The US-Mexico-Canada Agreement: What's Next for Trade with China?

    Commentary article by Phil Calvert

    By Phil Calvert on October 3, 2018

    The opinions expressed by authors in this commentary do not necessarily represent the views of the China Institute or the University of Alberta.

    When the text of the new Canada-US-Mexico trade agreement was released, many were concerned to see a new and unforeseen provision that will have a direct impact on Canada’s international trade strategy. Article 32.10 of the agreement specifies that if any of the signatories to the agreement enters into a free trade agreement with a non-market economy, the other two parties can terminate the agreement and enter into a more limited bilateral agreement with the country concerned.

    This is pretty heavy-handed stuff. It’s all about China, of course.  The term “market economy status” specifically relates to how accurate domestic prices should be determined in anti-dumping cases so that an assessment can be made of whether and by how much a product may be being dumped in foreign markets.  But it has a larger meaning for leaders on both sides as an indicator of how much the Chinese state is still involved in the economy, and its impact on trading partners.  Article 32.10 expresses the intensity of US suspicion regarding China’s trade practices—a suspicion that many countries share.  It also reflects growing Sino-US trade tensions, and US concerns about the possibility of a China-Canada FTA.

    It’s not surprising that the China policy community in Canada—at least those who have been advocating for a free trade agreement with China, have expressed consternation at this new provision.  It ties the hands of the current Liberal government, which has been exploring an FTA with China since Trudeau’s 2016 visit to China, as well as the hands of any future government.

    In the face of this development, what should Canada do with respect to its trade relationship with China? First of all, we should keep in mind that the economic relationship with our second largest trading partner is healthy and growing. It may not be living up to its full potential, but that cannot be solved by an FTA alone.  Significant investment in the relationship, and in China competence in institutions, government and the private sector, will help improve Canada’s performance in this market.

    Canada will also have to think creatively about the architecture of its bilateral trade relationship. The fact that a standard, full-blown FTA is no longer in the cards calls for a different approach—a broad Economic Partnership Framework which would serve as an umbrella for a range of bilateral economic initiatives.

    An EPF would be broad in scope, but nimble and flexible in application. Under such a framework, Canada and China could explore a range of possible initiatives, including limited sectoral agreements in goods and/or services, which could have more immediate benefit to some parts of the Canadian economy than would have been achieved by waiting for the conclusion of a full-scale FTA.  The EPF could also address regulatory issues, promoting transparency and consistency, and exploring initiatives like mutual recognition and certification agreements that would reduce the administrative burden associated with trade in China. It could also include formal, high-level mechanisms for swiftly addressing trade disputes. Cooperation could also extend to broader global issues, like battling global protectionism. It could also eventually provide a good framework for discussing issues considered too sensitive for a standard FTA and which were obstacles to the intended launch of FTA talks last year.

    In essence, an Economic Partnership Framework would be an ongoing process of continued liberalisation and strengthened cooperation. Since the WTO/GATT defines an FTA as something that covers “substantially all trade”, an EPF would not violate our agreement with the US and Mexico.  It would, however, be nimble enough to address new issues and launch new initiatives, broad enough to address the range of bilateral economic concerns, and concrete enough to have a real impact on market access for Canadian companies in the China market—earlier than they might have had under a standard free trade agreement.

    Of course, the Canadian government would continue to address other bilateral concerns outside the EPF—real and serious concerns with respect to security and human rights, for example.

    Conclusion of a renewed trade agreement with the US and Mexico is good news for Canada. Canada had to make concessions to reach agreement, and Article 32.10 is a major one. But it should not stand in the way of further developing our trade ties with China if we invest time and effort into finding a creative and effective way forward.