Trading with China without setting off the U.S. tripwire
Canada plans to diversify away from its trade dependence on the United States in the wake of recent local difficulties with President Donald Trump.
In the summer cabinet shuffle, Jim Carr became the minister for the newly minted portfolio of “international trade diversification.” But those plans have hit a snag. Trump quite likes Canada being reliant on America as a destination for three-quarters of its exports — it makes it much easier to leverage what he called “the power of tariffs.”
As such, a clause was written into the new trilateral trade agreement with Canada and Mexico that essentially gives him a veto over this country’s future trade relations with China.
“Entry by any party into a free trade agreement with a non-market country shall allow the other parties to terminate the agreement,” says clause 32.10 of the new United States Mexico Canada Agreement.
The Trudeau government dismisses the significance of the clause, saying any of the partners could quit the USMCA at any time. The Chinese don’t see it that way, condemning a “hegemonic action ... that blatantly interferes with the sovereignty of others.”
This presents a dilemma for Canada. It needs the new USMCA. But if this country is serious about reducing its dependency on an American administration that treats its allies and its enemies in much the same fashion, it also needs to improve its trade links with China, which accounts for one-third of the world’s growth.
The Public Policy Forum, an Ottawa-based think-tank, says it has the answer to what it called “an unprecedented ceding of sovereignty” — sectoral agreements between Canada and China in areas like agri-food, natural resources, education and tourism that do not offend the new USMCA clause because they do not constitute a comprehensive free trade agreement in World Trade Organization terminology (since they cover “substantially all trade”).
The new Forum paper is the result of 18 months of consultations with industry, government, environmentalists and union leaders (amongst others). Chaired by Edward Greenspon, Forum’s president, and Kevin Lynch, vice-chair of BMO Financial, the consultative group heard that the sectoral approach has worked well in the past — the Canada-U.S. free trade agreement built on the auto pact between the two countries. Canada exports $23.6 billion to China — 4.3 per cent of all our exports — compared to the 8.4 per cent of U.S. exports that go to China.
“We don’t believe a sectoral agreement would be a tripwire. At least until we hit 8.4 per cent, we should be OK,” said Greenspon. “That’s another $25 billion of exports.”
The potential for growth is apparent: only 10 per cent of companies with fewer than 500 employees export at all, and only 10 per cent of them export to Asia.
Internet sales platforms like Alibaba offer easier avenues to reach foreign markets.
At the same time, previous studies have shown much of China wants what Canada is selling, as it moves from an export-based economy to one centred around consumer spending.
The report suggests the sectors most complementary to Chinese demand are agrifood, forestry, clean technology, life sciences, engineering services, tourism, education and research.
It suggests sensitive areas like technology transfer and national security should be avoided.
“Selling lobsters, filling hotel rooms, shipping timber or oil and gas don’t pose direct security threats to Canada or its allies,” it says.
Not everyone agrees that negotiating with the Chinese makes sense. In his new book, Right Here Right Now, former prime minister Stephen Harper said his government declined to even enter into free trade talks with China after a pre-study in 2012.
“Canada is simply not in a position to get a good deal bargaining one-to-one with the People’s Republic,” he said.
He pointed to the consequences of China being allowed to join the World Trade Organization in 2001, which offered the country wide-ranging access to Western markets — access that was not reciprocated in the Chinese market.
“Not surprisingly, China has racked up enormous trade surpluses … it has cost the U.S. millions of well-paying jobs,” he said.
The Forum study makes clear that Canada must be cautious, incorporating clear dispute settlement mechanisms into any sectoral agreement, as well as adjustment policies for industries that are adversely affected.
The authors point out that more than 60 per cent of Canadians are open to increasing trade with China, as U.S. protectionism grows.
“We have experienced the train wreck of being dependent on a single country that is no longer benign,” said Greenspon. “We now have a minister of international trade diversification (Jim Carr), but he can’t be minister of trade diversification without China.”