DID U.S. TIE CANADA’S HANDS ON CHINA?
USMCA may help Trump isolate Beijing
Hardly a day had passed after the United States-Mexico-Canada Agreement was announced when jarringly different views of it began to emerge from officials on either side of the border.
“I think the continent as a whole now stands united against what I’m going to call unfair trading practices by you know who,” White House economic advisor Larry Kudlow said in an interview with Fox News on Tuesday. The USMCA “sends a signal to China that we are acting as one and I think that’s very good,” he added.
Speaking to reporters in Vancouver that same day, Prime Minister Justin Trudeau struck a very different note on relations with the Asian superpower. China is “a significant, growing player on global trade, and as always, we’ll look for ways to engage, deepen and improve our trading relationship with them,” he said.
Trudeau was responding to growing concerns about Article 32.10, a surprise provision in the USMCA that would give any party the option to exit the pact with six months notice if another enters a freetrade agreement with a “nonmarket economy.”
Though no country is named, analysts agree that the obvious target is China.
There is a diverse range of views on what the provision might mean for Canada’s sovereignty and for its efforts to diversify its trade relationships away from the United States.
“I think it is more rhetoric than substance, I don’t know for sure,” Derek Burney, senior strategic advisor at the law firm Norton Rose Fulbright and the former ambassador to the United States, said in a webcast.
“I would hope our government would do everything possible to show that this has no binding effect on Canada. This would be extraterritoriality gone nuts as far as I’m concerned,” Burney said.
“We have misfired in our approach to China so far,” he added. “I think we need to redouble those efforts and get more serious.”
Previous trade talks with China went off the rails when Beijing resisted Canadian efforts to add provisions on the environment, human rights, labour and gender issues. Those differences haven’t gone away, suggesting a full-scale free-trade agreement wasn’t coming soon, argues Robert Wolfe, professor emeritus at Kingstonbased Queen’s University who has studied Canada’s international trade policy for several decades.
Under the terms of both the original NAFTA and the new deal, a party can already exit with six months notice, he said. And Canada can still pursue smaller-scale talks with China that advance trade relations.
“It would be better not to include something like Article 32.10 but it’s unlikely to have much impact on what we actually do,” Wolfe said. “The provision is mostly symbolic, given the broad U.S.China standoff and it changes very little. It’s basically a transparency requirement.”
The clause has nevertheless fuelled worries that Washington will exercise outsized power in Ottawa’s trade relationships, and is using the USMCA to entangle Canada and Mexico in its trade war with Beijing.
“America is trying to bring all its allies onside in this trade war,” said Gregory Chin, a professor of political economy at York University and a former Canadian diplomat in Beijing. “There has been a toughening on China across the board in the United States and the question for Canada is are we going to be swept along by that?”
At the very least, the clause and the U.S. messaging surrounding it
should prompt Canada to clearly state where it stands on China and what sort of investments and trade relationship it wants from the Asian superpower, Chin added.
“I do think now would be the time to set out in very clear terms how we view China strategically.”
U.S. President Donald Trump has imposed US$250 billion in tariffs on Chinese goods so far and is threatening more levies if Beijing doesn’t change what the U.S. views as unfair trading practices. China has been accused of dumping subsidized goods into other markets and forcing companies to transfer their technologies to state-owned firms in exchange for access to the Chinese market.
Indeed, the clause in the USMCA is at least partly intended to address American fears that Beijing will attempt to evade American
tariffs and trade rules by forging individual free-trade pacts with Canada and Mexico, analysts say.
The U.S. concern is that those deals will enable the practice of “illegal transshipping,” in which subsidized goods would be moved into Canadian and Mexican markets free of tariffs, and then into the U.S.
“I think that is mostly what this is about, preventing a flow of Chinese goods from entering the U.S. under the cover of USMCA,” said Gordon Houlden, director of the China Institute at the University of Alberta, adding that the clause nevertheless could have a “chilling effect” on Chinese investment and trade talks with Beijing.
“We still have the sovereign right to conclude an agreement I think, but anyone in Canada at a senior level will look at that clause
and think ‘is this worth a fight with the United States?’ So this just hangs there.”
There are other concerns. Under the terms of the clause, the countries alone determine what qualifies as a “non-market economy,” rather than relying on a common definition, such as the one used by the World Trade Organization.
That looseness in terms “opens up a lot of leeway for interpretation and manipulation,” said Chin. “There are a lot of Asian nations they could argue that against.”
Others suggest the U.S.’s blunt approach to pulling trade partners into its trade dispute with China could ultimately benefit Canada. While the clause opens up “some real concerns about sovereignty”, it also addresses a central worry about Chinese trade practices that is shared by many countries, said Chad Bown, a senior fellow at the Peterson Institute for International Economics in Washington.
“There’s different ways to see this,” Bown said. “Clearly the Trump administration has taken a very provocative approach to China, but I also think China’s practices are among the biggest challenges facing market-oriented economies. So the question is how do you get a coalition of countries to take on the task of changing that? I’m not a fan of the stickover-carrot approach but what the U.S. is doing is getting at this issue.”
The U.S. likely placed the clause into the USMCA so that it can then have a template to work with in the raft of other trade deals it intends to negotiate while simultaneously taking on Beijing, analysts say.
That ongoing effort to reform Chinese trade “doesn’t need to happen under U.S. leadership,” said Sherman Robinson, non-resident Senior Fellow at the Peterson Institute for International Economics.
“That should be an international effort, under the WTO, not a U.S. project.”
QUESTION FOR CANADA IS ARE WE GOING TO BE SWEPT ALONG BY THAT?