Canada needs a pragmatic approach to free-trade dealings with China

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December 25, 2017

Canada needs a pragmatic approach to free-trade dealings with China

Written by Paul Moen for the Globe and Mail. Click here to read the original.

Free trade with China represents a golden opportunity to secure market access to a global powerhouse at a time of uncertainty in the NAFTA talks. But if we thought the North American free-trade talks were difficult, we have recently seen that negotiations with China will be fraught with even more dramatic ebbs and flows. Canadian pragmatism will be tested, as we are the first G7 country to start down this path.

One issue requiring some artful navigation is the issue of China’s “market economy” status. China asserts it has diminished state control and moved to a market economy. Indeed, many key sectors have opened to foreign investment and restrictions on the service sector have been liberalized. But a “reasonable person” could remain skeptical about the Chinese state’s involvement in its economy, on many levels.

 China’s non-market economy status affects trade remedies such as anti-dumping. These rules are designed to protect domestic producers from Chinese imports priced below market or even below the cost of production. China’s economic data do not meet international standards yet, so its trading partners use third-country data – rather than China’s own economic data – as comparators in assessing anti-dumping duties.

In 2016, China formally launched a complaint against the United States and the European Union claiming that, under the terms of its accession to the World Trade Organization in 2001, it was promised that in 15 years it would graduate to market economy status. Its partners say no such promise was offered. The Trump administration has been unequivocal: asserting that the Chinese government’s role in its economy and effects of its own markets create “fundamental distortions in China’s economy.” In contrast, the EU has softened its opposition to China’s bid for market economy status. To balance the interests of its own producers, which seek higher duties, and its consumers, who seek lower prices, the EU proposes duty calculation rules that include “significant distortions” arising from state intervention.

For Canada, while the potential benefits of access to the Chinese market are obvious, it is the second-largest market in the world, soon to be the largest. Manufacturers that compete with Chinese imports are understandably concerned about free trade. But when it comes to finding the right balance, Canada should look at a system that protects manufacturers without imposing undue costs on consumers.

First, in talks with China, Canada should not soften its position on the market economy too soon. At the same time, we should remain open to change. The issue is real for China’s exporters, and Canada’s producers and consumers. It also carries a great symbolic importance for China’s goal of full acceptance into the world trading system.

Once negotiations have sufficiently advanced, there might be a Canadian quid pro quo acceptable to both sides. The concept is what trade experts call a “lesser duty rule.” It would reduce duties only to the level required to offset actual injury. Today, anti-dumping duty levels often exceed the extent of the harm, imposing a punitive duty as well as an attempt to assess and compensate actual injury. Domestic producers reap a windfall of protection, but users and consumers pay higher costs, the economy suffers a net loss – and serious wounds are inflicted on relations between winner and loser.

A lesser duty rule could help achieve a balance between domestic producers, and downstream consumers on the other hand. China would likely mirror these changes in its own anti-dumping system as it applies to Canadian goods. This would ensure that any Canadian exports found to be dumped or subsidized would only be subject to duties to offset real injury – to the benefit of our exporter helping to secure their competitiveness in China’s booming markets.

Canada’s current NAFTA experience confirms that any trade partnership is a long, complex undertaking requiring a careful balance between costs and benefits. Free trade with China will be no different. A reasonable approach to assessing dumping penalties as part of a solution to the debate over China’s market economy status could be an opportunity to avoid a dangerous divide on the need to ensure China’s smooth integration into the global trading system.

Canada has demonstrated leadership and creativity in its approach to talks with our European partners and the Asian Comprehensive and Progressive Agreement for Trans-Pacific Partnership process. We know how to craft the best international trade agreements. We can do it again with China.