US-Mexico-Canada trade deal could lead to China’s isolation, says report

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Beijing | Published: October 3, 2018 6:05:55 PM

US President Donald Trump, the architect of the USMCA, is also asking India to sign a trade deal with America.

Trade experts said the USMCA agreement, which replaces the 24-year-old North America Free Trade Agreement (NAFTA), could be the forerunner to economic and trade alliance against China. (Reuters)

The new US-Mexico-Canada Trade Agreement (USMCA) could become a major threat to China as it gives a near-veto power to America over any attempt by Canada or Mexico to try to reach a similar deal with countries of “non-market economy” status which Beijing is yet to acquire, a media report said.

Trade experts said the USMCA agreement, which replaces the 24-year-old North America Free Trade Agreement (NAFTA), could be the forerunner to economic and trade alliance against China.

China, which became a member of the World Trade Organisation (WTO) in 2001, has not yet been granted the market economy status which could lead to radically lower anti-dumping duties on Chinese goods by forbidding the use of third-country price comparisons.

The US and the European Union opposed granting market economy status to China which is a technical distinction in the WTO framework that would reduce the ability of Washington and Brussels to impose trade sanctions on Beijing.

Beijing argues that it is entitled for the status as it has completed 15 years in the WTO. The WTO is yet to give its ruling.

Significantly, the USMCA 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.

If one of the three countries were to sign a free-trade agreement (FTA) with a non-market country, either of the other two would have the right to terminate the trilateral USMCA with six months’ notice, the Hong Kong-based South China Morning Post reported Wednesday.

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

China is Canada’s second-largest trading partner after the US. Ottawa is in talks with Beijing since 2016 to work out an FTA.

But the USMCA clause has wider implications. 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, Post reported, quoting trade experts.

US President Donald Trump, the architect of the USMCA, is also asking India to sign a trade deal with America.

The US emphasis on trade deals with different countries could, in effect, create a new partnership hemming in China, the experts said.

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.

Trump, who launched the current trade war with China, 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, appears to be a necessary part of any new trade deals, the Post quoted him as saying.

Kotaro Tamura, an Asia fellow at the Milken Institute, 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.

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

China looks increasingly isolated despite its repeated claim that it is the true protector of global free trade and multilateralism centred on the WTO, the paper said.

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, it said.

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 and the US.

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

China’s Ministry of Foreign Affairs and Ministry of Commerce have yet to comment on the USMCA’s impact as China is currently celebrating week long National Day holidays.

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