October 13, 2018 1:46 pm

Study says Canada needs trade with China, but the USMCA will make that more challenging

WATCH: Prime Minister Justin Trudeau said it is still looking into improving its trade relationship with China when asked about how they would report their progress to the U.S. as per the USMCA.

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The legal world was confounded a few weeks ago when it discovered that the United-States-Mexico-Canada-Agreement (USMCA) contained a clause requiring Canada to keep the United States abreast of its intentions to enter free trade talks with “any non-market economies” – which many took to mean China.

Though most experts predicted that this section, Clause 32, would make it much more challenging for Canada to engage in trade talks with China, a study compiled by the Ottawa-based research firm Public Policy Forum states that this is precisely what Canadian regulators need to do.

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“You can’t really be serious about a diversification strategy if you don’t include China in it. China accounts for 33 per cent of global growth, economic growth. That is an extraordinary number. It’s more than all the rest of Asia combined,” explained Edward Greenspon, co-chair of Publicly Policy Forum.

The clause specifically 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.” If any party is opposed to the agreement struck, they’re permitted to give notice of withdrawal from the USMCA.

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

The frustration with this clause arose from the assumption that the only “non-market” economy (defined as an economy that the U.S. Department of Commerce determines does not operate based on free-market principles) that Canada would be interested in increasing trade relations with is China.

Greenspon added that Clause 32 in the USMCA represents the consequences of Canada’s trade dependence on the United States.

“It’s definitely supremely important that Canada diversify its trade relations. We’re sort of seeing right now the consequences of weakness in this clause, and in some other clauses. Our negotiators didn’t have a lot of bargaining power,” he said.

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“When you have 75 per cent of your eggs in one basket, and that basket is owned by people much more powerful than you, that’s what happened.”

Public Policy Forum’s report, entitled “Diversification Not Dependence; a Made-in-Canada China Strategy,” states that not only should Canadian regulators consider engaging China on trade, but that linking the Canadian market to China’s accelerated growth could kick-start our own economy as well.

“So, if you want to diversify, and if you want to create jobs and opportunities and higher incomes for Canadians, you can’t do it unless you’re trading with nations that are growing faster than you and are large in scale, and that brings you to China,” Greenspon explained.

READ MORE: U.S. senators urge Justin Trudeau to drop China’s Huawei from Canada’s upcoming 5G network

Policy experts previously told Global News that Clause 32 is likely rooted in the United States’ ongoing trade war with China.

“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,” said Walid Hejazi, a professor of policy and economics at the University of Toronto’s Rotman School of Management.

Furthermore, Hejazi seconded Greenspon’s argument that Canada’s trade dependence on the United States likely put negotiators in a position where they had no choice but to accept unfavourable terms.

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“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 said.

He also added, that members of the policy community have been calling for increased relations with China for quite some time. However, despite many insisting that increasing trade with China is in Canada’s best interest, Hejazi relents that “the Americans can really blackmail the Canadians to say, it’s China or it’s us.”

These economic realities are not ignored in Public Policy Forum’s report however. Greenspon points out several potential pathways to trade with China that don’t violate the terms of the USMCA.

WATCH: USMCA offers ‘opportunity’ to fix trade imbalance with China: Harper

The solution, the study states, may lie in a sectoral approach to trade rather than drawing up a free trade agreement.

This is because, Clause 32 of the USMCA only specifies that signatories must be informed of intentions to engage in free trade. While a free trade agreement, as defined by the World Trade Organization, covers substantially all trade relations between two nations, a sectoral trade agreement covers just one section of the economy.

“We think it’s very possible that the sectoral approach will not offend the clause in the USMCA,” he said, using agriculture, cleantech and natural resources as potential sectors in which kickoff these talks.

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In addition, the trade needs of Canada and China compliment each other in many of these sectors. For instance, Greenspon explained that China needs safely-sourced food and protein – whereas Canada is extremely strong in agriculture. China has shown interest in obtaining natural resources from a wider variety of trading partners – an area in which Canada has always excelled.

The attitude of the Trump administration towards its main trading partners as of late makes it doubtful that they won’t take issue with a stronger trade relationship between Canada and China, Greenspon notes, though he retorts that the current administration won’t be in power forever.

“We find ourselves on the horns of a dilemma in that we need to United States, and we also need to grow away from this dependence on the United States. That will be a very delicate thing to manage.”

Until the tension around United States’ relationships with other countries simmers down, Greenspon concludes that Canadian regulators should focus on reaching out to China in any way possible, while appeasing the stirring grizzly to the south.

© 2018 Global News, a division of Corus Entertainment Inc.

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