The USMCA’s Non-market Country Clause and the NAFTA Lesson not Learnt

When Prime Minister Trudeau announced that Canada and the US had reached an agreement in the North American Free Trade Agreement (NAFTA) negotiations on October 1, Canadians breathed a sigh of relief. Though certain industries have found some provisions unsatisfactory, the full text confirmed that the worst was avoided. Nightmares of a five-year sunset clause, elimination of the independent dispute settlement mechanism or the outright termination of NAFTA would not be realized.

However, hidden towards the end of the new United States-Mexico-Canada Agreement (USMCA) is a clause that counters the greatest lesson Canada has taken away from its NAFTA renegotiation experience. Article 32.10 demands that parties to the USMCA inform each other if they plan to negotiate free trade agreements with any non-market country.

The USMCA’s definition of a non-market country relies on what any one of its parties have recognized as a non-market economy at the time of USMCA signing. It does not include countries that parties currently have a free trade agreement with. Should a party seek to sign a non-market country free trade agreement, it must provide other USMCA parties with the text of the agreement for review. If the party enters into a non-market country free trade agreement, the other USMCA parties have the right to terminate the USMCA.

The article clearly aims at China and targets the potential Canada-China free trade agreement. The US considers China a non-market economy and the Trump administration has aggressively targeted China with tariffs worth over USD$200 billion (summaries of round one and round two of tariffs). Meanwhile, Canada has worked towards free trade negotiations with China, its second largest trading partner, coming close to announcing exploratory discussions in 2017. The article does not apply to Vietnam, the other significant non-market economy Canada may sign further trade deals with, as Canada and Vietnam have already signed a free trade agreement (the Comprehensive Progressive Trans-Pacific Partnership). Consequently, it is evident that Article 32.10’s target is China.

Though Article 32.10 is directed at China, it does not introduce any unprecedented US veto over a Canada-China free trade agreement. Parties under NAFTA could withdraw after providing six months’ notice, so the US could have similarly used the withdrawal clause to veto a Canadian-China free trade agreement.

While the article does not introduce substantial legal implications, the article’s political message is important. It explicitly holds Canada’s crucial trading relationship with the US hostage against Canada’s freedom to negotiate a free trade deal with China.

Though the article prescribes that the USMCA can be replaced by a bilateral agreement in case of termination and Foreign Affairs Minister Chrystia Freeland says that the choice to stay in a trade agreement is one that Canada has always made with regards to NAFTA, terminating the USMCA is not an option for Canada. A new bilateral agreement does not guarantee the same benefits as the previous one as countries will recalibrate and strive for larger gains when signing a new deal.

This leaves Canada with few options to avoid the worst-case scenario of USMCA termination and simultaneously strengthen trade with China. Phil Calvert of the University of Alberta’s China Institute has proposed alternatives to a Canada-China free trade agreement, such as an Economic Partnership Framework that focuses on particular areas for cooperation. Otherwise, any free trade agreement Canada negotiates with China must meet US approval, lest the USMCA unravel.

These limited options reflect the fact that Canada has ceded its independence over negotiating trade agreements to the US. As Wenran Jiang of the University of British Columbia describes, this is a cession of Canadian sovereignty. Though Canada’s crucial bilateral relationship with the US has heavily influenced Canadian foreign policy throughout history to modern day, the USMCA marks a new milestone.

For all USMCA’s constraints, Canada may have had few choices other than to accept Article 32.10 given Canada’s weaker negotiation position. Yet, the sad contradiction in Canada’s battle to secure the USMCA is that Canadian acquiescence to Article 32.10 limits diversification – the very thing Canadians realized was essential throughout re-negotiations.

The Trump administration’s extreme demands and tariffs created uncertainty about the stability of Canada’s trading relationship with the US, thereby reigniting another Canadian surge to seek other trading partners. Prime Minister Trudeau’s July 2018 cabinet shuffle, which took place as the US and Mexico hammered out NAFTA revisions, reflected this surge. The shuffle introduced Jim Carr as the Minister of International Trade Diversification, when the position’s previous title was simply “Minister of International Trade”. Additionally, Minister Carr’s mandate letter had diversification at the top of its agenda, and included a focus on the Asia-Pacific region.

Despite these moves towards diversification, the USMCA shows that Canada is moving the other way. Instead of learning its most valuable lesson from the NAFTA renegotiations and allowing itself the chance to keep the diversification door open, Canada has further shackled its fate to the US and whatever direction the US instructs Canada to take.

 

 

Verna Yam is from the unceded territories of the Musqueam, Squamish and Tsleil-Waututh people, also known as Vancouver, Canada. She is a Masters in International Affairs candidate at Carleton University, where she focuses on Canada-Asia relations and climate change cooperation.

Featured image from Wikipedia

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