CANADIAN TRADE MISSION TO CHINA HIGHLIGHTS

UNCLAS SECTION 01 OF 03 OTTAWA 000382

SIPDIS

GENEVA FOR USTR

STATE FOR EB/TPP/BTA AND WHA/CAN - HOLST

DEPT PASS USTR FOR ALLGEIER, MELLE AND CHANDLER

USDOC FOR 4322/ITA/MAC/WH - BENDER AND HERNANDEZ

USDOC PASS ITC

TREASURY FOR IMI

E.O. 12958: N/A
TAGS: ETRD EINV PREL CVIS KFRD CH CA
SUBJECT: CANADIAN TRADE MISSION TO CHINA HIGHLIGHTS
ENERGY, EDUCATION, TECHNOLOGY, TRANSPORTATION

REF: (A) OTTAWA 228
(B) 04 OTTAWA 2885 (Canada investment rules)
(C) 04 OTTAWA 625 (Canada-Asia trade)



1. SUMMARY/INTRODUCTION: Economic relations with China were
a key focus of Prime Minister Paul Martin's January tour of
South and East Asia (which also touched on tsunami relief
and a range of political issues - see ref A). China
displaced Japan in the past decade as Canada's largest
trading partner after the United States. In recent years,
growth of this trade has been concentrated in resource-based
commodities such as wood and wood pulp, metals, energy
products and chemicals. A separate report will outline
Chinese investors' interest in Canada's energy sector.


2. Ref C outlined Canada's trade relations with major East
Asian partners. Canadian businesses share most of the
problems of their U.S.-based counterparts (indeed, in many
cases they are the same corporate entities, and/or Canadian
content is trans-shipped through U.S. firms). Canadian
officials have come to view these trade relations in a
continental framework.

END SUMMARY/INTRODUCTION

TRADE THRUSTS: SERVICES NOW, OIL TO COME?
--------------


3. International Trade Minister Jim Peterson led the
trade side of the January 18-25 Canadian mission, which
visited Shanghai, Beijing and Hong Kong. Some 280 Canadian
companies were represented, and over 100 company-to-company
agreements were signed, along with ten government-to-
government agreements in a range of areas. While some of
these "agreements" merely commit the parties to further
talks, there appeared to be real substance in the following
areas:


4. ENERGY AND MINING: Canada and China have formed a
deputies-level "joint working group" on energy, with
specific reference to oil sands and nuclear technologies.
Canadian policymakers are thinking of China as a strategic
market for oil (see septel) and forest product exports from
western Canada. One Canadian firm signed a five-year
agreement to supply crude oil to China. More immediately,
Canadian firms will provide a variety of services to help
develop energy resources in China, such as oil and gas,
thermal electricity generation, and coal-based methane and
methanol. Others agreed to help explore and develop gold
and other metal deposits, and to develop mining facilities
in China. The GOC continues to seek stronger investor
protection for these players, some of whom have ventured
into exploration in China only to find themselves excluded
from the benefits of development and production.


5. EDUCATION AND TRAVEL: Nearly 30 commercial agreements
were signed in the educational services area alone. In most
cases, Canadian organizations would help establish training
programs in China, in a range of areas from auto repair to
nursing. Some of these programs would prepare Chinese
students for entry into programs in Canada. Also, on
January 21, 2005 China granted "Approved Destination Status"
(ADS) to Canada, meaning that Chinese citizens are now able
to travel to Canada for tourism; previously Chinese could
only visit for business purposes. Canadian interests spent
five years negotiating ADS, which they expect will reverse
the recent decline in Chinese tourism to Canada and raise
the number of Chinese visitors to one million per year by

2010.


6. TECHNOLOGY: Numerous deals involve Canadian firms
providing products and services in areas such as
livestock genetics, pharmaceuticals, cancer
diagnostics, fiber optics, wireless communications,
data exchange, multimedia production, imaging, and
satellite TV. One telecom industry veteran who took
part told us that the Chinese tend to be overly focused
on engineering, and can benefit from North American
help in learning the crucial "human side" of technology
businesses: project management, quality control, brand
development, marketing, and customer service.
(Comment: While Canadian media have quoted
intelligence sources' warnings about Chinese
technological espionage, this did not come up in our
conversations with trip participants. End comment).

