Canada Plays China Card
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Canada Plays Its China Card
Summary
Amid rising trade tensions and energy leverage, Canada is adopting a bold stance towards the United States, likened to "speaking loudly and carrying a big piece of lumber." The longstanding dispute over U.S. tariffs on Canadian lumber has intensified, with Canadian Prime Minister Paul Martin linking a resolution to the U.S.'s access to Canadian energy supplies. Concurrently, Canadian Natural Resources Minister John McCallum has traveled to China to engage with officials in the oil, mining, and forestry sectors.
Article Body
Canada's strategy in dealing with trade friction and energy dynamics with the United States marks a significant shift. The escalating dispute over American tariffs on Canadian lumber recently prompted Prime Minister Paul Martin to suggest that resolving the issue would be linked to continued U.S. access to Canada's energy. Meanwhile, Natural Resources Minister John McCallum has embarked on a mission to China to meet with key players in their energy and resource sectors.
Energy Ties: A Double-Edged Sword
Under the 1994 NAFTA Free Trade Agreement, Canada was established as a primary energy supplier to the U.S. Surprisingly, Canada meets 17% of U.S. oil import needs, 16% of natural gas, and supplies nearly all hydroelectric power. The Canadian government controls most of the country's energy resources, exporting over 1.5 million barrels of oil daily to the U.S., which accounts for 8% of its consumption.
China's Expanding Influence
China's increasing interest in Canadian energy is drawing attention from Washington. Beijing has set aside $100 billion for overseas oil and gas acquisitions and is investing heavily in Canadian energy companies. Notably, China spent $2 billion on a pipeline from Alberta’s tar sands to the coast, connecting it to Beijing and Shanghai. With questions surrounding Saudi oil reserves, Canada's recoverable reserves of about 175 million barrels?"mostly profitable oil sands?"are significant. Canadian oil production could potentially reach six million barrels a day.
In addition, China now hosts over a million ethnic Chinese residents in Canada and has become its second-largest trading partner. Recently, Chinese President Hu Jintao's visit led to a strategic partnership declaration between the two nations.
The U.S. in a Tight Spot
This burgeoning Chinese-Canadian relationship presents challenges for the United States. The enduring lumber dispute remains unresolved, despite a NAFTA panel ordering the U.S. to return $5 billion in tariffs to Canadian companies. Relations further cooled when Canada opted out of the U.S.-led missile defense program, despite the countries’ intertwined economies?"90% of Canadians live within 100 miles of the U.S., and 85% of Canadian exports are American-bound.
Many Canadians are opposed to the Bush Administration’s policies, which is a sensitive topic, especially in lumber-reliant regions. With national elections looming, Prime Minister Martin's stance could win favor as it stands up to pressures from the south.
Investment Opportunities
While the relationship between the U.S. and Canada is strained, the ongoing energy boom offers fruitful investments in Canadian markets. The Canada iShare (EWC), which tracks the MSCI Canada Index, boasts 40% exposure to Canada’s energy and materials sector. This index has performed well, with year-to-date gains of 16.6% and a 28.8% increase over the past year.
Also, timber is a strategic addition to any portfolio. The timber REIT Plum Creek Timber (PCL), featured in our core portfolio, is attractive due to its inflation hedging properties and lack of correlation with stocks or bonds, serving as a stabilizer during market downturns. Historically, from 1973-2000, timber yielded returns averaging 15% annually. While timber values dipped between 2000-2002, they have since rebounded, with Plum Creek rising by 23% in 2004 and maintaining strong dividends.
Conclusion
The U.S. should act swiftly to resolve the lumber dispute and secure Canadian energy before China solidifies its position. While influencing diplomatic relations might be challenging for investors, they can capitalize on this dynamic by considering Canadian and timber investments to enhance their portfolios.
You can find the original non-AI version of this article here: Canada Plays China Card.
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