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US-China trade war: All stories

China ‘threatened with isolation’ by veto written into US-Mexico-Canada trade deal

A clause allowing any member of the North American trio to effectively block each-other’s free-trade deals seems aimed at China and is expected to feature in future US trade agreements

PUBLISHED : Tuesday, 02 October, 2018, 10:01pm
UPDATED : Wednesday, 03 October, 2018, 9:32pm

A special clause in the new US-Mexico-Canada trade agreement would give Washington a near-veto over any attempt by Canada or Mexico to agree to a free-trade deal with a “non-market economy”, in what analysts have said is a major threat to China’s position in the global trading system.

The United States-Mexico-Canada Agreement (USMCA), finalised on Sunday to replace the 24-year-old North America Free Trade Agreement, stipulates that any of the three parties to the deal has the right to be informed about any negotiations on a free-trade agreement with a “non-market economy” at an early stage, and can review any such deal signed by another member.

If one of the three were to sign a free-trade deal with a non-market country, either of the other two would have the right under article 32.10 to terminate the trilateral USMCA with six months’ notice and form its own bilateral deal on the same terms.

The agreement needs to be approved by the governments of all three counties, including the US Congress, which isn’t expected to take it up until early next year.

Despite repeated Chinese demands that they do so, the US and European Union have refused to classify China as a “market economy” – a technical distinction in the World Trade Organisation framework that would reduce the ability of Washington and Brussels to impose trade sanctions on Beijing.

Although the new stipulation – which was not included in the trade deal between the US and South Korea agreed last month – does not name any specific country, analysts understand it to be aimed at China.

With the power to review and then impede or effectively veto a possible free-trade deal between China and Canada or Mexico, the US can block potential “backchannels” for Chinese products to enter US markets via its neighbours, and gain a significant advantage in weakening Beijing’s negotiating power in future trade talks.

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The clause would effectively end any dalliance between Canada and China – Canada’s second-largest trading partner after the United States – over a possible free-trade deal. The two countries agreed in 2016 to study the feasibility of such a deal, although it was not taken further and the Chinese government’s announcement in March of its existing and potential future free-trade deals did not mention Canada.

But the clause has wider implications than scuttling any future China-Canada deal. If the US were to insert a similar clause into trade deals it is negotiating with the EU and Japan, it would mean Beijing’s best hope of trading with the EU, Japan and Canada to offset an extended trade war with the US would be quashed, according to trade experts.

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It could, in effect, create a new partnership hemming in China, much as the 12-country Trans-Pacific Partnership was meant to do when it was signed in 2016, before being scrapped.

Song Eui-young, an economics professor specialising international trade at Sogang University in Seoul, said the clause was a sign of Washington’s desire to create an “economic alliance” against China.

US President Donald Trump has changed his early tactic of quarrelling with all of the US’ major trading partners simultaneously and is instead pursuing “a new trade stance to unite Europe, Japan and Canada into an economic alliance against China”, Song said.

The veto clause, presenting a near-insurmountable obstacle to possible free-trade deals between China and major US trading partners, was not a pressing issue only a few months ago when Washington and Seoul were revising their bilateral trade agreement. But the US now appears to see it as a necessary part of any new trade deals, he added.

Kotaro Tamura, an Asia fellow at the Milken Institute and a former senator and parliamentary secretary in charge of economic and fiscal policy in Japan’s cabinet office, said the USMCA “will definitely be the [new] blueprint to contain China in terms of trade”, with Washington using the “non-market economy” clause as a loyalty test for its major trading partners.

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“The US will try to reach a similar agreement with other countries surrounding China, including Japan,” Tamura predicted.

With updated trade deals in North America and South Korea in hand, and Washington negotiating with Japan and the EU on new ones, its ultimate design would be a new US-led global trading system underpinned by a series of bilateral agreements.

China looks increasingly isolated despite its repeated claim that it is the true protector of global free trade and multilateralism centred on the World Trade Organisation.

A US-led trade system that excludes China would be the worst-case scenario for Beijing because such a structure could lead to fundamental realignments of international economic relations and global value chains, which in turn could curb China’s economic rise.

So far, China has signed 16 bilateral free-trade deals, including those with Australia, New Zealand, Iceland, South Korea, Singapore and the 10-nation Association of Southeast Asian Nations, in total accounting for about a quarter of China’s total foreign trade. China has no free-trade deal with Canada, Mexico, Japan, Europe or the US.

Christine Loh, an adjunct professor at the Hong Kong University of Science and Technology, said the US’ moves to form a new trade alliance during its heated trade war with China would “change supply chains all over the world”.

Some industries, such as garment and shoe manufacturing, had already started to move out of China to other developing economies with lower labour, energy and rental costs, Loh noted. Chinese businesses have started to join the exodus, with US tariffs the final blow to their ability to make a profit at home.

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China’s Ministry of Foreign Affairs and Ministry of Commerce have yet to comment on the USMCA, which was announced during China’s week-long National Day holidays. Its state media was largely silent on the deal and made no mention of article 32.10.

After US-imposed tariffs on an additional US$200 billion worth of Chinese products last month and China’s subsequent rejection of a US invitation to hold talks to ease the dispute, Chinese President Xi Jinping toured his country’s northern rust-belt region, sending a message that China would have to rely on itself for future development.

Arthur Kroeber, research head and co-founder of the economic consulting firm Gavekal Dragonomics, wrote in a note on Tuesday that the USMCA may put an end to Trump’s trade position of “picking fights with anyone and everyone”. Washington, he said, would focus its fire on the nation it perceives as the real trade enemy: China.

“The US has confined its economic warfare to a single battlefield, but the fight will be a long one,” Kroeber said.