As a February Fraser Institute study concluded, and as China’s Ambassador to Canada Lan Lijun noted in early March, trade relations between the two countries have yet to even approach full potential. Though bilateral trade between Canada and China has certainly exploded during the last 10 years, there remain considerable opportunities to expand the relationship.

Mr. Harper was notoriously absent from the 2008 Beijing Olympics, and his rhetoric up to now has focused on matter such as China’s human rights reputation. Criticisms by Mr. Harper’s Conservative government of China and his 2007 meeting with the Dalia Lama are sore points for the Chinese, triggers for what Mr. Lan described several weeks ago in testimony before the Canadian Senate’s foreign affairs committee as a “downturn” in relations between the two countries.

But Trade Minister Stockwell Day spent seven days in China in April, and Foreign Affairs Minister Lawrence Cannon last week concluded a five-day visit. Mr. Cannon met with his counterpart, Chinese Foreign Minister Yang Jiechi, and also spent nearly an hour with Vice-President Xi Jinping. The Canadian foreign minister returned to Ottawa with a formal invitation from Chinese officials for Mr. Harper to come to China.

As the reality of a severe global downturn exposes the need for Canada to diversify its economic relationships away from near total dependence on the US, however, engaging China more aggressively is now imperative.

While Chinese officials are to some degree leery of Mr. Harper’s Conservative government, they too recognize the vital role Canada can play in contributing to their country’s economic development.

In a March 6, 2009 address to the Canada China Business Council-Hong Kong Canada Business Association Luncheon, Mr. Lan noted:

With crisis comes opportunity. A stronger tri-partnership between China, Hong Kong and Canada is the call of the times.

Trade between China and Canada, however, has fallen short of vast potential for mutually beneficial trade, investment, and broader bilateral opportunities.

As the February Fraser Institute paper detailed, while China’s share of Canadian trade has tripled since the mid-1990s, only 2 percent of Canadian exports went to China in 2007, while nearly 80 percent went to the US. Canada’s foreign direct investment (FDI) in China is 0.3 percent of its total FDI, while China’s FDI in Canada is just 0.1 percent of its total.

The most obvious areas of potential growth are natural resources–the bulk of Canada’s exports to China at present consist of minerals and forestry products.

Canada is one of the world’s leading exporters of iron ore; China, the world’s biggest consumer, boosted imports of the material to a record 57 million metric tons in April.

And China’s purchases of copper and copper products reached a record 399,833 metric tons last month, up from 374,957 tons in March.

Sinopec (NYSE: SHI) recently purchased an additional 10 percent interest in the proposed Northern Lights oil sands project from Total (NYSE: TOT); the Chinese could make further moves in the oil sands because they believe oil prices will rebound, while the cost of investing has declined from two or three years ago, when the sector was booming. China, now the world’s second-biggest energy-consuming country, increased crude imports by 14 percent in April.

The opportunities to expand the bilateral relationship extend beyond iron ore, copper and oil, however. Mr. Lan also pointed out in his March 6 speech:

Canada is known as an energy superpower, with vast riches in energy resources, and more importantly, home to many cutting-edge technologies in clean energy and environment protection. It is among world leaders in aerospace, information and communications technologies (ICT), wireless technology, and health sciences–areas like biotech, e-medicine and biomedical equipment. Canadian companies with infrastructure and transportation technologies enjoy a long and solid reputation in China.

Canada-made high-speed locomotives and buses made with Canadian hybrid engines are running on the streets of Beijing. Stage III of the Qinshan Nuclear Power Plant includes the construction of a CANDU reactor design supplied by Atomic Energy of Canada. Canada-based Manulife Financial (TSX: MFC, NYSE: MFC) and Sun Life Financial (TSX: SLF, NYSE: SLF) are taking advantage of the expanding Chinese middle class’s demand for insurance products, and Royal Bank of Canada (TSX: RY, NYSE: RY) and Bank of Montreal (TSX: BMO, NYSE: BMO) are capitalizing on China’s liberalized rules about foreign bankers operating in the country. The ubiquity of Research in Motion’s (TSX: RIM, NSDQ: RIMM) BlackBerry extends to the Mainland.

The effort to improve and expand trade begins with more engagement and more dialogue. Mr. Harper is scheduled to visit Singapore in mid-November for a summit of Pacific Rim leaders, but significant hurdles must be cleared before Beijing is added to the itinerary.

For example, China would like to see criticism of its human rights record cease. And it will certainly be paying attention when the Dalia Lama visits Ottawa again in September. A repeat of the scene during the Dalai Lama’s previous audience with Mr. Harper, when the Tibetan flag was in prominent view, could derail any hope of significant progress in 2009. On the trade front, Chinese officials want to know that their state-owned firms will have unfettered opportunities to acquire Canadian oil or mining interests–they’d like assurances they’ll be subject to the same rules as any other company.

From Canada’s perspective, Mr. Cannon would like to revisit the Canada-China Human Rights Dialogue, a series of closed-door sessions between officials. Conservatives criticized previous rounds of these meetings as “ineffective.”

These issues require care, but recent events suggest Mr. Harper’s government has a new vision for Canada’s relationship with China. There’s still work to be done, but it’s possible the prime minister will himself engage directly with Beijing sometime in 2009.

Speaking Engagements

I’d like to extend a special invitation to EMS readers to join me and my colleagues Elliott Gue, Roger Conrad, Benjamin Shepherd and GS Early May 30 at the historic Mayflower Hotel in Washington, DC for the 2009 KCI Wealth Summit.

You’ll have an opportunity to talk with me and my fellow editors as well as an exclusive group of investors about the challenges we face amid these volatile times. Click here for more information.

I look forward to seeing you.