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Canada-China ties caught in trade war crossfire

Canada’s commercial and economic ties with China are becoming a victim of Trump’s trade wars

What is in a name? When it comes to the renegotiated North American Free Trade Agreement (Nafta) - now dubbed the decidedly un-phonetic US-Mexico-Canada Agreement (USMCA) -there is more than meets the eye, especially with respect to the US' escalating trade war with China and the latter's growing stake in North American energy markets.

It is fitting that the words 'free trade' never appear in the sprawling text, say its critics. In their view, the USMCA is not a free trade deal per se, but a restriction on free trade aimed at solidifying US dominance in its ongoing trade battles with its global trading partners.

To wit: Section 32.10. This clause limits the ability of member countries to negotiate separate trade deals with third-party "non-market" countries, a barely disguised sideswipe at China. While not directly impacting Mexico, the section is of huge concern for Canada, where Chinese companies held more than C$190bn ($143.45bn) of oil and gas assets at the end of 2016, according to government statistics. This represents 25pc of total foreign direct investment in energy in Canada, placing China second only to the US.

It comes as President Trump threatens crippling tariffs on the full range of China's $600bn annual exports to the US, as well as while Canada ponders a separate free trade deal with China after ratifying the modified Trans-Pacific Partnership (now dubbed the equally un-phonetic comprehensive and progressive agreement for trans-Pacific partnership) from which Trump withdrew upon his election in 2016.

Against WTO rules

American commentators argue that 32.10 prevents China from dodging US tariffs by exporting products to Canada under a separate trade deal and dumping them across the 49th Parallel under the USMCA. Canadian critics complain the clause is an unprecedented assault on Canadian sovereignty.

Wenran Jiang, senior fellow at the Asia Pacific Foundation of Canada, calls Section 32.10 a "poison pill" designed to provide the US with an insurmountable leverage-not only in its trade battles with China, but also Japan and the EU. "This is what I call a China-killer clause," says Jiang. "It's an unfortunate situation for Canada to give up sovereignty to negotiate with another country. It's a contradiction of multilateralism and WTO rules. It's clearly protectionist."

Jiang stresses that the clause does not mean Chinese investment in Canadian energy will immediately end but will continue on a case-by-case basis. In September, Chinese subsidiary Nexen cut the ribbon on a C$400mn expansion of its Long Lake oil sands project. Just two days later, Sinopec announced plans to build a C$8.5bn refinery in Alberta. And at the end of that month, Shell approved its C$40bn Kitimat LNG project in which PetroChina is a 15pc partner.

"But now it looks like a Canada-China free trade agreement is clearly off the table," Jiang says.

Truth be told, Canadian public support for free trade with China is not particularly strong. The former Conservative government placed restrictions on oil investment by so-called state-controlled entities following Cnooc's acquisition of Nexen in 2013.

Canadian negotiators clearly felt it was not worth risking some $550bn in annual US-Canada trade - more than $1bn per day. And the USMCA faces a greater challenge in clearing the US Congress after Democrats regained control of the House of Representatives. They are already threatening to scuttle the pact without major changes to terms around the Mexican automobile industry.

But it appears the die has been cast for President Trump's new world order. Whether Canada is prepared to participate, or face potential collateral damage, remains to be seen. Former Prime Minister Pierre Trudeau once quipped that when the US sneezes, Canada catches a cold. Whichever way it pivots, it may risk a serious case of influenza.

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