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Clause in USMCA Could Hinder Eventual FTA Between Canada/Mexico and Mainland China

A provision included in a relatively obscure chapter of the recently unveiled United States-Mexico-Canada Agreement (USMCA) could potentially hinder an eventual free trade agreement between mainland China and Canada and/or Mexico (as well as an FTA between mainland China and a post-Trump United States, for that matter). The clause reflects the continued fixation of the Trump administration with mainland China, which observers believe could become even more pointed in the weeks ahead now that the NAFTA modernisation negotiations have been successfully concluded.

The language in question, found in Article 32.10: Non-Market Country FTA of Chapter 32 on exceptions and general provisions, would require a USMCA party to provide a three-month advance notice to the other USMCA parties of its intention to commence FTA negotiations with a non-market country. An NMC is defined as a country that on the date of signature of the USMCA at least one party has determined to be a non-market economy for purposes of its trade remedy laws, as well as a country with which no USMCA party has an FTA. There is no question that mainland China would be considered an NMC under this provision.

The notifying USMCA party would have to provide as much information as possible regarding the objectives for the aforementioned FTA negotiations. As early as possible and no later than 30 days before the date of signature of any such FTA, the notifying USMCA party would have to provide the other USMCA parties with an opportunity to review the full text of the agreement, including any annexes and side instruments, in order for the parties to assess the potential impact of any such FTA on the USMCA.

Notably, a party (such as the United States) would be able to withdraw from the USMCA on a six-month notice if another party (such as Canada or Mexico) entered into an FTA with an NMC (such as mainland China). Should that occur, the withdrawing party would then replace the USMCA with a bi-lateral agreement with the party that entered into an FTA with an NMC comprised of all USMCA provisions except those the relevant parties decide are not bi-laterally applicable. The parties would utilise the six-month notice period to review the USCMA and determine whether any amendments should be made to ensure the proper operation of the new bi-lateral agreement. Any such bi-lateral agreement would enter into force 60 days from the date the applicable parties notify each other of the completion of their respective ratification processes.

There is little question that this provision, which is unprecedented in previous U.S. FTAs but could become the norm in future trade deals, forms part of a broader effort by the Trump administration to contain mainland China’s growing influence in the international economic and trade arena while seeking to strengthen North American value chains. While Mexico has in recent years sought to enhance and broaden its bi-lateral trade and economic relationship with mainland China, an FTA between these two economies appears far-fetched at this time because the Mexican economy is geared heavily towards manufactured products such as motor vehicles and automotive parts, electronics, and electrical equipment and parts, many of which compete with products that are already produced in the mainland. By contrast, Latin American economies that have signed FTAs with mainland China, such as Chile and Peru, tend to focus on commodities and other raw materials that mainland China continues to demand in large quantities as inputs for a range of industrial activities.

Canada, on the other hand, on 22 September 2016 launched exploratory discussions on a possible FTA with mainland China. Canadian authorities conducted during 4 March-2 June 2017 a public consultation process that involved more than 600 stakeholders and issued the results of that process on 10 November 2017, identifying a number of opportunities as well as challenges. It appears that there has not been any serious additional activity on this front since last year and USCMA Article 32.10 certainly has the potential to dampen Canada’s appetite for an FTA with mainland China at this time.

Content provided by Picture: HKTDC Research
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