Strategy

UAE raises the stakes for Canada

Dubai is learning an old lesson, which is that linkage is only good when it works.

It’s safe to say the business environment in the United Arab Emirates is less friendly to Canadians now than it was a couple of months ago. Back then, Canadians didn’t need visas to get into the country, Canada had a key military base there, and, if the website of the UAE’s embassy in Ottawa can be believed, there were soon to be more flights between the tiny Gulf state and Canada.

This was the state of play in late September when the UAE and Canada were nearing the end of negotiations to increase landing rights in Toronto, Calgary and Edmonton for the UAE’s two state-owned airlines, Etihad Airways and Emirates Airlines. The UAE said three round-trip flights a week, for each airline, to Toronto and back was not enough. But in early October the Canadian government disagreed. It was welcome news to Air Canada. It was concerned UAE’s airlines would eat into its market by using the additional flights to route passengers from Canada through Dubai to India, Pakistan and other points east. But while Air Canada celebrated, the UAE plotted to overturn the decision by forcing Canada to play high-stakes diplomatic poker.

Canada had been using Camp Mirage, just outside Dubai, as a forward base for its Afghan mission for nine years. When the deal fell through, the UAE decided to gamble that the base was more important to Canada than landing rights, and sent Canada a 30-day eviction notice. The UAE then tried upping the stakes by refusing to let Defence Minister Peter MacKay fly through its airspace on his return flight from Afghanistan. It was a bad bet. Canada left and is now using bases in Cyprus and Germany; in retaliation, the UAE slapped Canadian travellers with a visa that kicks in Jan. 2.

In a matter of weeks, the UAE turned a seemingly small trade dispute into a military and diplomatic quarrel that has Canadians who do business in the region wondering what’s going to happen next. “I don’t see how this can get any worse, but you never know,” says Walid Hejazi, a professor at the Rotman School of Management who travels to the UAE regularly to teach and network. “This definitely moves Canada-UAE business relations in the wrong direction. This will hurt. The question is, to what extent.”

Hejazi is eagerly awaiting the details of coming visa requirements. The UAE government owns both of its airlines, so it could simply include them in the cost of a ticket, or just ask passengers for a few dollars upon arrival in Dubai in exchange for a stamp in their passports. However, if the UAE decides Canadians need to travel to Ottawa to get their visa before they fly, the issue could become what Hejazi calls: “a big administrative uncertainty” that could dissuade Canadians from going to the UAE at all.

It’s certainly not great news for Canadian companies trying to do business in the UAE. Bennett Jones, a Canadian law firm specializing in corporate deals on energy and infrastructure, became the first Canadian firm to open an office in the UAE on Nov. 2. The decision to branch into the Gulf was driven by the widespread belief in Bennett Jones and beyond that the UAE is the commercial and financial hub for the Gulf and the best place to take advantage of the trillions in liquidity there just waiting to be invested. “It would be fantastic if all of these issues went away,” says Dany Assaf, Bennett Jones’s Middle East managing partner. “There’s no doubt it would be very positive to have strong and continuing relations on all levels between Canada and the UAE.”

Bilateral trade between the two countries stands at $1.8 billion, a number that has risen more than 350% over the decade. Canadian exports account for $1.4 billion of that. Assaf says he doesn’t think the dispute will harm Bennett Jones or Canada-UAE business interests on the whole, because growth is strong in the Gulf, and the UAE is a crucial hub.

But Hejazi is far more pessimistic. His office at the Rotman School has been flooded with e-mails from UAE business executives since the dispute kicked off. “The whole perception is that it’s building a divide between Canada and the UAE,” Hejazi says. “The perception things are going in the wrong direction will limit the extent to which UAE companies will engage with Canadian companies because they don’t know what will happen next.”

This uncertainty was fuelled by the UAE’s decision to aggressively link various elements of its foreign policy. Linkage diplomacy is based on the simple idea that if a country wants action on file A, they will need movement on file B. “The view among officials has always been that it’s a dumb way to pursue policy, but that doesn’t mean there weren’t times when you did it,” says Michael Hart, a professor at Carleton University’s Norman Paterson School of International Affairs. “One of the ways to concentrate the mind of politicians in the country that you are complaining to is to show them your retaliation list.”

Linkage worked for China back in September when it secured the release of a fishing trawler captain taken into custody by Japan after threatening to start a trade war over the issue. But if the UAE was looking for Canada to fold under a similarly styled threat, it had to be upset when another Gulf state, Qatar, quietly signed an aviation agreement with Canada on Nov. 11. The deal will allow Qatar Airways to fly three passenger flights and three cargo flights a week to and from Canada.

“The thing about linkage is, it’s a good thing when it works for you and a bad thing when it doesn’t,” says James Lindsay, a director of studies with the Council on Foreign Relations. “You can counter the linkage by linking to something else or by playing another card.”

And while Harper may have just played the Qatar card, no one is celebrating. The game is still on, and neither Canada nor the UAE appears willing to fold.