China may use Canada as ‘Trojan horse’ into US market

NAFTA is not just a free trade agreement between Canada, Mexico and the U.S. The agreement is premised on and embedded in the post war U.S. security architecture. Until the end of the Cold War, Canada was a reliable ally that met defense and security commitments to the U.S. and played a major role in international peace and security.

Canada shared with the U.S. a common perception of security threats and could be reliably counted on to uphold and defend allied interests.

{mosads}Canada of 2017, however, has sharply diverged from the U.S. foreign policy toward the People’s Republic of China (PRC) and Northeast Asia in general. The U.S. have become gravely concerned with the PRC’s challenge to the rules-based international order like the “sea grab” of the South China Sea in violation of UNCLOS, the PRC arms buildup and economic and military support of regimes like North Korea (DPRK) that pose an existential threat to the U.S.

Canadian Prime Minister Justin Trudeau’s Liberals articulated a foreign and defense policy in June 2017 that sees no military threat from the PRC and virtually ignores North Korea’s nuclear missile threat to North America, including Canada.

Combined with Canadian defense spending of 1 percent of GDP and no credible signs of improvement, it is fair to say that Canadians no longer share a common threat perception with the U.S. for East Asia and particularly China. To wit: The Trump administration is “done talking about North Korea” and actively considering alternatives but Canada is not materially contributing to military options.

Disagreement between Canada and the U.S. on the PRC military threat extends into the economic sphere, where the Liberal regime prioritized securing a free trade deal with the PRC with little concern as to the predatory behavior by PRC firms and national security concerns.

U.S. allies like Australia and New Zealand have entered into free trade deals with the PRC with only limited security concerns. But those deals are, compared to the PRC demands from Canada, limited, tightly-circumscribed agreements that generally do not impinge on key allied sovereignty and security interests. By contrast, PRC’s demands on Canada are breathtaking for their scale and scope. What do the PRC want from Canada?  

Geopolitically, the PRC aims to detach Canada from its alliance with the U.S. and other allies and secure Canada’s acquiescence to the PRC aggression against neighboring states like South Korea, Japan, the Philippines, Vietnam, India, the South China Sea, etc. PRC routinely tightly link foreign policy with trade to punish countries.  

PRC expressed its opposition to Terminal High Altitude Area Defense (THAAD) in South Korea with intense economic coercion. These campaigns are supported by intensive efforts to subvert the political and economic elites of U.S. allies, including molding public opinion in favor of PRC. The ramifications for NAFTA are serious.

PRC demands from Canada for a free trade deal include: recognition of PRC as a market economy (MES) under the World Trade Organization (WTO); unrestricted access for PRC goods and services including communications and other security-related sectors; liberalization of export licenses from Canada for sensitive technologies; elimination of restrictions on PRC (state and private) ownership of Canadian assets; a ban on national security exceptions by Canada and freedom to import Chinese nationals into Canada.

The PRC’s demands from Canada need to be viewed with reference to the privileges enjoyed by Canada under NAFTA. For example, if Canada recognized PRC as a market economy, effectively, it would enable dumping of PRC products into Canada to bypass U.S. International Trade Commission (ITC) action by incorporating the dumped item into a Canadian product.  

“North American” content required to qualify for NAFTA is set at between 50-60 percent under Chapter 4. With this low bar, many PRC goods and services can be regarded as Canadian products. It is conceivable that a PRC-made airliner equipped with North American origin engines, avionics, hydraulics, etc., will qualify as a “domestic” North American product if it entered Canada duty free for final assembly. Thus, Canada can demand NAFTA preferences for Chinese products and services.

U.S. Trade Representative Robert Lighthizer minced no words when he termed granting PRC “market economy status” “cataclysmic for the WTO”. PRC’s top demand from Canada for a free trade deal would, de facto, circumvent the U.S. refusal to grant China MES.

Additional demands from the PRC, like lifting national security restrictions on investment, access to security-related sectors (which would include the Canadian defense market) and carte blanche to acquire Canadian firms with sensitive technologies, etc., would, if granted by Canada, require the U.S. and allies to disengage Canada from every major defense and security arrangement and every trading arrangement, including NAFTA, to prevent Canada being used as a back door.

Canada could become neutral or a client state aligned with the PRC if NAFTA remains as is.

Given the eagerness of the Trudeau regime to secure a deal with the PRC by 2019, USTR negotiators must assume and prepare for the worst case, and do whatever it takes to tightly restrict the ability of PRC to use Canada or Mexico under NAFTA as a Trojan horse against the U.S. and allies.  

Danny Lam, Ph.D., is a research associate at Waterloo Institute for Sustainable Energy (WISE) at the University of Waterloo, Canada. He co-directed the Project on Environment and Competitiveness at the Pacific Basin Research Center in the 1990s that dealt with PRC’s accession into the WTO. 

The views expressed by contributors are their own and not the views of The Hill.