USMCA Renegotiation May Require a Tougher China Clause

By Prof. David Collins

Last week US President Donald Trump threatened to impose a 100% tariff on all Canadian goods in the event that Canada concluded a free trade agreement with China. The statement appears to have been prompted by Canadian Prime Minister Mark Carney’s announcement in Beijing that Canada and China had reached a “landmark trade agreement.” Carney now insists that Canada has no intention of signing a trade agreement with China, and that the meeting with Chinese President Xi merely resulted in tariff relief on a narrow but important set of products, notably Canadian canola oil and Chinese electric vehicles. In making this clarification, Carney acknowledged that signing an actual free trade agreement with China could violate the United States Mexico Canada Agreement (USMCA), up for renegotiation later this year.

The relevant provision of the USMCA is Article 32.10, sometimes known as the “China Clause.” It requires USMCA parties to notify each other if they are entering into trade agreement negotiations with a non-market economy. USMCA parties are allowed to review the full text of any such agreement and, should they wish, terminate the USMCA on six months’ notice as a consequence. Effectively, Canada, the US and Mexico are forbidden from entering a trade agreement with China without the others’ permission.

This latest tension between Canada and the US would seem to have arisen because the term “trade agreement,” such as it appears in the USMCA, is being used inappropriately by politicians when dealing with the media. “Trade agreement” has a distinct meaning in international law. Under Article XXIV of the World Trade Organization (WTO)’s General Agreement on Tariffs and Trade (GATT) to be lawful as exemptions to the Most Favoured Nation Principle of Article I (where all members of the WTO community get equal tariff treatment), preferential trade agreements must satisfy certain conditions. The most significant of these is that they must cover “substantially all trade” between the partner countries. This means that unless the agreement is comprehensive, across all or nearly all sectors, then it does not count as a WTO-certified free trade agreement, and would constitute an illegal violation of MFN.

Since it does not meet the requirement of covering “substantially all trade,” the arrangement that Carney negotiated in Beijing, much as what Trump agreed with Xi a few months earlier, are better described as accords, or, in the case of slightly more ambitious ones, strategic partnerships, as in the UK-US Economic Prosperity Deal. The word “deal,” which Trump himself favours, could be used too, but its ambiguity risks fomenting misunderstandings. Whether these types of mini agreements are themselves GATT compliant is another issue – it would depend on how they are worded and the purpose they aim to serve.

Turning back to the China Clause in the USMCA, it is quite likely that when that trade agreement is renegotiated later this year, Art 32.10 will be expanded because of increased global instability coupled with intensifying scrutiny over traditional US allies’ dealings with China.

The 2025 US-Malaysia FTA could offer some insight into what the US will insist upon from Canada under the new USMCA. Under Article 5.3.3, if Malaysia enters into a new bilateral free trade agreement or preferential economic agreement with a country that jeopardizes essential US interests, the US may, if consultations with Malaysia fail to resolve its concerns, terminate the agreement. Note that, along with the express recognition of the national security purpose of this provision, there is no reference to non-market economies. The US-Malaysia FTA goes on to caution, under Art 4.1, that “if benefits of this Agreement are accruing substantially to third countries or third-country nationals, a Party may establish rules of origin necessary to achieve the Parties’ intention [that the benefits of the agreement accrue party countries and their nationals].” Rules of origin are likely to be a point of contention under the USMCA renegotiation as the US seeks to ensure that Canada and Mexico are not used as conduits through which cheap Chinese goods enter the US market.

The most striking part of the US-Malaysia FTA appears under the heading Economic and National Security, especially subheading 5.1 entitled “Complementary Actions.” This section requires Malaysia to follow any US trade restrictions that are imposed on third countries for the purposes of national security, effectively ensuring that the two countries maintain geoeconomic alignment. This includes duplicating US tariffs, quotas, even economic sanctions. Such coordinated actions may be taken to counter below market sales in the US (dumping) which for the purposes of this FTA are treated as national security concerns, evidently irrespective of the product or industry. Such a provision is unprecedented in modern FTAs.

It is hard to imagine that Canada would agree to such terms as it would require them to work in lockstep with the US and its national security driven forays into trade policy, a highly fraught partnership given Trump’s erratic behaviour in this area. On the other hand, Canada is highly dependent on the US, not just economically but also militarily. This is unlikely to change in the near future, particularly since Carney’s ruling Liberal party appears to be unwilling to help revive Canada’s weak domestic economy through de-regulation and tax relief and infrastructure projects as had been promised during the Federal election last year. Until Canada’s own economy improves and diversifies internationally, it will remain beholden to its southern neighbour.