The USMCA, China and the Politicisation of Economic Intercourse

Uday Khanapurkar, Research Intern, Institute of Chinese Studies

Strategic competition between the USA and China continues apace in the economic domain with tit-for-tat tariffs and strengthened investment regulations. This reassertion of sovereignty has irredeemably politicised economic intercourse. The market share that a state’s productive agents command has, akin to a conventional resource such as oil, emerged as a veritably prominent component of national power, thus bringing the zero-sum character of the international system to the fore. So much so, that the restructured Free Trade Agreement (FTA) between the US, Mexico and Canada, or the USMCA, also reflects the adversarial tenor in US-China relations.

Much attention has duly been afforded to article 32.10 of the USMCA since it quite explicitly targets China. According to this provision, should any signatory to the agreement enter into an FTA with a non-market economy (read China), the other parties reserve the right to dismantle the USMCA following a six-month notice. Moreover, the other parties would need to be informed of the intent three months prior to entering into negotiations. With this provision, the USA aims to preserve its economic hegemony over Canada and Mexico, and thwart the inroads China was poised to make. In Canada’s case the threat was particularly pronounced.

Canada has been eager to reduce its economic dependence on the USA, prompting its policymakers to advocate vociferously for extensive engagement with China. A recent study published by Canada’s Public Policy Forum even suggests that it should open up with China on a sectoral basis in order to circumvent the ‘poison pill’ provision of the USMCA. Nevertheless, on account of the USA’s strong signalling, Canada is bound to be measured in its approach to China. According to Chad Bown of the Peterson Institute of International Economics, the Trump administration has effectively compelled its neighbours to pick a side. It will likely succeed in this endeavour; being the largest trading partner of both Canada and Mexico by a comfortable margin, it enjoys a great deal of leverage over them. According to one commentator, the threat of greater engagement with China was used merely as a bargaining chip by Canada and Mexico, in a bid to preserve as many terms of the old NAFTA as possible. Irrespective of their tumultuous relation with the current incumbent of the White House, the USA’s North American neighbours are highly unlikely to place their bets with China.

Article 32.10 also serves to co-opt Canada and Mexico in the USA’s economic competition with China by generating tension among the signatories to the Comprehensive and Progressive Trans Pacific Partnership (CPTPP). Following the withdrawal of the US from the original TPP, the 11 remaining signatories dropped the provisions lobbied for by America and rechristened the agreement as the CPTPP. Since then, Chinese officials have reportedly expressed an inclination to be a part of the CPTPP – an agreement to which Canada and Mexico are signatories. With article 32.10 of the USMCA in place, the USA’s neighbours cannot be relied upon to support China’s admittance into the CPTPP fold. As such, a Chinese attempt to hedge against deteriorating economic relations with the USA by engaging the CPTPP is likely to be stillborn. Of course, the 32.10 provision also addresses the USA’s concern that an FTA between China and its North American neighbours will enable China to evade American tariffs by trans-shipping commodities through Canada or Mexico.

Meanwhile, the agreement’s revised rules of origin requirements for the automotive sector also appear to have a China angle. In a globalised economy, a finished commodity is made up of components manufactured in multifarious geographical locations. The commodity escapes tariffs only if the value of components manufactured indigenously, or by an FTA partner, exceeds a certain proportion. Under the old NAFTA, for an automotive commodity to escape American tariffs, 62.5 per cent of its value had to be manufactured within the continent – this requirement has been increased to 75 per cent. It is not incidental that China’s fourth and sixth largest customer for automotive parts and components is Mexico and Canada respectively. Stricter rules of origin are expected to expedite the migration of manufacturing supply chains away from China as businesses set up shop in North America in order to avail the zero tariff.

More importantly, however, the USMCA has set a precedent that could very likely enable the politicisation of trade and investment agreements to come. Countries slated to enter into agreements with the US are likely to bear cognisance of the USMCA precedent and the USA’s commitment to competition with China. Much like Canada and Mexico, they could employ the threat of entering China’s orbit to inveigle concessions from the US.

Effectively, the US has incentivised throwing China under the bus and made it clear that state objectives are to be afforded greater importance than has hitherto been the case in trade talks. The Trump administration is already in the early stage of trade talks with Japan, UK and the EU and is fully intent on recalibrating the manner in which the costs and benefits of free trade are evaluated. US Secretary of Commerce, Wilbur Ross, has even indicated that ‘poison pill’ provisions are being considered for these deals as well. The consequences will be far reaching. Multilateral trade agreements such as the Regional Comprehensive Economic Partnership and CPTPP will be increasingly laborious to advance if key participants such as Japan are forced to choose between free trade and power politics. Globalisation will be the casualty of this recalibration as consumers and corporations are forced to forego economic surplus in order that states may maintain or improve their power positions relative to others.

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