Us or Them: The anti-China provision may become the norm in US trade deals

Canada,Mexico and the United States agreed last year to a newtrade agreement – dubbed the USMCA – to replace the longstandingNorth American Free Trade Agreement (NAFTA). The agreement is a win for PresidentDonald Trump, who will no doubt see it as proof positive that his strong, zerosum approach to international relations is working.

TheUSMCA provides many talking points, among them the increased access Americandairy farmers will get to the Canadian market, tightened intellectual propertyprotection for pharmaceuticals and restrictive local content requirement for automobilesmaking it more difficult to qualify for duty free access under the agreement.

Hiddendeep in the USMCA is a curious, unprecedented provision specifying that if theUnited States, Mexico or Canada intends to enter into a tradedeal with a “non-market” economy, the other partners can terminatethe USMCA and form their own bilateral trade pact.

Non-marketeconomy is defined in the agreement as being a country where “atleast one Party has determined to be a non-market economy for purposes of itstrade remedy laws and is a country with which no Party has a free tradeagreement.”

Thoughavailable to any partner, it is thought that only the United States would makeuse of the withdrawal provision.

Theprovision is aimed at China. President Trump accuses China of manipulating thetrading system, illegally subsidizing companies and “stealing or pressuringforeign companies to hand over technology” as a condition for doing business inthe country.

Theinnovative withdrawal provision is another line of attack in the antagonistic President’songoing Trade War.The intent is to isolate China. The message is very clear. Countries can havedeals with the United States or with China, but not both.  

The provisionis effectively an American veto over any China trade deal by Canada or Mexico.Canada and Mexico are economically dependent on the U.S., and neither wouldabandon that relationship for one with China.

The Trumpadministration appears to be changing tact as the trade war with Chinaintensifies. After a year of acrimony, name-calling and even economic sanctionsagainst its most loyal friends, Trump is now seeking to recruit them aspartners in coercing China to become more open to foreign products andinvestment and shift to a market-oriented economy. Canada and Mexico may justhave been unwittingly dragged into the trade war.

Canadasends 75 percent of its exports to the U.S. and is desperate to diversity awayfrom its close but erratic neighbor. Ratification of the Comprehensiveand Progressive Trans-Pacific Partnership, an agreement which willexpand Canada’s reach into Asia, will provide an initial boost to thediversification strategy. But Canada needs more, and for some time had wanted anagreement with China.

TheCanadian government has always been tempted by the allure of China, yet scaredof the burgeoning economic power.  Canadaand China discussed trade in 2016, but the meetings did not progress to the negotiatingstage. It is believed both parties were keen to re-start the talks before adiplomatic spat erupted over the arrestand potential extradition of Huawei CFO Meng Wanzhou and China’s subsequentarrest of several Canadian citizens.

Some nowbelieve that even if Canada wanted to it could not proceed with further trade discussionswith China. For this reason, the provision sparked debate and controversy inCanada among the left and right. Left leaning politician Tracey Ramsey calledthe provision a “severerestriction on Canadian independence” and one that holds Canada “hostage to theAmericans if we decide to trade with another country.” Conservative legislatorMichael Chong said the deal “literallymakes us a vassal state of the Americans.”

TheCanadian government counters that the termination provision is not a cause forconcern, as the NAFTA always allowed for a party to withdraw from the treaty onsix months’ notice without cause. That general withdrawal clause is repeated inthe USMCA.

CanadianForeign Affairs Minister Chrystia Freeland stated that each country has thesovereign right to determine whether it wants to remain in a trade agreement –“That hasalways been the case with NAFTA. It continues to be the case…”. CanadianFinance Minister Bill Morneau repeated the party line, stating that theprovision will not “makea material difference in our activities”.

TheCanadian government is correct in saying that the provision is somewhatredundant in that a country could withdraw for no reason whatsoever on sixmonths’ notice, but they are incorrect in downplaying its significance. Theprovision was unnecessary, but it was included in the agreement for a reason. Itsend a signal.

UnitedStates Secretary of Commerce Wilbur Ross laid bare the reason when he admittedthe provision is a “poisonpill” to be used when trade partners seek to engage with trade in China.The United States does not see the provision as a one off unique to the USMCA,but rather wants it replicated in other deals. The European Union and Japan arethe prime targets, and the United States recently stated in its “specificnegotiating objectives” with the European Union the ability to “takeappropriate action” should Europe negotiate a trade agreement with anon-market economy. China has reason to worry, even if its trading relationshipwith these partners is not immediately affected or harmed.

TheAmericans are saying to partners, “choose us or them”. This is a sign that theUnited States sees its Trade War with China lasting for a long time. This, morethan the provision itself, is the worrying take-away.

Bryan Mercurio is Trade Pacts affiliate and Professor of Law and Associate Dean (Research) at the Chinese University of Hong Kong, Faculty of Law.