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Business Commentary Including China in CPTPP would benefit Canada more than a sectoral approach to trade

Prime Minister Justin Trudeau with Chinese Premier Li Keqiang in Beijing in 2016.

Lintao Zhang/Getty Images AsiaPac

The Trudeau government, coming off a gritty triumph in renegotiating NAFTA with the U.S. and Mexico, is now back to floundering as it faces its big remaining trade challenge – China.

The vitriolic reaction by Chinese leaders to the inclusion of the so-called “China clause” in the recently concluded U.S.-Mexico-Canada Agreement (USMCA) has clearly spooked Ottawa about its future relationship with the country.

This is because the offending USMCA clause can be interpreted as precluding any one of the three parties from negotiating a free-trade agreement with a non-market economy, such as China, without the consent of the others. Although Canadian government officials have played down the impact of the clause, make no mistake that it is an overt U.S. attempt to put China in the doghouse while trying to settle their bilateral trade war. Having said that, Canada needn’t apologize for supporting the U.S. over the continuing flagrant violation by Chinese authorities of World Trade Organization (WTO) rules.

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As The Globe and Mail recently editorialized, that clause may have done this country a favour in parrying unwanted Chinese efforts to pursue a bilateral trade agreement with Canada – a symbolic first among Group of Seven countries.

In response to a seemingly relentless Chinese full-court press, the new Canadian talking points repeated by Finance Minister Bill Morneau, International Trade Diversification Minister Jim Carr, Treasury Board President Scott Brison and Ambassador to China John McCallum, focus on a nebulous proposal to proceed in the short term with specific sectoral deals, while maintaining the long-term objective of a comprehensive agreement.

Where did this come from? It turns out that in October of this year, the Public Policy Forum, a Canadian research and advocacy organization, published a report entitled Diversification not Dependence: A Made-in-Canada China Strategy. The principal recommendation in this report is to “begin now with targeted sectoral agreements … [starting] with agri-food and natural resources.”

Unfortunately, the fatal flaw of the proposed sectoral approach with China is that it cannot deal with Canada’s principal impediment to access to the Chinese market, especially for resource-based products: tariffs averaging about 15 per cent. Other issues, such as regulatory impediments, pale in comparison.

The reason tariffs cannot be reduced on a sector-by-sector basis is that such action would run afoul of WTO rules that require a bilateral deal to cover virtually all industrial sectors in order to gain exemption from providing other WTO members equal treatment. There is therefore no back-door entry for Canada’s resources.

In fact, Australia, a commodity-exporting competitor of Canada, recognized this problem by concluding a bilateral free-trade agreement with China in 2015 after 10 years of negotiation. As a result, with its preferential access to the Chinese market, Australia already has a big leg up on Canada.

All of this suggests that the proposed sectoral approach to Canada-China trade relations is not a strategy, let alone a useful tactic that goes beyond business-as-usual co-operation between governments. As such, it is not sustainable, even as a talking point.

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A more fruitful approach for Canada would be the pursuit of China to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), of which Canada is a member. As a state-of-the-art trade agreement with advanced undertakings in areas such as intellectual property protection, Chinese adherence to the CPTPP would require their commitment to significant changes in policies and practices – changes that could be monitored for compliance by the 11 other members.

Such a strategy would take some time to implement and could not realistically begin before some resolution of the U.S.-China dispute. Indeed, potential policy changes by China in resolving that standoff could facilitate adherence to CPTPP obligations.

Further, it is not inconceivable – probably post-Donald Trump – that the United States could seek entry into an expanding CPTPP. It was, after all, an American initiative, although originally designed to contain an expansionist China.

In the meantime, Canada could engage in pragmatic bilateral economic initiatives with China that serve our mutual interests. Let’s just not try to dress it up as a better mousetrap.

Andrei Sulzenko is a former trade negotiator and is currently an executive fellow at the School of Public Policy, University of Calgary

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