Giant Panda figure is seen during an event to mark the arrival of two three-year-old giant pandas from China, at the Smithsonian National Zoo in Washington, U.S., October 16, 2024. REUTERS/Nathan HowardNathan Howard/Reuters
Wolfgang Alschner is an associate professor at the common law section of the University of Ottawa. He holds the Hyman Soloway Chair in business and trade law.
Regardless of who sits in the White House, the 2026 review over the extension of USMCA, the North American free-trade pact, will be dominated by a country that does not sit at the bargaining table: China. Yes, a laundry list of other trade irritants from access to Canada’s dairy market, softwood lumber duties and Canada’s digital service tax will surely be thrown into the mix. But Canada should not overestimate its own importance. It’s Beijing, not Ottawa, that keeps folks up at night in Washington.
The spectre of China could be to Canada’s advantage. During initial negotiations in 2018, Canada was caught off guard by U.S. preoccupations with competition between the great powers. That resulted in USMCA’s “China clause,” discouraging free-trade agreements by the USMCA members with non-market economies.
This time, Canada must be prepared. It should use the review as an opportunity to reassure the United States – its closest ally and trading partner – while not throwing the relationship with China – its second-largest trading partner – under the bus.
How then should Canada approach the USMCA review? In 2022, Jake Sullivan, the U.S. national security adviser, outlined the American economic security policy vis-à-vis China as a “small yard, high fence” strategy. The idea was to limit a forced decoupling of Sino-American trade relations to a small subset of sectors essential for national security and future prosperity, such as cutting-edge chip production and biotech. Canada’s offer to the U.S. can be simple: Canada can help keep the fence high, but only if the yard stays small. That maxim should ultimately appeal to both Canada and the U.S.
Start with the U.S., which abandoned the multilateral route to rein in unfair Chinese trade practices after deeming it futile, only to realize that a bilateral approach of sky-high China tariffs and strict unilateral export restrictions is proving similarly ineffective. Circumvention, both legal and illegal, is rampant. Mexico has replaced China as the U.S.’s most important trading partner in part by acting as conduit of Chinese-made goods. Growing Chinese investment in Mexico to benefit from tariff-free U.S. market access is likely to aggravate the plight. Add to that increased evidence of custom fraud, trade diversion and transshipment of Chinese goods, including through Canada, and the back door to the U.S. market seems wide open.
The most effective way to close that door and to realize Washington’s economic security ambition of a “high fence” lies in co-operation among neighbours and allies. Co-ordinated action kept Chinese tech out of major Western advanced telecom networks and co-ordinated export restrictions between the U.S., Japan and the Netherlands effectively curtailed Chinese access to high-end semi-conductor equipment. The U.S. neither has the industrial base nor the market size to build competitive, China-free parallel supply chains alone. Yet, broader efforts of coalition-building are stalling. The U.S.-EU led negotiations on a Global Arrangement on Sustainable Steel and Aluminium as a collective response to Chinese overcapacity have hit a dead end.
That setting provides Canada with strategic leverage in USMCA renegotiations. Canada can help shore up Fortress North America by beefing up its ailing customs enforcement to prevent fraud and transshipment and by mirroring U.S. tariffs and export control regimes. Building on precedents developed in the recent Japan-U.S. critical mineral agreement, Canada and the U.S. can also co-ordinate on inbound investment screening to close the back door to problematic Chinese capital. Finally, as an inverse China clause, Canada can commit its convening power to help build alternative trading arrangements with like-minded countries around high labour and environmental standards.
Crucially, however, that bargain only works in Canada’s favour as long as the yard remains small. Since Mr. Sullivan introduced the idea, there has been considerable mission creep as more and more sectors, ever further removed from national security concerns, get sucked into the orbit of trade restrictions, with additional tariffs on Chinese solar panels and electric vehicles being the latest example. The yard has turned into a park. That not only makes the increasingly stretched-out fence more porous, but it renders the entire concept unworkable for mid-sized trading nations, such as Canada, who are ill-equipped to absorb the costs of a wider trade war amidst a cost-of-living crisis and an ailing economy, and on whose co-operation the success of the U.S. strategy ultimately depends.
The USMCA review therefore provides an important opportunity to demarcate the yard and to reinforce the fence. If successful, Canada can emerge with a deepened economic security partnership with the U.S., help bridge the widening gap between U.S. and Mexican economic interests, while also containing trade tensions with China.