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Business Commentary How a thaw in U.S.-China trade feud could leave Canada out in the cold

Reports that U.S. President Donald Trump may be near a deal to end his high-stakes trade feud with Beijing should be good news for the global economy.

The standoff between the world’s two largest economies has been really bad for business. The tariffs on hundreds of billions of dollars of each others’ goods are pummelling global trade flows and weighing heavily on business investment as companies fret about where it will all end.

But if the settlement is as advertised, it would be another gut-punch for Canada and other long-time U.S. allies.

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That’s because at the heart of the proposed deal is expected to be a series of commitments by China to buy more than US$1-trillion in American goods, such as cars, agricultural products and liquefied natural gas (LNG).

The problem is that these massive directed purchases would come at the expense of exports from other countries.

And such an arrangement would do little to address the trade barriers facing all countries in China, including massive subsidies, the predatory behaviour of its state-owned enterprises and opaque restrictions on foreign investment.

Instead, it would draw Beijing into a form of managed, and potentially illegal, trade arrangement with the United States that could prove difficult to unwind.

“This is an outrageous illustration of the kind of trade policy the Trump White House is pursuing,” Toronto trade lawyer Lawrence Herman argues.

Without a comprehensive free-trade agreement in place between the two countries, such a deal could run afoul of the World Trade Organization’s anti-discrimination rules, according to Mr. Herman.

“Favouring suppliers from one country over others offends the root WTO principle of non-discrimination in international trade,” he explains. “Canada and other affected countries should bring this blatant offence to the WTO for adjudication.”

For example, a key piece of the emerging U.S.-China agreement would involve state-owned China Petroleum & Chemical Corp. buying US$18-billion worth of LNG from Houston-based Cheniere Energy Inc., according to The Wall Street Journal. The newspaper identified Canada among the potential losers because the gas China buys from the United States it would not buy somewhere else.

Among the other possible sources of liquefied natural gas for China is LNG Canada – a Royal Dutch Shell-led project now under construction in Kitimat, B.C. When completed, shipments from Canada’s first LNG plant could wind up in the same crowded Asian market as U.S. LNG. Several other Canadian LNG plants are in various stages of consideration on both the East and West coasts.

The collateral damage from preferential Chinese purchases could extend to other sectors, including agriculture, where there is significant overlap between what Canada and the United States sell. Both countries are major exporters of wheat, oil seeds, beef, pork and other farm commodities. Both countries also export civilian aircraft to China.

Particularly galling for Canada is that China would get relief from most U.S. tariffs in exchange for agreeing to these purchases.

Canada, meanwhile, continues to face tariffs on its steel and aluminum – levies that Mr. Trump imposed to put pressure on Ottawa during the negotiation of the U.S.-Mexico-Canada Agreement.

There has been an internal debate within the U.S. administration about how hard to push the recalcitrant Chinese to fundamentally reform their economic system.

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Mr. Trump, facing mounting legal and political troubles at home, is apparently anxious for a quick deal that he can brag about as a big trade victory. And he wants to unveil the agreement at a summit with Chinese leader Xi Jinping tentatively set for later this month at his Mar-a-Lago country club in Palm Beach, Fla.

U.S. Trade Representative Robert Lighthizer is pushing for more enduring and enforceable concessions from China in areas such as subsidies, state-owned companies, investment and forced technology transfers.

The prominence of Chinese pledges to buy more U.S. goods suggests an expedient deal may be in the offing rather than something more comprehensive.

Unfortunately, what’s expedient for the United States and China could prove very costly for the rest of the world. Barclays PLC has estimated that if the United States succeeds in getting China to buy an extra US$1.35-trillion of its goods over the next five years, Japan would see its exports to China fall by US$28-billion a year. South Korea and Taiwan would lose US$23-billion and US$20-billion respectively.

That kind of deal would also be a zero-sum game for the global economy.

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