CHINA IN THE INTERNATIONAL SYSTEM
--------------


7. In addition to the deputies-level working group on
energy mentioned above, Canada and China have also
formed a deputies-level "strategic working group" to
deepen cooperation in the multilateral arena. On the
economic side, this group is tasked to do the
following:

-- support a meeting of G-20 leaders.

-- identify areas for cooperation in APEC and the WTO.
The two sides promised to make joint efforts for the
early conclusion of the Doha Development Agenda.

-- work together in multilateral environment fora.


8. A joint statement said that "China reiterates its
concern on the issue of market economy status and
underlined the significance it attaches to the issue.
Canada acknowledges that China has made significant
gains in the process of building a mature market
economic system." One senior Canadian official
acknowledged that market economy status is not
something that can be "conferred" by trading partners,
but said this wording was a result of pressure from the
Chinese. Officials have told us that this wording will
make no practical difference in how Chinese exports are
treated in AD/CVD investigations; the Chinese have
probably been pushing the issue to bolster their case
for market economy status with the U.S. and other
trading partners.

NORTH PACIFIC SHIPPING "FAST TRACK"
--------------


9. Vancouver, Canada's dominant West Coast port, has
been challenged in recent years to keep up with the
expansion in trans-Pacific goods traffic. One feasible
Canadian alternative is Prince Rupert, near the
southern tip of the Alaska panhandle, where a
transcontinental rail line already connects to a deep-
water harbor. Promoters have advanced the idea that if
this underused grain port were redeveloped for
container and/or commodity traffic, its northern
location - which makes it relatively close to key East
Asian ports - would give it an advantage over other
ports on North America's west coast in "fast-tracking"
goods to central and eastern North America.


10. Prime Minister Martin endorsed this "Pacific
gateway" concept in his speech in Beijing on January
21, saying that Vancouver and Prince Rupert form "the
ideal gateway from China to North America and from
North America to China." The GOC is considering
helping to finance the expansion of Prince Rupert's
infrastructure.


11. Prince Rupert is also the port through which crude
oil from Alberta's oilsands would most likely be
shipped to Asia. Enbridge, a major pipeline firm, is
proposing to build this line and is seeking commitments
from Asian refiners.


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TABLE 1
CANADA'S EXPORTS BY COUNTRY
(BILLION CANADIAN DOLLARS, JANUARY-NOVEMBER DATA)
-------------- --------------
2004 PERCENTAGE CHANGE
MARKET EXPORTS OVER 2003
UNITED STATES 322.3 7.0
JAPAN 7.8 5.1
U.K. 6.7 20.9
CHINA 6.0 41.9
MEXICO 2.7 35.3

ALL COUNTRIES 379.9 8.4

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TABLE 2
CANADA'S IMPORTS BY COUNTRY
(BILLION CANADIAN DOLLARS, JANUARY-NOVEMBER DATA)
-------------- --------------
2004 PERCENTAGE CHANGE
MARKET EXPORTS OVER 2003

UNITED STATES 191.0 1.4
CHINA 22.0 28.5
MEXICO 12.3 9.4
JAPAN 12.2 -3.9
U.K. 9.0 6.3

ALL COUNTRIES 324.9 5.0

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TABLE 3
2004 VALUE AND YEAR-ON-YEAR GROWTH IN CANADA'S
EXPORTS TO CHINA, SELECTED H.S. CATEGORIES
(BILLION CANADIAN DOLLARS, JANUARY-NOVEMBER DATA)
-------------- --------------
CATEGORY 2004 VALUE Y/Y GROWTH

27- FUELS ETC. 62.8 12.2
2709- CRUDE OIL 23.1 21.9
29- ORGANIC CHEMICALS 4.2 43.6
44- WOOD 20.1 27.3
4407- LUMBER 10.5 31.9
4410- PARTICLE BD 3.9 39.3
4418- WINDOWS ETC 2.1 24.7
72- IRON AND STEEL 4.7 29.4
74- COPPER 2.1 45.8
75- NICKEL 2.5 83.9
87- MOTOR VEHICLES 72.9 3.9
88- AIRCRAFT 7.6 -18.8


SOURCE: STATISTICS CANADA

CELLUCCI