‘ASTONISHING’ CHINA CLAUSE

Trade deal gives Trump leverage

‘ASTONISHING’ RESTRICTION ON CANADIAN INDEPENDENCE, EXPERTS SAY

Canada’s efforts to forge trade deals with other countries are now far less likely to lead to free-trade negotiations with China, experts predict, because of a clause in the new North American deal that appears to give the United States unprecedented leverage over its partners’ other trading relationships.

The U.S.-Mexico-Canada Agreement (USMCA), which will replace the North American Free Trade Agreement if the three countries’ legislatures approve it, was finalized late Sunday after a long negotiating process made uncertain by the mercurial nature of the administration of U.S. President Donald Trump. That uncertainty has increased the Canadian government’s eagerness to expand trade with other nations, particularly in Asia and South America.

However, the USMCA includes language that requires signatories to give notice if they plan to negotiate a free trade deal with a “non-market country,” and to allow the other two signatories at least a month to review any agreement before it is signed. It explicitly states that if one of the signatories enters into such an agreement, the other two have the right to withdraw from the USMCA with six months’ notice.

The use of the phrase “non-market country” seems a clear reference to China. Under Trump, the U.S. has complained to the World Trade Organization that China should not be considered a “market economy.” However, the USMCA clause does not rely on WTO definitions — the way it is worded, if the U.S., Canada or Mexico “determines” a country isn’t a market economy, then for the purposes of the clause, it isn’t.

Paul Evans, a professor at the University of British Columbia, said the “astonishing” clause appears to pull Canada into line with the U.S. as the Americans engage in an escalating trade war with the Chinese — as of last month, the Washington and Beijing had slapped new tariffs on US$360 billion worth of bilateral trade in goods. “It’s a severe restriction on Canadian independence and capability,” said Evans.

Toronto trade lawyer Lawrence Herman agreed. “It was part of Canada’s concession to the U.S., to show Trump and co. that Canada can be counted on as an ally in dealing with China,” he said.

“This goes both ways, of course, and assures that Canada gets information on all U.S.-China trade talks as well.”

Peter Clark, an Ottawa trade consultant, said the U.S. is trying to “control our negotiations with China” with an unusual provision that had not been discussed publicly until now. “This type of extra-territorial pressure is unique to this agreement,” he said.

Asked at a press conference in Ottawa Monday how much influence the clause would give the U.S. over potential free-trade negotiations between Canada and China, Prime Minister Justin Trudeau did not answer directly.

“One of the things that we know is trade diversification is an extremely important part of growing the Canadian economy, and we’re going to continue to engage in increasing our trade footprint all over the world,” he said. Foreign minister Chrystia Freeland downplayed the clause’s importance, saying it simply means that if one partner deals with a nonmarket economy, it “could be a reason (for another partner) to leave.”

Two officials familiar with the government’s trade agenda, who spoke on the condition they not be named as they were not authorized to speak publicly, said the clause will not interfere with Canada’s sovereign right to negotiate deals with other countries. They reject the notion it might let the U.S. exert undue influence, as it always had the ability to pull out of NAFTA anyhow.

One described the provision as allowing for “sharing information and giving a heads-up,” and denied that the U.S. is trying to bring Canada in line with its posture towards China: “I think we have our own approach to dealing with trade with China, and that approach is not determined by the approach of our partners in this particular agreement.”

The other put it this way: “There are occasionally items added to agreements that speak more to a domestic constituency.”

That is how Brett House, deputy chief economist at Scotiabank, saw it. “The introduction of that doesn’t change that a country can withdraw at any point. What I think it does is provide the executive of any of the three countries, in this case mainly the White House, and the (U.S. Trade Representative) and Commerce Department, with a bit more political cover,” he said.

House agreed the language could give the U.S. “grounds” to shift to a bilateral deal with Mexico if Canada engages with a country it doesn’t like. “It changes the political calculus,” he said.

Canada and China had launched exploratory free trade talks in 2016. It was expected Trudeau might announce formal negotiations during a visit to Beijing last December, but nothing materialized. The relationship has been in neutral since then, though one senior Canadian official said there had been “increasingly positive” signs from China lately, and that the two countries were “working through” a template for a deal that China has in mind.

“Nothing is going to move quickly on that front now,” Evans said.

Some Canadian ministers are headed to China this November for a trip focused on promoting Atlantic Canada.

WE’RE GOING TO CONTINUE TO ENGAGE IN INCREASING OUR TRADE FOOTPRINT.