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

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.

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.