US-China trade deal: Canada caught in the crossfire

As posted on LinkedIn

This week the US and China signed the so-called “Phase One” economic and trade agreement after 18 months of negotiation. The agreement covers intellectual property, technology transfer, agriculture, financial services, and currency. It also includes a chapter on “Expanding Trade” whereby China has committed to purchases of US goods and services. So what does this all mean for Canadian business?

The deal includes some positive new disciplines on China that will benefit all foreign businesses operating there. Enforceable commitments on intellectual property protection, the practice of forced technology transfer, financial services liberalization and non-tariff barriers in the agricultural sector may help Canadian companies that face the same challenges as their US counterparts. While stopping short of making fundamental structural reforms to the Chinese economic system, the agreement is a good first step assuming there will be a more ambitious “Phase Two” negotiation.

Unfortunately the good news for Canada stops there. The agreement’s chapter on expanding trade could result in a significant decline in Canadian exports to China over the next two years. Under the agreement, China has committed to buying no less than USD $200 billion dollars in additional US goods and services by December 31, 2021 (over a 2017 baseline). Of Canada’s top 25 goods exports to China in 2018, 16 are included in the US-China deal (red in the chart below). This represents CAD $14 billion of Canada’s exports to China in 2018, 51% of everything we sent there.

Some of our largest exports are covered by the deal including canola, soybeans, motor vehicles, lumber and seafood. There is a real risk to Canadian exporters that some of their goods are substituted for US products as China fulfills its commitments under the agreement.

There is little the Canadian government can do in response to this effort to manage trade between the US and China. The agreement is most certainly not compliant with WTO rules, the WTO requires equal treatment of all countries under the principle of “most-favoured nation”. But given the current state of the WTO with a non-functioning dispute settlement mechanism, challenging the agreement is a fool’s errand.

For Canadian business, now is the time to develop contingency plans to prepare for a potential drop-off in demand from Chinese customers. The trade diversification imperative has never better greater.