NAFTA talks forced Canada to pick a side in U.S.-China trade war

When the Trudeau government agreed to a revised North American free trade deal, the Americans said Canadaalso agreed to something else: joining Donald Trump's trade war on China.

"The continent as a whole now stands united against what I'm going to call unfair trading practices," Trump's National Economic Council directorLarryKudlow saidthe day after the new United StatesMexicoCanada Agreement (USMCA) rolled out.

"There is a trade coalition of the willing that is going to fix a lot of broke areas of international trade [by] getting on the same page and co-operating. And that coalition will stand up to China."

The White House is fixated on Chinese trade practices as the root of America'seconomic ills.

But until recently, many officials in Canada might have said their biggest problem with Chinese trade is that there's notenough of it,givenCanada's needto seek paths to economic growthbeyond the U.S.

As the U.S.China tariff war escalated, Canada might have preferredto stay neutral. But oncethe Trump administrationstopped exempting Canada from steel and aluminum tariffs, thenthreatened more tariffs on cars, the Trudeau government had to pick a side.

Even a charitable reading of what Canada accomplished in the renegotiation of the North American Free Trade Agreement suggeststhese tariffs worked as leverage for the Americans.

For Canada, it was better to be inside an Americantariff wall than outside. But even as it continues to demand the removal of "national security" tariffs on principle,Canada'ssignature on this text helpsnormalize such tariffsasa legitimate trade tool.

Steel safeguards help protect U.S.

Finance Minister Bill Morneau'sannouncement Thursday of "emergency safeguards" imposed on foreign steel imports is another signal that Canada hassigned on to the cause.

Yes, more 25 per cent steel tariffscould increasecosts for secondary manufacturers in Canada. But when faced with U.S. demands to crack down on "transshipments" exports thatuse a third country like Canada as a trading way-station before moving on to the U.S. did Morneau have any choice?

Canada and Mexico concluded they couldn't beat 'em, so they joined 'em. South Korea made a similar call when it agreed to revise its bilateral trade deal with the U.S. and accept quotas on its steel exports.

Others may follow.Kudlowsaidif U.S. talks are successful, the European Union and Japan will be the next recruits for this coalition to fightChina's theft ofintellectual property, currency manipulation and unfair trade barriers.

In an interview with Fox Business, former prime minister Stephen Harper said the U.S. can't let ageopolitical rival like China exploit the U.S.market.

"While I can debate some of Trump's tactics, the fact that he is willing to address this I think is very important," Harper said.

Canada as a 'vassal state'

Negotiating an integratedtrading relationship with both the U.S. and China now seems impossible.

The text of the USMCAlays itbare in big ways (automotive rules of origin designed to shut Chinaout), smaller ways (dairy export restrictionsdesigned to chokeforeign investmentin Canada's supply-managed dairysector) and outright threatslike Article 32.10, America's custom-builtejection seat, which allows it to dissolve the deal with six months' notice if Canada or Mexico negotiates a bilateral trade deal with a "non-market economy" (read: China) without Uncle Sam's blessing.

"The current government was so desperate for a deal that we now have to ask Washington for permission to negotiate free trade with certain countries. Article 32 makes us a vassal state," said Conservative MP Michael Chong.

The Trudeau government responds to this criticism by notingthe U.S. already hasthe ability to withdraw from NAFTAwithsix months' notice for any reason. The message: Relax,nothing's changed.

But the new notification requirements effectively a duty to consult, if not a total veto fortalkswith a non-market economy(NME) go beyond what's normalin a regional trade deal.

NME is a self-definingterm inthis agreement. It means whatever the U.S. says it does, but it most certainly describes China in today's context.

"Although free trade agreements regularly require consultations on a variety of issues, they are typically on more narrow regulatory matters," said Mark Wu, an international trade professor at Harvard Law School who specializes in Chinese trade issues.

"Article 32.10 of the USMCA represents a novel and unprecedented approach," he said. And reiterating the six-month notice language in this part of the textis "particularly extraordinary."

'Poison pill' prerequisite

The Trump administration appearsfixated on the risk ofChinese imports slipping in through aback door opened by lax Canadian or Mexican rules.

"There is the persistent danger that a country could use a trading partner to circumvent tariffs," Wu said. "Those risks increase when countries conclude free trade agreements that allow for deeper integration of their economies.

"This provision is aimed at future-proofing the USMCA against such risk."

Including a termination threat is"logical, it's a kind of poison pill," U.S. Commerce Secretary Wilbur Ross told Bloomberg News.

And USMCA now sets a precedent: "People can come to understand that this is one of your prerequisites to make a deal," Ross said.

Bullying China, not Canada?

The practical implications may not be all that drastic.

Former Conservative cabinet minister James Moore, who played an advisory role in the NAFTA talks, said Canada's overlapping obligations to different partners inevitably requiresome degree of parallel negotiation keeping Five Eyes security partners informed when talking to China, for example.

Hypothetical trade talks with China would be unlikely to conclude during the Trump presidency anyway.

"It would be a long burn," Moore said on Power & Politics. A deal far less comprehensive than what Canada's been contemplating with China took Australia ten years to complete.

Susan Aaronson, a trade researcher at George Washington University'sElliott School of International Affairs, questions the enforceability ofArticle 32.10.

"Canada can still continue to negotiate," she said. "In any relationship, you give up sovereignty."

But the U.S. has more leverage now. "It's holding Canada's feet to the fire," Aaronsonsaid. Still, she added, "it's not bullying of Canada. I think it's bullying of China."

In doing so, she said, "I think the United States is becoming more like China." In other words, the U.S. is pushing for managed trade, notfree trade, on everything from wages to regulations.

So far, China doesn't sound very intimidated.

"This unyielding nation suffered foreign bullying for many times in history, but never succumbed to it," Chinese Commerce Minister Zhong ShantoldBloombergNews. "The U.S. should not underestimate China's resolve and will."

'Diversification or dependence'

In a report released this weekby the Public Policy Forum, authors Ed Greenspon and Kevin Lynch suggest that even before the USMCA, long-term comprehensive trade talks with China weren't the best approach: they take too long and tend to trip over any number of changing political and economic circumstances.

Instead, they suggest pursuingincremental gains through "sectoral agreements" starting with agriculture, foodand other natural resources, and then moving on to areas like tourism and education,where there's a demonstrated demand for Canadian goods and services, especially for China's growing middle class.

An agreement to cut tariffs on China would be blocked by the Americans. But non-tariff issues like burdensome regulations, for example "are increasingly more of an issue to a businessperson than the tariff itself," Lynch said.

What does the future hold for trade between Canada and China?

6 years ago

Duration 9:31

Public Policy Forum's Edward Greenspon and former Clerk of the Privy Council Kevin Lynch, discuss the Public Policy Forum's new report which calls for increased trade with China.

Canada's former strategy of organizing trade missions to China would land contracts for Canadian firms across arange of industries, but never reallyintegrated any particular part of the economy with that of the People's Republic.

By going deeper, perhaps one product or service at a time, "you generate more momentum, confidence and capacity," Lynch said. "Ithink it leads you more inextricably toward a free trade agreement if the political winds blow in that direction at some point in the future."

The Trump administration's "coalition of the willing" is starting to seemlike a hub-and-spoke trading system, with the U.S. dealing fromits centre.

Faced with that, "we have to get serious," Greenspon said."It's diversification or it's dependence.

"If we don't begin to diversify, then we're just going to be in a perpetual circuit of having no leverage, no bargaining power."