Rethinking Free Trade with China

Philip Calvert - 4 December 2017

Prime Minister Justin Trudeau is expected to launch formal free trade negotiations during his upcoming trip to China. China's economic growth and transformation, along with its growing global influence and dynamic private sector, make for a compelling argument for a free trade agreement-provided such an agreement brings genuine improvement to China's business environment and increases market access for Canadian goods and services. However, China is a trading partner like no other and therefore a broader, more creative approach to boosting our trade ties may ultimately result in a stronger and more sustainable economic relationship that benefits both countries.

A standard FTA negotiation will long and difficult. Both sides are likely to put sensitive and difficult demands on the table, such as access to each other's government procurement market. Chinese negotiators will probably want Canada to grant China Market Economy Status in all anti-dumping investigations, along with mobility for Chinese labourers working on projects in Canada, and elimination of differential treatment of investments by state-owned enterprises. Canada will likely want to see certain services and good sectors opened up, including agriculture and financial/professional services, and for an FTA to address newer elements like e-commerce, as well as systemic issues like regulatory barriers and intellectual property protection. Canada's demands will likely include elements that reflect the government's "progressive trade agenda"-labour and environmental standards, gender and indigenous issues. Some NGOs and politicians are demanding that broader human rights commitments be linked to a China FTA.

China has typically not been receptive to this kind of "progressive" agenda, although the environmental obligations may fit in well with its newly articulated international climate change agenda. However, China's trade agreements, whether bilateral or regional, tend to be more limited, while Canada tends to be more ambitious and broad in scope.

The challenge will be negotiating an FTA that effectively addresses the serious challenges Canadian companies face in doing business in China. Consultations with Canadians, including Canadian businesses, have highlighted China's systemic obstacles, including lack of regulatory transparency, consistency and predictability, as well as uneven application of border measures, and local business practices/ subsidies that frequently create an uneven playing field for Canadian business. Whether China will commit to significant systemic changes to its regulatory system within the context of FTA negotiations with a relatively minor trading partner (even if we are a G7 member) remains to be seen. Australia's 10-year FTA negotiations with China eventually had to back away from these issues, and instead focused on measurable market access gains.

Another consideration is public opinion. According to polls one by the Asia-Pacific Foundation and by the University of British Columbia, public support an FTA with China is rising, and now sits at nearly 70 percent. It is not clear, however, how much these poll results are a direct reaction to Canada's recent challenges with NAFTA, and thus how sustainable positive public opinion would be the face of an acceptable compromise on our talks with the US.

Using the Trudeau visit to add momentum to our economic relationship with China makes sense, but moving into a standard FTA negotiation may not be the most effective next step. Canada may wish instead to propose a broader Economic Partnership Agreement. Such an approach could provide a broad framework for productive engagement on bilateral issues and shared international economic agendas, such a fighting trade protectionism and promoting responsible global governance. Exchanges on regulatory issues, including food safety (a major issue in China), could be a constructive way to start addressing systemic concerns, and might lead to a regulatory cooperation mechanism that includes mutual recognition agreements.

An EPA could be useful framework for building mutual confidence and enhancing knowledge, and could serve as a platform for more incremental implementation of a free trade agenda, starting with sectoral agreements. This framework would be a way to lock in wins, for both sides, early, rather than at the end of a long negotiation, and would probably be less controversial amongst Canadians. It would also allow more time for the Canadian side, including governments and business, to improve its institutional and commercial China competence. This, in turn, would enable Canada to take full advantage of an FTA or other trade liberalization initiatives.

China presents significant opportunities for Canada, as we seek greater diversity in our international markets in a world of growing protectionism. Finding the right mechanism to do so is critical to our economic interests. Let's ensure that we get it right.

Philip Calvert is a Senior Fellow at the University of Alberta's China Institute. He spent 10 years at the Canadian embassy in Beijing, and served as Director General for North Asia in Global Affairs, as well as Ambassador to Thailand, Cambodia and Laos. The views expressed are his own.