Canada Urged to Hold Sector-by-Sector China Talks Amid U.S. Deal

(Bloomberg) -- Canada should boost ties with China by focusing on key sectors such as agriculture before trying to reach a comprehensive free trade deal, according to a think-tank report.

The report, to be published Thursday by the Public Policy Forum, comes as Canada weighs its future ties with the Asian powerhouse. Prime Minister Justin Trudeau has pushed to strengthen trade connections but the recently negotiated U.S.-Mexico-Canada Agreement includes a clause that could serve as a political barrier to a broad China deal.

While the assessment was in the works long before a Nafta update was agreed, “there’s a new urgency to diversifying our trade,” co-author Kevin Lynch told BNN Bloomberg television on Wednesday.

The report says Asian growth, and that of China in particular, can’t be ignored by Canada, but calls for expanded ties with China in more bite-sized chunks. Targeted deals in agriculture, forestry and oil would get the ball rolling -- and wouldn’t necessarily trigger some kind of U.S. review, as envisioned by the USMCA, Lynch said.

“Well before this clause, we came to the view that the best way forward is to start with a series of intensive sectoral negotiations and actually build up towards a free trade agreement,” said Lynch, who held Canada’s top civil service position under Trudeau’s predecessor and is now vice-chairman of BMO Financial Group.

‘Restore Clarity’

The report also calls for Canada and China to strike deals to cooperate on environmental protection and climate change; to ensure there are clear dispute settlement systems; and to “restore clarity and consistency” in Canada’s foreign investment rules.

Trudeau took office in 2015 with high hopes on China that have since fallen flat. The prime minister’s effort to launch exploratory trade talks with the country collapsed during a visit last year, and Canada later rejected a takeover of Toronto-based Aecon Group Inc. by a Chinese state-owned enterprise. China then criticized the “politicization” of the bid.

The USMCA deal -- which still must be signed and ratified to take effect -- includes a clause that would force any one of the U.S., Canada or Mexico to notify the others if it were to launch trade talks with a non-market economy, such as China. It then needs to provide text of any deal in advance; if a deal actually takes effect, the other countries can quit the USMCA deal and instead strike their own two-way deal.

The Canadian government and some trade lawyers have argued that it’s a largely symbolic clause, as any country can quit the USMCA on six months’ notice for any reason. Others have said it sends a signal and undermines Canada’s authority to strike its own deals.

“It certainly came as a surprise to many people and it really is an interesting intrusion on Canadian sovereignty,” Lynch said, adding he doesn’t think sectoral agreements would trigger that clause.

The Public Policy Forum report -- titled “Diversification not Dependence: A Made-in-Canada China Strategy -- also urges caution on the part of Canada’s government, calling on it to declare that it “will not tolerate external political interference in domestic politics or the affairs of residents of Canada, whether by Russia, China or any foreign country,” and also to work with “like-minded countries” to “encourage China to abide by the international legal commitments it has made.”

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