John Gruetzner, Managing Director of Intercedent Limited
To quote Chairman Mao: "The earth will continue to turn, Heaven will not fall." This is the most balanced response to the content of Article 32.10 in the United States, Mexico and Canada Free Trade Agreement, or USCMCA, which requires notification of, and co-ordination with all member countries when entering a free trade agreement with a non-market economy. Taking a more stoic but objective view of Article 32.10, which targets China, helps keep the Canada-China relationship moving forward to both peoples benefit.
Canada and China must work together to mitigate the bilateral fallout that rhetoric from diplomatic jousting and uninformed pugilists in both countries foment by placing too much emphasis on this undertaking.
The impact of a Free Trade agreement on the actual expansion of the bilateral flow of goods and services is generally over stated. There is more important work outside of an FTA to be done in Canada to make our exporters China market savvy. China has a lot of systemic reform to undertake internally before FTA negotiations can be contemplated. These economic reforms in China will ideally now accelerate after the reforms initiated nearly 40 years ago by Deng Xiaoping.
Currently an FTA is structurally not plausible for both countries to implement. The negotiation would likely fail or the Agreement or not be sincerely implemented. Until then, given that Canada's commercial relationship with China is not just government to government but more importantly relies on business to business and business to consumer commerce. These engagements will persist and expand within the existing commercial framework.
There is no doubt that by agreeing to Article 32.10 Canada is trading part of its prerogative as a free trading nation to a third party controlled process. This carries negative implications politically within Canada and is a blow to the freedom and right to trade globally. President Trump is proud of his successful golf courses. Canada, in his mind, is joining his golf club and he is imposing a dress code as part of that privilege.
There is, however, an even greater risk caused by imposing this dress code on Canada and Mexico to the United States strategic goals if the trade polemics between and China and the US continue to accelerate after the midterm elections. This risk is that China will respond in kind with its own dress code. China might require similar provisions as the ones imposed on Canada and Mexico to be added to its own FTA agreements and Belt and Road Initiative financial assistance. This may force China's major trading partners and neighbours to draw harder lines than should be drawn if the next economic cold war is to be avoided. Notably China has more neighbours than the US. American companies, unless they focus equal attention on doing well in global emerging markets as defending their own market, will ultimately lose a protracted trade war. This will simply because the economies of skill will tip in China's favor. The founder of Alibaba is potentially not wrong when he states this trade war may last 20 years.
Post-USMCA Canada should focus its energy to work with the EU, China and key Asian trading partners to update the World Trade Organization. A key part of this updating will be China's compliance to the original spirit as well as the regulatory regime that Accession was granted under. The complexity and political implications of all regional and bilateral trade is presently underpinned by the undermining of the WTO. Working together to modernize the WTO will broaden support within the White House for the WTO and create goodwill with President Trump if Canada and China are successful in improving it. A revived WTO process would compliment China's next round of reform policies and eventually provide Canadian exporters market access to China comparable to that which could be yielded through a Free Trade Agreement. It will also be easier to enforce.
It is important to recall that one of the key values of the World Trade Organization was to secure market access for nations from lower tiers of the global economy, or what was once labelled the developing world. China's own consumers will eventually benefit as its own government returns to the spirit and laws of the WTO. To do this will require stepping back after 40 years of reform with pride of socialist market driven success before launching the next 40 years of market driven success.
Canadian exporters need time to adjust to the return of stability that the USMCA provides before exploring new markets. With CETA, TPP and the potential of an ASEAN-Canada FTA there are still significant enough export markets for the time being to chase. This slowdown of focus on China should actually force Canadian firms to triage which global marketplace is the best for their company rather than take a leap into China based on the size of its population and economy.
There may be diplomatic venting coming from China directed at Canada but once this is over Canada and China should focus on doing more business together within the existing framework and work together to build a better partnership that is compliant to USMCA but also a role model for diffusing the trade war. The main goal of Trump's China team is to force China to be a market economy, which is actually in the Chinese people's interest. This is also where the economic reformers in Beijing want it to end up and what was originally committed to at the Third Plenum in 2015.
China's own demand for dairy products creates an opportunity to step up and work with Canada to buy Canada's newly created dairy surplus. This will create the goodwill within Canada for an enhanced economic partnership or a future FTA agreement. An FTA negotiation might even be launched with US support after the US federal election in 2020. This will be especially likely if China has moved forward to decouple the state's role in their economy.
Within China there are a number of obstacles that include, behind the border regulatory barriers, restrictions on trade and capital account currency convertibility and structural changes to China's VAT system which must be tackled before a free trade agreement can be successfully implemented.
President Trump's negotiation style is a combination of a monopoly player that wants your fourth hotel and a carnival barker. It is effective. It is therefore disingenuous for China to complain about Canada's negotiation position taken to secure a NAFTA Version 2.0. This wild card approach by Trump is also forcing China to accept new obligations to continue to trade with United States. A key point is that the US requires its trading partners to adhere to the principal and the letter of reciprocity of trade agreements to guarantee its own continued access to the United States. Canada will as a result of this process probably gain equal or possibly better access to China under equal treatment through the most favored nation clause of the WTO than it could under a bilateral Free Trade Agreement.
At the non-commercial bilateral level Canada and China ideally will use this break in commercial dialogue to focus on more important global problems. The areas where we share common ground include supporting the Korean Peninsula peace process, mitigating the Belt and Road Initiative's impact on climate change and the environment, enhanced protection of biodiversity in the form of an updated Convention on International Trade on Endangered Species and finding a way for both countries to support important but languishing projects like the Bonn Convention-a global commitment to plant 350 million hectares of trees.
The tougher areas of Taiwan, Hong Kong, the South China Sea and our respective domestic experience and mistakes in delivering social and economic progress to indigenous Canadians and the non-Han minorities should also be tackled off camera. This will allow the free exchange of ideas, information and perspective on these matters to advance. This dialogue shares equal importance in many respects to bilateral trade and will continue to be part of important government to government and leader to leader conversations.
As the earth continues to turn, Canada and China's commercial and diplomatic relationship will ideally continue to evolve. It will just require both sides to metaphorically continue spin the globe together in the same direction.
John Gruetzner
Managing Director of Intercedent Limited
Chair of Fund Raising Committee for the China Policy Centre being formed in Ottawa