Title: The Canada-China FTA in Peril Part II: Arrested Progress

China and Canada have strong economic and cultural ties. China is Canada’s second largest trading partner after the United States, and is an essential economic partner for the mid-size economy. Canada is also an important source of many natural resources for China, as well as a growing market for Chinese investments. Furthermore, Chinese immigrants to Canada are the largest immigrant population in the country, with 1.3 million Canadian residents (roughly 4% of the population) tracing their roots back to China. The economic contributions of Chinese-origin residents to Canada have been notable and serve as an important reminder of the crucial relationship between the two countries.

For these and other reasons, Canada and China seemed primed to foster future growth in their relationship, and by 2016 the possibility of trade talks looked promising. But obstacles soon began to appear. While the Trudeau government’s progressive trade agenda and the U.S.-Mexico-Canada Agreement’s (USMCA) Non-Market Country clause seemed generally surmountable, escalating tensions after the arrest of Huawei’s Chief Financial Officer Meng Wanzhou in Vancouver have dampened hopes of a Canada-China Free Trade Agreement coming in the near future. And more broadly, it means that all U.S. trading partners may have a difficult time with their relationship with China until the U.S.-China trade war is sorted out.

China Looks to the Great White North and Gets a Cold Shoulder

The beginnings of a Canada-China Free Trade Agreement (FTA) can be traced back to August 2012, with the joint release of the Canada-China Complementarities Study, which identified areas for bilateral economic cooperation. Official exploratory talks on a possible FTA were launched several years later, in September 2016. Meetings continued through 2017, but signs of friction began to appear in December during a state visit to China by Prime Minister Justin Trudeau, where Canada’s suggestion for the inclusion of human rights, environment, and gender issues in a future trade agreement was met with a tepid response from China. Canada’s request to include these “progressive” issues was to be expected, given its recent efforts to rebrand the Trans Pacific Partnership (TPP) as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) following the United States’ withdrawal from the pact. However, it is not clear how far the Trudeau government was willing to push China on these issues if doing so would mean no deal, and China’s Ambassador to Canada, Lu Shaye, remained hopeful that the differences could be bridged.

In November 2018, Canada’s Minister for Trade Diversification, Jim Carr, and Finance Minister Bill Morneau visited Beijing to launch talks on the Canada-China Economic and Financial Strategic Dialogue (EFSD), co-hosted by Chinese State Councilor Wang Yong. The outcomes of that meeting were heralded as a success by both sides, with agreement to pursue a broad list of objectives, covering issues such as a commitment to working through multilateral bodies and enhancing global governance, deepening two-way trade and investment cooperation, focusing efforts on priority sectors, and deepening financial cooperation.

A potential roadblock to progress, however, was the recently completed USMCA, which includes a provision that is designed to limit the ability of Canada and Mexico to negotiate their own FTAs with “non-market” countries such as China, as discussed in Part 1. This Non-Market Country FTA clause (Article 32.10) is also included in U.S. negotiating objectives for upcoming talks with Japan and the European Union, which suggests that this clause will extend beyond the USMCA and become a core component of Trump’s trade policy. However, with regard to a potential Canada-China FTA, Minister Carr emphasized that the USMCA would not be an impediment to such a deal.

In recent months, however, the situation deteriorated quite suddenly. While the USMCA non-market country provision and the conflict over “progressive” elements of a Canada-China FTA seemed like generally surmountable hurdles, Canada-China relations have since declined, due to another aspect of the aggressive U.S. stance on China’s trade practices, where Canada has been caught in the middle. On December 1, 2018, Meng Wanzhou, Chief Financial Officer for Chinese telecom company Huawei, was arrested in Vancouver, Canada. The arrest was on request of the U.S. Department of Justice, which sought her extradition to face charges of fraud and possible violations of U.S. sanctions on Iran. The action provoked strong responses from Chinese officials, who warned of “grave consequences.” China responded by arresting former Canadian diplomat Michael Korvig, who currently works at a think tank, and Michael Spavor, a Canadian businessman.

At the outset, China insisted the incidents were unrelated to the arrest of Wanzhou, instead arguing that the two men endangered Chinese national security. The Canadian government reported, however, that at least 13 Canadians had been detained in China following the December 1st arrest (though 8 had been released by early January 2019). The situation was made worse by an op-ed written by China’s Ambassador to Canada, Lu Shaye, in which he accused Canada and other Western countries of “arrogantly adopting double standards” when it comes to “showing respect for the rule of law” which he claimed was “due to Western egotism and white supremacy.” Tensions rose further when Chinese authorities ordered a retrial of Robert Schellenberg, a Canadian accused of drug smuggling, whose previous sentence of 15 years in prison was deemed too lax. He is now sentenced to death. While China insists that the ruling was made in accordance with its domestic laws and asked for respect of China’s judicial sovereignty, Canadian Foreign Minister Chrystia Freeland requested clemency for Schellenberg, as Canada opposes the death penalty. The issue remains unresolved, and Schellenberg is likely to appeal the decision. While some of the facts regarding China’s response to Canada’s arrest of Meng Wanzhou remain ambiguous, it is clear that it has raised serious concerns in the international community. Amb. Lu Shaye appears keenly aware of this, having cautioned Canada against using the Davos meetings to turn others against his country.

Conclusion

In evaluating all the challenges that may impede further progress on Canada-China relations, the political conflict over these recent arrests is clearly the most difficult to resolve. It is important to keep in mind that this issue is part of the broader China-U.S. tensions, in which many U.S. allies are caught in the middle. Chinese companies such as Huawei are a target for U.S. regulators, as technological competition is increasingly taking center stage in the U.S.-China trade war. The United States has long been wary of China’s technological ambitions and has acted on numerous occasions to block Chinese investments in the United States, with 5G wireless technology a likely next battleground. The smoothing of tensions between China and the United States is quickly becoming a necessary precondition for just about any cooperative action between U.S. allies and China.

The U.S. efforts to take on the practices of the Chinese government and Chinese companies are causing deep frictions, as shown by the current Canada-China arrests and prosecutions. Along the same lines, there has even been talk of kicking two countries out of the Central America Free Trade Agreement (CAFTA) because of their deepening ties to China. Until the U.S.-China trade war is sorted out, a wide range of countries may face significant difficulties in their efforts to form closer economic ties with China.

. . .

Simon Lester is the Associate Director of Herbert A. Stiefel Center for Trade Policy Studies at Cato Institute and the founder of WorldTradeLaw.net

Huan Zhu is a Research Associate of the Herbert A. Stiefel Center for Trade Policy Studies at Cato Institute.