Sectoral Free Trade with China: Harder than it Looks

Sectoral Free Trade with China: Harder than it Looks
Exploratory talks on a proposed Canada–China deal took place in April 2017 at an undisclosed location in Ottawa, sparking protest from the Council of Canadians, among others.The Council of Canadians (https://canadians.org/canada-china)

by Philip Calvert

Canada has announced a change of tack in its pursuit of free trade with China. Instead of pursuing a broad free trade agreement, Canada will seek reductions in Chinese tariffs through bilateral sectoral agreements. The agriculture sector is apparently first on Canada’s list.

This sounds very compelling, and reflects the recommendations of the Public Policy Forum’s report released last month. But this approach — focusing on bilateral sectoral tariff negotiations — raises a number of questions.

First of all, China does not yet appear to have agreed with this change in game plan. It could be a hard sell. China’s tariffs are generally higher than Canada’s, so in a game of reciprocal tariff cuts, they could have more to lose. In other free trade negotiations, China’s key demands have included issues like getting more Chinese labourers to work on China-invested projects in the other country, or on treatment of state-owned enterprises — issues that fall outside sectoral negotiations. Without these issues, China may not be that interested.

Starting with agriculture, as has been suggested, presents its own problems. This is usually the most sensitive sector in bilateral or multilateral trade negotiations, and seldom a good place to start. China would seek more market access to Canada’s agriculture sector. What tariff cuts in agriculture is Canada prepared to put on the table, so soon after CETA and the USMCA?

Tariff levels are only one aspect of access to a foreign market, and systemic issues can undermine gains made through tariff reductions. China’s regulatory system still lacks transparency and predictability, and protection of intellectual property, while improving, is still a problem. Decision-making at the provincial or municipal level is often capricious and favours local companies, as does China’s increasingly nationalistic industrial policy. If Canada is to engage China seriously on market access, there should be an opportunity to address such concerns.

Finally, if Canada wants to negotiate sector-by-sector tariff reductions, it risks running afoul of its own WTO obligations. Under Article I of the General Agreement on Tariffs and Trade, which is incorporated into the WTO agreements governing global trade, all members commit to the principle of most-favoured-nation treatment, which means that “any advantage, favour, privilege or immunity” granted to one WTO member must be granted to all other members. The exception to this rule, as set out in Article XXIV, is for negotiated free trade agreements or customs unions; these arrangements, by definition, must cover “substantially all trade” between countries. Sector-by-sector bilateral tariff reductions wouldn’t pass the sniff test unless they were granted to all members of the WTO.

Canada’s attempt to find creative new ways to increase trade with China is commendable, but the combination of the US–Canada–Mexico Agreement (USMCA), which limits options for a full-blown free trade agreement, and the WTO rules put Canada between a rock and a hard place.

Given these constraints, Canada and China should try something a little different, and establish a broad framework agreement under which several initiatives could be launched. Under this framework, for example, Canada and China could develop a work plan to reduce regulatory barriers through sectoral agreements, exchange of information, mutual recognition agreements, and capacity-building. Other issues could include customs procedures, labelling, anti-dumping, and other processes that have an impact on bilateral trade. This framework agreement could also include a fast-track trouble-shooting mechanism, staffed at senior levels on both sides, to address urgent market access problems on short notice — especially in the agriculture sector, where delays can ruin an entire shipment. These kinds of agreements don’t have the political sparkle of a free trade agreement, but they can have real impact on market access.

Canada and China have a healthy and growing trade relationship, but there is room for improvement. It does not appear that a full-blown free trade agreement is in the cards for now, but there are other options for improving the trade architecture without transgressing USMCA or WTO rules.

The other important element, of course, is increasing knowledge and understanding of China within the Canadian system — in governments (federal and provincial), in the private sector, and indeed in our educational system. Without such knowledge, it will be more difficult for Canada to take advantage of any agreements — free trade or otherwise — that we negotiate with China.

Philip Calvert is a Senior Fellow at the China Institute, University of Alberta, and a Senior Research Fellow at the Centre for Asia-Pacific Initiatives at the University of Victoria. A former diplomat, he was Canada’s Ambassador to Thailand, Laos, and Cambodia from 2012 to 2016. He has also served as Deputy Head of Mission in the Canadian Embassy in Beijing, and as Director of the Technical Barriers to Trade Division, and as Director General for North Asia in Global Affairs Canada.

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