The Trump administration has found a new tool in its trade battle with China: Using deals like the recent U.S.-Mexico-Canada Agreement to try to freeze China out of creating its own deals with trading partners.
Tucked away at the very end of the USMCA deal, under “exceptions and general provisions,” is a section dubbed “Non-Market Country FTA.” It effectively nullifies the deal should any of the three member countries strike a trade deal with a country that “at least one Party has determined to be a non-market economy for purposes of its trade remedy laws.” A country like, say, China.
In other words, the U.S. has pre-empted Mexico and Canada from entering into any kind of trade agreements with China. If they do, then the White House can break the USMCA into two separate bilateral deals, something President Trump has said was his policy preference all along.
“It’s logical, it’s a kind of a poison pill,” Commerce Secretary Wilbur Ross told Reuters Friday.
Trade policy experts say they have never seen anything like this before, even as a concept for policy. “This is completely novel in a trade agreement,” said Gary Hufbauer, nonresident senior fellow at the Peterson Institute for International Economics, calling it the “latest strand in the Cold War that the administration has launched against China.”
That it is directed at China is unmistakable. The term nonmarket economy is used in U.S. anti-dumping laws to refer to China.
“There wasn’t a deal imminent with either Canada or Mexico, but it was something that was being talked about,” said Dan Griswold, director of trade and immigration policy at George Mason University’s Mercatus Center. He said Trump used Canada and Mexico’s need to maintain their relationships with the U.S. as leverage to prevent them from a trade alliance with China.
Griswold added: “It is hard to see how this clause benefits average American consumers, but maybe these kind of agreements could end up benefiting the United States if enough other countries could exert enough pressure on China to reform its internal policies.”
The administration is now expected to try to add similar language to potential future trade deals with countries that do business with China, such as Japan. In a speech Wednesday at the Hudson Institute, a conservative Washington think tank, Vice President Mike Pence said: “To advance our vision of a free and open Indo-Pacific, we’re building new and stronger bonds with nations that share our values across the region, from India to Samoa.”
Should the ploy succeed, it would frustrate China’s ability to circumvent the tariffs that the Trump administration has already placed on it.
The Trump administration has placed levies of 10 to 25 percent on $250 billion worth of Chinese goods and threatened to add tariffs to $267 billion in other goods, enough to cover every item imported from China to the U.S. It has also put tariffs of 25 percent on steel imports and 10 percent on aluminum ones, policies mainly directed at China.
“The message that the U.S. is sending to its trading ‘partners’ is quite clear,” said Hugo Perezcano Diaz, deputy director of the International Law Research Program at Canada’s Centre for International Governance Innovation. “The U.S. does not want them to negotiate with China. And the message to China is quite clear as well. The U.S. is drawing its trading partners and building a front against China.”
If the USMCA deal fell apart because one or both of the other countries violated the nonmarket clause and negotiated a deal with China, the U.S. would have leverage to undermine any side deal with China in the talks for the bilateral deals that would be needed to replace the USMCA. In that scenario, Canada and Mexico would have to negotiate the new agreements with the U.S. on their own, a much weaker position than they enjoyed under the more recent talks that created the USMCA, when they could form a united front against the U.S.
Although the USMCA deal directly involves Mexico and Canada it is part of a broader trade policy realignment pushed by the White House meant to address what it sees as predatory trade actions by China. A major goal of Trump in creating the USMCA deal was to force manufacturers to locate more of their supply chains in the U.S. by removing economic incentives to outsourcing and using foreign-made parts. Trump has argued that free trade policies that allowed such practices let China to take advantage of US.
Mercatus’ Griswold said that the nonmarket section was troubling in many ways. “It sets a precedent that does nothing to advance a more open U.S. economy,” he explained, adding that “it shouldn’t be our business to tell other countries who to sign trade deals with.” It will discourage China from signing more open trade deals with other countries, one of the best ways to get it to open its economy, he noted.