New clause in U.S.-Mexico-Canada trade agreement risks isolating China
October 9, 2018 Category Foreign trade, Weekly
A veto written into the U.S.-Mexico-Canada trade agreement (USMCA) risks to isolate China, according to analysts. The special clause would give the U.S. a near-veto over any attempt by Canada or Mexico to agree to a free-trade deal with a “non-market economy”. The USMCA replaces the 24-year-old North America Free Trade Agreement (NAFTA). If one of the three countries 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 USMCA needs to be approved by the governments of all three counties, including the U.S. Congress, which isn’t expected to take it up until early next year. Despite repeated Chinese demands that they do so, the U.S. and European Union have refused to classify China as a “market economy”, which would reduce the ability of the U.S. and EU to impose trade sanctions on Beijing. With the power to review and then impede or effectively veto a possible free-trade deal between China and Canada or Mexico, the U.S. can block potential “backchannels” for Chinese products to enter U.S. markets via its neighbors, and gain a significant advantage in weakening Beijing’s negotiating power in future trade talks. If the U.S. 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 U.S. would be quashed, according to trade experts.
Kotaro Tamura, Asia Fellow at the Milken Institute, said the USMCA “will definitely be the new blueprint to contain China in terms of trade”, with Washington using the “non-market economy” clause as a loyalty test for its major trading partners. “The U.S. will try to reach a similar agreement with other countries surrounding China, including Japan,” Tamura predicted. With updated trade deals in North America and South Korea in hand, and Washington negotiating with Japan and the EU on new ones, its ultimate design would be a new U.S.-led global trading system underpinned by a series of bilateral agreements to counter the multilateral system centered on the World Trade Organization (WTO). A U.S.-led trade system that excludes China would be the worst-case scenario for Beijing because such a structure could lead to fundamental realignments of international economic relations and global value chains, which in turn could curb China’s economic rise.
So far, China has signed 16 bilateral free-trade agreements (FTAs), in total accounting for about a quarter of China’s total foreign trade. China has no free-trade deal with Canada, Mexico, Japan, Europe or the U.S., the South China Morning Post reports. China’s Ministry of Foreign Affairs and Ministry of Commerce did not comment on the USMCA, which was announced during China’s week-long National Day holiday.
One bright spot in the U.S.-China trade war is that art works were excluded from U.S. tariffs imposed on USD200 billion of Chinese imports, preventing the collapse of the USD400 million market for Chinese art in the U.S. Paid up front for art entering the country on consignment, the tariffs would have imperiled China-focused U.S. galleries and forced the relocation of auctions of Chinese art, while probably giving an added boost to China as an ascendant top player in the USD64 billion global art market, according to an Art Basel and UBS report. With tariffs imposed, the market for Chinese art would have left the U.S.
Imported toys have so far also not been affected by the tariffs. But Spider-Man action figures, Barbie dolls and Transformers could be affected if U.S. President Donald Trump goes through with his threat of adding tariffs to all Chinese-made goods, which accounted for more than USD505 billion in exports to the U.S. last year. If the U.S. were to move forward with a 25% tax on all imported toys, it would cut USD10.8 billion out of the U.S. economy and led to the loss of 68,000 jobs in America, said Rebecca Mond, Vice President for Federal Government Affairs at the Toy Association. About 85% of all toys sold in the U.S. annually are produced in China.
Hong Kong businesses badly need new markets as the China-U..S. trade war rages on, Jimmy Kwok, Chairman of the Federation of Hong Kong Industries, said. He urged officials to speed up work on free-trade deals with other countries. Almost half of the Chinese goods shipped via Hong Kong to the U.S. will be affected by the tariffs. The U.S. is Hong Kong’s second-largest trade partner. Kwok added that Hong Kong entrepreneurs operating in mainland China could consider circumventing the tariffs by setting up a factory in industrial parks along the “Belt and Road Initiative” countries such as Cambodia, Myanmar and Laos. Hong Kong has signed seven free-trade agreements, the latest with Georgia in June.
Standard Chartered Bank expects Hong Kong’s economic growth to slow down as trade tensions escalate and interest rates start to rise, according to its “Global Focus – Q4 2018” report. Standard Chartered downgraded its forecast for Hong Kong’s economic growth from 3.8% to 3.6% for the full year. It cited the U.S.-China trade conflict, the likelihood of further interest rate rises, an expected slowdown in exports, and disappointing growth in the second quarter as reasons for the downgrade.
Meanwhile, the U.S. Senate has passed the Better Utilization of Investments Leading to Development Act (BUILD), overhauling the way the federal government lends money for foreign development, a measure taken largely in response to China’s growing influence. The measure creates a new organization, the U.S. International Development Finance Corp, that consolidates the Overseas Private Investment Corporation (OPIC) and other government development organizations that lend money for projects in developing countries to better compete with China’s increasing investment throughout the world.
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