Trudeau to seek closer trade ties with China despite USMCA ‘non-market’ clause

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Canada still intends to pursue closer trade ties with China even as a clause of the new trade deal with the United States and Mexico places restrictions around seeking free-trade agreements with the Asian superpower.

“Obviously, 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,” Prime Minister Justin Trudeau said in a news conference in Vancouver.

He was responding to questions about a section in the new United States-Mexico-Canada Agreement (USMCA) that lays out a set of obligations for any of the USMCA partners seeking a bilateral free-trade agreement with a “non-market economy.” Among other things, the clause requires any partner seeking such a pact to provide its USMCA counterparts with the full text of a proposed agreement in advance of signing, and identifies such a trade pact as specific grounds under which those counterparts could serve six-month notice to withdraw from the USMCA.

While the section does not specifically name any country, trade experts have no doubt that its prime target is China.

They point to the rising trade tensions between the United States and China as the likely impetus behind the provision. The United States has been increasing the pressure on China in recent months to change what it views as unfair trading practices; as of last month, the United States has imposed tariffs on US$250-billion of Chinese goods – representing nearly half of its annual imports from China.

Trade experts said the USMCA clause looks designed, in part, to short-circuit any efforts China might make to get around the U.S. sanctions by making deals with the other USMCA partners, and then having its goods make their way into the U.S. market tariff-free by shipping them via another USMCA country. They said Canada’s overtures to explore trade talks with China had heightened American concerns.

“There has been a lot of twitchiness that Canada might negotiate with China,” said trade-policy veteran Robert Wolfe, a professor at Queen’s University.

Critics say the clause impedes Canada’s freedom to negotiate any future bilateral-trade deal with China – something Ottawa has shown interest in doing – because it may effectively give the United States a seat at the table, if not an implicit veto over a Canada-China free-trade pact. Senior government officials spent Tuesday playing down those fears.

“We’ve been clear that we continue to see the importance of diversifying our trade around the world,” Finance Minister Bill Morneau told a news conference following remarks to the Greater Vancouver Board of Trade. “China is, of course, a place where we continue to have discussions.”

He confirmed that the United States sought assurances that the new proposed trade deal wouldn’t leave a “back door” for other economies to come through Canada into North America. “It’s a point of view that they have. It’s a reasonable point of discussion, even if we don’t fully agree on everything.”

Observers also suggested that the USMCA clause may be designed to send a message to Beijing that the United States’ North American partners support its push to get China to clean up its practices and open its markets. Comments in the past two days from Larry Kudlow, head of U.S. President Donald Trump’s National Economic Council, suggest the U.S. administration sees a united North American trade alliance as a means to further isolate China in the escalating trade war.

“The continent as a whole now stands united against what I’m going to call unfair trading practices by you-know-who,” Mr. Kudlow told reporters on Tuesday. “I think it sends a signal to China that we are acting as one, and I think that’s very good.”

Daniel Schwanen, vice-president of research at economic think tank the C.D. Howe Institute, said the clause “is an imposition on our ability to negotiate, for sure.” However, he believes the provision is meant as more a reasonable consultation within Canada’s most-important trade alliance, than an attempt to block any Canada-China trade deals.

“It’s less of a barrier than it may sound,” he said.

Mr. Wolfe of Queen’s University said the wording of the clause, which specifically refers to a “free-trade agreement,” may have been intentionally crafted to leave the door open for more modest trade pacts with China that don’t amount to a full-fledged free-trade deal.

“It doesn’t have to be a full-fledged free-trade agreement to be a useful conversation,” he said.

With a report from Ian Bailey in Vancouver