Why Canada likely just gave the U.S. and Mexico a say over its own trade talks with China

Buried in throes of the updated free trade deal between Canada, the United States and Mexico, is a clause that some are concerned could pose a threat not only to Canada’s ability to conduct trade with China, but to its national independence as a whole.

What is Clause 32?

Clause 32, which sits third from the bottom in the United States-Mexico-Canada Agreement, states that “at least three months prior to commencing negotiations, a party shall inform the other parties of its intention to commence free trade agreement negotiations with a non-market country.”

A non-market country refers to an economy that the U.S. Department of Commerce determines does not operate based on free-market principles, according to a definition determined by the U.S. Court of International Trade in 2009 during a case known as Arch Chems., Inc. v. United States.

This is significant because according to international trade strategist Peter Clark, the only two non-market economies Canada is interested in trading with are Vietnam and China — and Canada already has a trade deal with Vietnam.

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Therefore, experts agree that this clause is a proactive attempt to subvert any blossoming trade relationships between Canada and China, before they take hold.

Why are policy experts concerned?

Foreign Affairs Minister Chrystia Freeland and Prime Minister Justin Trudeau have tried to downplay the importance of Clause 32, countering that it likely won’t ever be used.

In Clark’s opinion, however, “that’s nonsense. It’s there because somebody will want to use it.”

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And what’s more, “it is interference,” he insisted.

“It’s just the concept of the United States trying to exercise supervision — to put a polite word on it — of Canadian trade efforts with China… That’s just too hands on.”

He’s not the only Canadian trade expert who feels this way.

Bernard Wolf went a step further.

The York University professor emeritus of economics and international business said, “this really has nothing to do with Canada or Mexico, this has to do with another cannonball directed at China.”

He went on to say that while Clause 32 “could have teeth,” even if it seems largely symbolic.

‘We’re the mouse and they’re the elephant. What price would we have to pay in order to protest?”

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At the end of the day, however, he predicted that the clause would be more of a “thorn in the Chinese’s side” than an impediment to Canadian trade efforts.

Lawrence L. Herman, an international lawyer and public policy counsellor, added that even from a confidential standpoint, sharing details of these talks with the U.S. could pose a problem for Canada when negotiating with China in the future.

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“For one thing, when you enter into negotiations you have to respect confidentiality,” he said. There’s a requirement not to negotiate in public and not to share protective or confidential information that is disclosed during the course of the discussions.”

While most experts agreed that China and Canada aren’t ready to ink a trade deal quite yet, Clause 32 will likely complicate matters.

Experts call Clause 32 ‘unusual,’ ‘unprecedented,’ and ‘rather strange’

While it’s not unusual for trade agreements to limit the sovereignty of the signatory nations slightly, the USMCA’s Clause 32 takes it a step too far, Herman stated.

“That’s a very unusual agreement, a very unusual provision, almost in my experience unprecedented,” he explained.

He added, however, that NAFTA negotiations have taken a back seat to the trade war brewing between the United States and China.

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Clark, who’s worked in and around government institutions since 1965, said he has never seen anything like this in a trade agreement in his career.

He adds, however, that the power imbalance between the U.S. and the deal’s two other signatories makes it difficult for Canada to use Clause 32 to its own advantage.

“I think if we threaten to leave the agreement, the U.S. would say, ‘Well, sorry about that, don’t let the door hit you on the way out,” he said.

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Did we have a choice? 

While some are alarmed by the forwardness of the clause, Canada’s dependence on the United States for much of our trade portfolio put negotiators between Trump and a hard place, said Walid Hejazi, professor of economics and policy at the University of Toronto.

“What the Americans are doing is to ensure that Canada remains vulnerable to them, politically, they want to ensure that we remain under the American political umbrella and wouldn’t get closer to a country like China,” Hejazi said.

He added, however, that if Canadian legislators had focused their efforts on diversifying trade prospects years ago, the country may have found itself with more leverage while renegotiating NAFTA.

“If we were much more diversified, it would mean two things. Our vulnerability to unilateral actions by the U.S. would be limited, but secondly, and more importantly, in the aftermath of American action, we would have the networks in place to diversify our trade,” Hejazi stated.

Gus Van Harten, a professor at Osgoode Hall Law School at York University, stated that despite Clause 32, it’s futile to think that the U.S. would have no leverage over Canada’s trade activity.

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“All they can do is apply the same kind of pressure that they’ve been applying for the last few years to us about NAFTA, and that they will always be able to apply to us regardless.”

Clause 32 simply formalizes this influence, Harten concluded.

“There’s definitely some losses but when you’re dealing with a country with so much leverage over you no matter what, we’re never going to have a trade agreement that protects us.”