Andrei Sulzenko is a former trade negotiator and is currently an executive fellow at the School of Public Policy, University of Calgary.
For Canada, the renegotiation of NAFTA and President Donald Trump’s rebranding of the proposed deal as the United States-Mexico-Canada Agreement (USMCA) essentially represents the status quo with a few wrinkles, a notable achievement under very difficult negotiating dynamics.
The issue that has drawn most critical attention to date is not supply management or drug patents, but an obscure provision – Section 32:10, which provides that any one of the three signatories contemplating free-trade negotiations with a “non-market country” is obliged to provide the other signatories with advance notice and transparency on the results. If there is disagreement, the ultimate sanction is withdrawal from the USMCA – on the same terms as the general withdrawal provision; namely six-months notice (as also the North American free-trade agreement the USMCA is to replace).
The main argument against this provision is that it impairs Canada’s sovereignty in pursuing its own trade agenda, notably with China, a country deemed by the United States to be a non-market economy.
Not surprisingly, the most negative initial response to the clause came from Chinese sources, citing a U.S. administration attempt to isolate China as part of their bilateral trade war.
In recent days, the Chinese Foreign Minister, Wang Yi, is reported to have engaged directly on the issue with Foreign Affairs Minister Chrystia Freeland, pushing for the advancement of dormant China-Canada trade talks and warning, according to a Globe and Mail report, that “any attempts that aim to sabotage China’s modernization plan will fail.” With that kind of less-than-diplomatic rebuke, Canada now seems to be in the crossfire between two powerful countries.
The question is, did Canadian negotiators make a mistake in agreeing to insert the non-market country clause in the USMCA? The answer is no, and here is why.
The bottom line is that Canada and like-minded countries should be supportive of the U.S.-led strategic objective of change in China’s commercial policies and practices.
China was granted membership in the World Trade Organization (WTO) some 17 years ago under false hopes, certainly by Group of Seven countries, that China would quickly become a market-driven economy, with government intervention constrained by WTO rules. Instead, the Chinese model continues to be one of rigorous state control and the furthering of its economic interests by the (often-covert) flouting of trade rules when it suits the regime.
For Western economies, this has become problematic. China is now an economic powerhouse, and its trading partners know that complaints about its practices risk state-mandated retaliation. That is why only the United States is big enough to take on the challenge of pushing for policy change by China, and why other countries have been quietly cheerleading, not only as free-riders but also in taking advantage of improved market access to the Chinese market in areas where new tariffs are now being applied against imports from the United States.
In policy terms, Canada’s objectives are consistent with those of the United states, particularly regarding China’s spotty intellectual-property protection, restrictive foreign-investment rules and distorting state subsidies. Further, it is possible that in the absence of the current challenge to these practices, Chinese intervention detrimental to all trading partners will increase rather than decrease in achieving the stated goal in the current five-year plan of becoming pre-eminent in technology-driven areas.
These kinds of concerns about China were recognized by former U.S. president Barack Obama when his administration spearheaded the negotiations among a dozen countries, including Canada and Mexico, for a Trans-Pacific Partnership. By pointedly excluding China, the strategic U.S. objective was to undercut that country’s push for regional dominance.
This seemed to have been lost on Mr. Trump, whose almost first act as President was to announce American rejection of that agreement. As a result, the United States has foregone preferential access to an enormous market under the now Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), signed recently by the remaining 11 countries.
In these circumstances, why would Canada want a bilateral trade agreement with China? Such an agreement could look fine on paper, just as the WTO rules do today. In practice, however, we would be at great risk of living up to our market-opening concessions while not effectively realizing potential gains in the Chinese market. Added to the strictly commercial calculus, is the continuing concern among Canada and its defence allies about security issues regarding Chinese state-controlled actors.
Section 32:10 is really about giving the United States time and space to do the heavy lifting. Canada should wait and see how that dispute plays out and then decide on the best strategy for furthering economic relations with China.
In the meantime, there will be plenty of opportunities for pragmatic bilateral economic engagement with China. Ms. Freeland is reported to have confirmed that approach in her discussion with the Chinese Foreign Minister. Nothing in the USMCA inhibits that.