"It's not that the United States has shrunk dramatically in terms of its share of the global economy," said Rowlands.But the U.S. bloc is no longer able to dictate in world affairs, he added.

Feeling their growing power

"When they set a policy ... they wouldn't really have to care how much other countries bought into the idea," he said of the U.S. But in their reaction to sanctions on Russia, he said that China and India have shown they can now frustrate U.S. and European policy. That is relatively new and a source of friction.

Goldfarb, Rowlands and many others have said that Canada's ultimate goal must be to use any influence it has to preventthe conflict between China and the U.S. from escalating into war.

But as the IMF'sGeorgievahas described, disruptions short of war could have a serious effect on the world economy.

"The IMF's view is that globalization is great," said Rowlands. "We should just let industries go to wherever they're going to be more efficient."

Responding to what some see as Chinese bullying in the Chong case may be one way of pushing back on the diplomatic front.

But Rowlands said that as security concerns grow and China threatens to block essential goods such as rare earth minerals, which it has done, it becomes imperative for Canada and its allies to become more self-sufficient, even if that makes us a little poorer in theshort run.

"I think it's a fair argument to make that by importing goods from overseas and letting them do all the production, that we are losing certain advantages economically, as well as as I mentioned, strategically in terms of security."