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Global Commerce Insider Trade deal’s ‘China clause’ gives expanding companies pause

Companies such as Canadian startup inMotive, which makes electric vehicle transmissions, have high hopes for the Chinese market. But it's concerned a clause in the USMCA trade deal could hurt its global ambitions.

The Associated Press

Paul Bottero has big plans to turn his startup, inMotive, into a global powerhouse in electric auto parts – as long as the new North American trade deal doesn’t get in the way.

“We have an office in Bangalore and we’ll be opening an office in Shanghai next year,” says Mr. Bottero, president and chief executive officer of the Toronto-headquartered firm he co-founded eight years ago.

With 23 employees, Mr. Bottero is looking to the future. His company has developed an electric vehicle (EV) transmission that he says has greater range, acceleration and top speeds than those now in electric cars and will save up to 50 kilograms in weight in each car.

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Even though the United States and Mexico are Canada’s auto manufacturing partners, China is an obvious target market for these transmissions. According to researcher Bloomberg New Energy Finance, China already accounts for roughly half of the world’s EV market.

While EVs account for only about 2 per cent of global sales, and both the Trump administration and Premier Doug Ford’s Ontario government’s policies are hostile to EVs, China is embracing the technology, so it’s a logical place for inMotive to expand.

But Mr. Bottero is concerned that a clause buried in the proposed United States-Mexico-Canada Agreement (USMCA) could cause trouble for his expansion plans – and for Canada’s efforts to increase trade with China.

Article 32.10 is the troublesome section. Experts are already referring to it as “the China clause.”

The section addresses what happens when any one of the three USMCA countries wants “to commence free-trade agreement negotiations with a non-market country.”

It says, in effect, that after three months’ notice, the country that wants to talk free trade with the non-market country can be booted out of the North American deal.

The process could be triggered if one of the partners (say President Donald Trump’s United States) is angered by another’s free-trade move (say Prime Minister Justin Trudeau’s intentions to chat with China). Under the clause, the United States could withdraw from USMCA and replace it with a bilateral deal with Mexico, leaving Canada out.

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'We’re going to have to find a solution [to the 'China clause]'. China is just too big a market for us,' says Paul Bottero, president and chief executive officer of Toronto-based inMotive.

inMotive

“It’s definitely something that we’re watching,” Mr. Bottero says.

In sync with many trade experts, however, he’s not sure whether this clause has enough teeth to keep Canadian companies from expanding trade ties with China. While it’s not quite keeping him awake at night, the clause gives him pause.

“We’re going to have to find a solution. China is just too big a market for us,” he says.

The worst-case scenario is considered unlikely, but current events have a way of conspiring these days to make the unlikely a little less so.

At the beginning of October, as the ink on USMCA was still drying, Mr. Trudeau said pointedly that Canada intends to pursue deeper trade ties with China, which is already Canada’s second-largest single nation trading partner (behind the United States) even without a pact.

Even more pointedly, in comments clearly relating to the questionable clause, Minister of Foreign Affairs Chrystia Freeland said that Canada does not consider China to be a non-market economy.

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Mr. Trump doesn’t necessarily agree about China, though. “They’re hurting us,” he has said.

His administration has already slapped US$250-billion worth of tariffs on Chinese goods. China has retaliated with US$110-billion on U.S. goods, but the President has threatened to add another US$267-billion in tariffs.

(The World Trade Organization lists China as a non-market economy even though China is a member and a huge global trading partner and has sought to get off the list. Vietnam, North Korea and Mongolia are among a handful of other countries also on the list.)

Jesse Goldman, partner and international trade expert at Borden Ladner Gervais, says that while analysts of this situation take notice of the clause and Mr. Trump’s bellicose talk about China, it’s not likely to derail prospects for businesses such as inMotive.

“The optics of this clause are not ideal from a Canadian standpoint, but in practical terms it’s overblown,” Mr. Goldman says.

“For one thing, USMCA is designed to last longer than any one U.S. administration,” he explains. Another administration may be less hostile than this one to Chinese trade policies, and even Mr. Trump has said he’s willing to do a deal at some point with China, which implies that the U.S. doesn’t see it as a non-market economy anyway."

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The second reason not to be overly concerned is that even if Canadian and Chinese trade negotiators get along swimmingly, it will take years to negotiate a free-trade deal.

“Canada and China can continue to negotiate, but it’s not something that’s going to happen overnight,” Mr. Goldman says.

Third, the United States would be shooting itself in the foot if it were to withdraw from USMCA over something like Canada-China talks.

“The key provision in USMCA, particularly for areas like the auto sector, simply don’t function without Canada. If the U.S. were to withdraw and keep out Canada, it would in fact sacrifice the entire supply chain for the auto industry,” Mr. Goldman notes.

This would be encouraging for Mr. Bottero, who says that expanding his EV transmission business into the United States is just as important to him as expanding into China.

“The U.S. is the world’s second-largest automotive market. We’re seeing American car companies designing electric vehicles for the Chinese market first [before the U.S. market],” he says. He wants his e-transmissions to be a part of this U.S. expansion.

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Ideally, Mr. Bottero says he’d like a simple outcome from anyone’s reading of USMCA Article 32.10, or any future agreements with other countries.

“Clarity and simplicity,” he says.

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