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The Canadian Agri-food Advantage: Equipping Canadian SMEs for Success in China

How should Canada balance the trade opportunities with China while managing the growing number of trade-compromising factors?

Tenzin Dasel, Michelle J. Hui, Jason Kreutz, Naveen Kanwadia, & Phaedra de Saint-Rome | 27 Jul 2022

Articles

This executive summary lays out highlights from the report The Canadian Agri-food Advantage: Equipping Canadian SMEs for Success in China, written by Max Bell School Master of Public Policy students as part of the 2022 Policy Lab.

Access the summary and presentation below, and read their full report here.

Scope

The topic of Canada-China trade is intricate and nuanced. To fully understand the opportunities and challenges faced by Canadian agri-food exporters, it is necessary to examine the geopolitical and economic realities of this trade relationship, the current state of the Canadian agri-food sector and the role it will play in the future, and the specific challenges faced at the level of individual exporters. This policy brief will provide pertinent information on these areas. However, EDC, in its capacity as a Canadian Crown Corporation, is limited in its ability to influence many of the relevant factors to this policy challenge. In light of this, the recommendations crafted in this brief are generally focused on Canadian agri-food small and medium-sized enterprises (SMEs) at the business level.

At a Glance: Canada's Trade with China

China is Canada's second largest trading partner after the United States and before the United Kingdom. The volume of Canadian exports set to reach China is expected to continue to increase over the coming years and should a free-trade agreement be instituted, it would add an additional 25,000 Canadian jobs. Overall, it is both Canada's and its exporters' interest to further trade relationships with China. This must be done while continuing to adhere to Canadian values and internationally recognized standards on business conduct and human rights protocols. Additionally, despite the attractive opportunities presented by the high growth Chinese economy, risk-averse Canadian SME exporters encounter numerous barriers and uncertainties when exporting to China.

China's Food Security Reality

The latest Chinese Five Year Plan emphasizes the key issue of food security and ensuring that Chinese citizens can satisfy their needs with agri-food imports in particular. At a time when food supply chains are struggling under the weight of compounding global economic shocks and geopolitical uncertainties, food security concerns are of increased salience to the Chinese government and people. The relevant global uncertainties and shocks in this case include the fallout from the COVID-19 pandemic, China's Zero-COVID policy and the war in Ukraine.

These global phenomena are occurring at the same time that arable land in China is diminishing because of the dual effects of climate change and urbanization. Food security is a consistent key feature of China's policy concerns dating back to the Maoist era. But in spite of important economic reforms that have improved living standards and access to nutritional foodstuffs, the aforementioned factors threaten this progress. As a result, food security is again a defining feature of Chinese Communist Party policy. While it has been an important consideration in Chinese agricultural policy throughout modern history, for the first time in many decades food security in China is particularly fragile and as a result features as a central component of the 14th Five Year Plan.

This provides opportunities for Canadian agri-food exporters to further establish themselves within the Chines market. The realities in China coincide with the Canadian government's emphasis on diversifying Canada's trade relationships away from heavy reliance on trade with the United States (US). This sets the stage for crown corporations like EDC, whose mandate is to support the trade diversification activities of the federal government, to enable the expansion of Canadian exports to China.

The Canadian Agri-food Advantage

Despite having approximately three times less arable land than China, Canada's population is only 3% that of China's, which increase the per person availability of food in Canada manifold. This allows Canada to be a major net agri-food exporter to the world. Moreover, food originating in Canada is associated with being high quality which id desired by China's rapidly growing middle class who have the means to afford premium food. The Canadian agri-food sector is also associated with being reliable in terms of maintaining steady supply flows even in the face of global emergencies like the pandemic and the ongoing conflict in Ukraine. Furthermore, evidence shows that Canadian agri-food exporters succeed in the Chinese market if they offer products tailored to local tastes and when they engage in proper business etiquette and understand cultural norms.

EDC and Canadian SME Exporters

SMEs constitute the core segment of EDC's customers, which EDC recognizes as "key contributors to Canada's economic growth, innovation and new job creation." In 2019, EDC served approximately 14,500 SMEs, which was an increase of 30% since the year before, and represented 86% of its customer base.

The pandemic has underscored the need to make EDC's serices and information available digitally, while also streamlining communications among the many stakeholders involved in supporting Canadian SMEs abroad. Many SME exporters face significant information barriers when it comes to accessing Chinese markets. This is particularly important for SMEs which typically face information asymmetries that larger firms do not. Without the same resources or capital, it is challenging for SMEs to gain the knowledge and information needed to realize success in China.

EDC's credit- and finance-product offerings could also be expanded to capitalize on innovative business strategies that mitigate some of the common issues that Canadian agri-food SMEs face. Right now, strategic partnerships and value addition are important methods for Canadian SMEs to realize success in new ways in China. However, achieving these ends is difficult, necessitating the support of EDC.

Given China's growing significance as a Canadian export destination and the barriers that SMEs face in exporting to China, EDC has a role to play in bridging the gaps that exist.

Problem Statement

All of these complexities present a difficult yet lucrative situation for Canadian agri-food SMEs. On one hand, China is a massive market with abundant opportunities for Canadian agri-food exporters. At the same time, numerous barriers exist that make the market risky for Canadian agri-food SMEs. With EDC's mandate to support Canadian SMEs, it is vital that EDC bridge these gaps to the extent possible so that Canadian exporters can fully reap the benefits of exporting to China. In light of this reality, the specific problem statement that this Policy Brief addresses is as follows:

How to enhance opportunities for Canadian agri-food SME exporters to succeed in China while mitigating factors that inhibit their participation in this market

Recommendations

There are six key recommendations laid out in this report. These are made with the overall intent of optimizing opportunities and success for Canadian agri-food SME exporters conducting business with China. The criteria for success include: 1) an overall increase in Canadian Agri-food exports to China in terms of both volume and value; 2) an increase in the number of SMEs exporting to China in the agri-food sector; 3) an increase in EDC revenues stemming from China-related deals; and 4) a reduction in risk with respect to trade inhibiting factors. The recommendations are as follows:

Create a China Information Centre. This will provide consulting services and data to Canadian exporters. It will assist in providing information on particular subsegments of the Chinese market, business etiquette, cultural factors, and concerns related to human rights and sanctions.
Create an IPR toolkit. This will assist SMEs in understanding the IP-related legal and regulatory landscape in China and how to seek legal counsel if necessary.
Create credit products and services to facilitate strategic partnerships. These products will help SMEs in scaling their businesses and create new product lines to meet the demands of a growing Chinese middle class. They will also help insulate SMEs from potential friction with authorities and other actors by attracting non-controlling Chinese investments.
Create credit and risk management products and services to facilitate value addition. These products will assist SMEs in utilizing more resource-intensive but potentially profitable production strategies to capitalize on different segments of the Chinese market.
Create a digital platform for Canadian exporters. This will serve the purpose of unifying entities and the services that support exporters on a single platform. It will offer data and information for exporters and provide referrals to access a plethora of services housed in EDC and other organizations. It will also provide a forum for exporters to build networks and develop partnerships.
Increase on-the-ground presence of EDC in China. On the ground support is imperative for success in China. Increasing the offices and/or the personnel that EDC and TCS (Trade Commissioner Service) have in China would aid Canadian exporters.