Since taking office, the Biden Administration has been slow to engage on the trade agenda, putting a priority on jobs and seeking to reinvest in America's competitiveness. The U.S. Trade Representative, Katherine Tai, has consistently stated that her focus will be on a "worker-centric" trade policy. While work proceeds on several fronts under the Canada-U.S. Roadmap agreed between Prime Minister Trudeau and the President to ensure supply chains and the border remain open to support the integrated North American economy, the United States has to date not pursued any new trade negotiations, deferred consideration of joining the Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP) and has yet to offer concrete proposals for moving the World Trade Organization (WTO) agenda forward.
On October 4, however, and following an eight-month internal review, Ms. Tai in a major speech set out how the United States intends to pursue economic relations with China, which alongside Canada and Mexico, remains among the top U.S. trading partners. The major elements include:
- Maintaining the Trump-era tariffs on Chinese imports under the so-called Phase I agreement, in light of the fact that China has not completed its purchase and other commitments under the deal;
- Implementing a streamlined and more transparent tariff exclusion process to permit affected American business to have access to essential inputs and imports at lower cost;
- Addressing a range of Chinese practices unaddressed in the Phase I agreement, encompassing what the United States describes as "non-market policies and practices like abuse of state-owned enterprises, anti-competitive behavior and subsidies, [and] the theft of American intellectual property," and threatening the use of retaliatory and unilateral tools to achieve results; and
- Working with allies and partners going forward to modernize international rules for trade and technology.
While initial commentary interpreted the stance as a continuation of confrontational politics with China, Ms. Tai was careful to emphasize that she did not want to inflame trade tensions, as the ultimate goal was to establish a bilateral "durable co-existence" and meaningful change from China through "frank conversations" with her Chinese counterparts and to "directly engage with China" on its industrial policies. Indeed, by the end of last week she had spoken with her Chinese counterpart Vice Premier Liu He. The focus was reportedly to press China to live up to its Phase I commitments, as a basis for future dialogue on underlying structural and industrial policy issues.
The framework follows a similar approach taken by U.S. Commerce Secretary Gina Raimondo, who in late September acknowledged to the Wall St. Journal that a significant part of her job is to defend American industry, and that Chinese economic policies disadvantage U.S. companies by subsidizing exports at below-market prices. She stated that the United States must trade with China given the size of its market, saying that "robust commercial engagement will help to mitigate any potential tensions."
In sum, rather than an open trade war between the United States and China or broad "decoupling", it appears that both China and the United States are seeking to manage their trade relationship, even if sensitive sectors and technologies will remain areas of tension and controversy. In Canada, similarly, following the release of Michael Spavor and Michael Kovrig, Foreign Minister Garneau has stated that the Canadian approach to China will be guided by a four-fold approach to: "coexist, compete, co-operate and challenge."
Working with Allies and Partners—Implications for Canadian Business
Despite professing a desire to work with like-minded countries, the United States in the first instance seeks to improve its own terms of trade with China, which carries several implications for Canadian business.
First, the Phase I purchase commitments by China for a range of U.S. products and services, from agricultural to manufactured goods to energy, are at the expense of competing sales from other exporting countries, including Canada, and run afoul of basic WTO rules that any concessions offered outside a free trade agreement should be made on a non-discriminatory, "most-favoured nation" basis to all trading partners. China also made promises not to manipulate its currency, protect foreign intellectual property (IP) and refrain from forcing foreign companies to transfer technology.
Thus, Canadian exporters may be at a competitive disadvantage and face headwinds if, as expected, China directs its enterprises to purchase U.S.-origin goods and services. It therefore behooves any firm with current or potential sales to be proactive and vigilant in maintaining open dialogue with purchasing entities to preserve and build market share.
Second, alongside the United States maintaining additional tariffs on Chinese imports, the Administration's promise to effectively use a range of enforcement tools to hold China to account poses the risk that Canadian exports to the U.S. will also be implicated, either because U.S. trade remedies may be applied on a global basis (as Canadian steel producers have experienced), or because Canadian finished products may incorporate Chinese-origin parts or components that could be caught within the scope of U.S. trade remedy complaints or in anti-circumvention proceedings involving Chinese components/materials used in Canadian-produced exports to the United States similar vigilance and anticipatory analysis of U.S. customs treatment is advised.
Third and conversely, to the extent that the United States does accompany its unilateral approach with an effort to coordinate with allies, the Canadian government may be encouraged to adopt a parallel approach, including adoption of import restrictions and/or more rigorous anti-circumvention measures to ensure Chinese exports do not enter the U.S. market through the back door. Accordingly, Canadian business should consider monitoring closely the evolution of Canadian trade policy with China.
A Look Ahead
Later this week, U.S. Trade Representative Tai will make another major speech, in Geneva, on the U.S. approach to the WTO and multilateral trade relations. Together with her China speech, we may be witnessing the start of more constructive engagement by the Biden Administration on the international trade agenda. However, with mid-term elections looming and the labour vote being central to both political parties' prospects, an America first and American-worker first approach is likely to dominate. Thus, although the Canada-U.S.-Mexico Free Trade Agreement (CUSMA) affords some security, the continued application of "Buy America" preferences, including in any infrastructure package that might be approved by Congress, will continue to impede open competition for Canadian firms in the U.S. market.
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