Out of chaos, a strategy | BMG DIY Investor

Out of chaos, a strategy

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With trade deals revised, the U.S. looks determined to remake the world’s trading system to isolate China

Strategy is not something we associate with Donald Trump. But after months of insults, bravado, threats and fake deadlines by the president himself, a new U.S. trade strategy has emerged.

Whether you call it a China isolation policy or simply trade war escalation, the U.S. now has a trade policy that could very well outlive the current administration, and be a challenge for more than one Canadian prime minister.

Now that revised trade deals have been reached with South Korea and then through the new U.S./Mexico/Canada Agreement (USMCA), the U.S. looks determined to remake the world’s trading system to isolate China.

Those two deals really are managed trade agreements with import quotas and sections some critics call impositions of U.S. doctrine over sovereignty. And since Mexico doesn’t have the same powers Canada has, the “new NAFTA” really is two bilateral deals packaged as a trilateral deal.

There is language in the USMCA that requires a member country to submit the text of any free trade agreement with China to the other two USMCA partners for approval.

There’s bound to be tension with the U.S. over a $225-million Chinese investment in a baby formula plant near Kingston, Ont. This plant was a near deal-breaker during the USMCA negotiations.

The Americans wanted specific export quotas on that plant’s production. But Canada assured the Americans there’s just enough room to contain plant production within this country’s overall dairy export quotas. That sounds like a razor-thin compromise.

With China ending its “one child per couple” rule, that country will be looking for higher baby formula production in Canada.

The U.S. now is looking for trade agreements with the European Union (EU) and Japan, and the USMCA is widely expected to be the model Washington wants. As with the USMCA, the U.S. will refuse – for now, anyway – to cancel its tariffs on steel with the EU and Japan.

Among the first things Trump did upon taking office was to pull the U.S. out of the Trans-Pacific Partnership (TPP) – a trade deal the Obama administration instigated to contain China’s influence. Trump now appears to be trying to make up for a hasty mistake in pulling out of the TPP.

He also has set his sights on the 23-year-old World Trade Organization (WTO) – another U.S. initiative.

The Americans continually threaten to pull out of the WTO while undermining it by refusing to nominate dispute-resolution judges.

U.S. trade policy is all about bilateral deals reached through a combination of bullying allies, threats of special tariffs, negotiation and, if Trump succeeds in getting rid of the WTO, no rules-based international trading system.

At some point, American workers, consumers and companies will get tired of being collateral damage in the trade wars Trump likes to start. In the meantime, Canada will have to adopt its own trade policy.

So far, Prime Minister Justin Trudeau seems to be on the road to trade diversification away from the U.S. after a litany of failures that go back to his father in the 1970s.

Ottawa is shrugging off USMCA language and proceeding with opening trade with China, which suddenly is eager to start formal free trade talks with Canada.

Canada’s ambassador to China, John McCallum, told the CBC that Ottawa won’t sign a trade deal with Beijing unless it changes its ways on human rights. But his remarks sound a lot like bargaining language. After all, Finance Minister Bill Morneau and Trade Diversification Minister Jim Carr are heading to China in November to talk trade and investment.

Watch for Canada and China to announce formal negotiations before the USMCA is ratified in the U.S. Congress to avoid any requirement to submit a deal to the U.S. and Mexico for vetting.

In late October, Canada excluded the U.S. and China from a conference in Ottawa of 13 “like-minded” nations about bolstering the WTO. With Canada taking ownership of a WTO rescue, the Americans aren’t just our noisy neighbours downstairs anymore. They are becoming geopolitical rivals.

Trump, however, has succeeded in doing something that has eluded Canadian governments: stiffening our resolve to be less economically dependent on the U.S.

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