Canada urged to seek sectoral trade deals with China

Sector-specific agreements would build business links with Asia despite USMCA: PPF report

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Canada should pursue deals that focus on specific industries such as agriculture and energy in expanding its business links with China in light of the perceived “U.S. veto” clause in the new U.S.-Mexico-Canada Agreement (USMCA) trade pact.

That’s one of 12 recommendations made by Canadian think tank Public Policy Forum (PPF) in its Diversification Not Dependence: A Made-in-Canada China Strategy report released last Thursday.

The report, the culmination of 18 months of discussion within the PPF’s Consultative Forum on China, included the views of academics, government officials, non-governmental organizations, labour unions and human rights groups.

Forum co-chairman Kevin Lynch said that, while the research was conducted prior to the USMCA’s Article 32.10 was revealed, the report’s findings are timely considering the circumstances.

“We came to the view – well before anyone was aware of Clause 32.10 in the USMCA – that a sectoral approach gives us better prospects for success [with China] than full-blown comprehensive free-trade negotiations,” said Lynch, who is also BMO Financial Group’s vice-chairman. “The reason for that is comprehensive trade negotiations take a long time. CETA [Canada-European Union Comprehensive Economic and Trade Agreement] took eight years; China’s FTA [free-trade agreement] with Australia took 10 years.… It’s hard to keep businesses excited, interested and engaged during that time, so I think there’s more of a chance for failure if we try to do that.”

Article 32.10 allows the United States to pull out of the USMCA if either Canada or Mexico engages a non-market economy in comprehensive free-trade negotiations. China is the largest of a handful of countries the World Trade Organization deems “non-market.”

The PPF’s report recommends that Ottawa focus first on non-sensitive sectors like agri-foods and energy and stay away from industries that involve technology transfer and national security links.

Because tariff barriers can’t be addressed outside of a free-trade agreement, the report suggests pursuing sector-specific efforts like a mutual recognition of certification and a mechanism to mediate disputes between parties to bring Canadian and Chinese businesses closer.

“We note that before free trade with the U.S., there existed a long-standing auto pact, which proved a confidence builder,” the report said as it cited U.S.-Canada relations as an example. “A sectoral formulation offers a model for diversifying more rapidly, getting wins on the board, building capacity and avoiding the risk of attempting to leap before we can walk.”

The key, Lynch said, is to accumulate momentum in the Canada-China business relationship sector by sector, building the ground-up support for trade and exchange in lieu of a comprehensive FTA.

“There’s no national security issues with selling a Nova Scotia lobster to a Beijing restaurant. And you can get a whole lot of folks doing business there, talking about doing business there, learning about doing business there. That momentum, I believe, begets more interest.”

Lynch added that he isn’t concerned that Washington might have concerns about a sectoral Canada-China approach, noting that the United States has higher proportional exports to China in both agriculture and energy than Canada does.

He did caution, however, that the report’s 12 recommendations need to be taken as a package rather than piecemeal.

The PPF also recommends that:

Ottawa negotiate co-operative arrangements with Beijing in environmental and other global interest areas so it can offer Canadian expertise in social consumer protection and adjust policies and funds to help companies get “China-ready”;

•Ottawa draft a clear parliamentary declaration that Canada will not tolerate external political interference on Canadian sovereignty by any foreign country; and

•Canada work with “like--minded countries within relevant international institutions” to get China to abide by its legal commitments in areas such as human rights.

The report also does not close the doors on a future comprehensive trace pact with China – depending on “the course of the new USMCA and whether the U.S. ultimately defines China as a non-market economy.”

Ultimately, Lynch said it is crucial for Canada to have an in-depth, homemade solution to the China relations dilemma, given the USMCA ordeal and the reality that Canada more than ever needs to diversify its trade beyond the usual markets.

“What the report tries to do, really purposely, is to find out if there is a balance where everyone feels comfortable moving forward,” he said. “I think we found that balance, and I think the government should find that helpful in trying to inform them how to move forward. Canada, in its own self-interest, has to diversify trade. So if you accept that, then you have to deepen relations with China. It almost flows logically from the need to diversify our trade.”

The full report can be read at ppforum.ca.