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USMCA designed to keep Canada from China's orbit

Despite the deal's benefits, the US veto raises increased uncertainties over trade and investment

The new US-Mexico-Canada agreement, or USMCA, which is expected to be signed by the end of November, offers its most northerly signatory an energy 'win' by scrapping a controversial decades-old proportionality clause. But a US say in Canada's ability to strike trade agreements raises a more concrete concern than the largely symbolic victory.

The USMCA, which will replace the North American Free Trade Agreement (Nafta), eliminates a proportionality clause which required Canada to maintain a fixed proportion of oil exports to the US, even in the event of a supply disruption. It was a holdover from the original US-Canada free trade agreement, signed in the late 1980s, when long queues at American filling stations in the wake of the previous decade's oil embargoes remained relatively fresh in US policymakers' minds. Given the US' domestic production boom, it may have decided the clause was entirely obsolete.

Almost two-thirds of Canadian oil production is exported south to the US. But infrastructure, rather than the terms of Nafta, is the main driver. The proportionality clause was never invoked, mainly as there hasn't been a global oil supply crunch since the signing of the original treaty.

Canadian nationalist groups such as the Council of Canadians complained the clause limited Canadian sovereignty over its natural resources. But there's little evidence that fear of US buyers invoking a right to a stable proportion of Canada's supply deterred producers targeting either alternative buyers abroad or under-supplied domestic regions of the vast country, which is import-dependent in certain areas.

Third-party states

Of potentially far greater material concern is USMCA's section 32.10, which requires signatory states to notify each other on entering trade talks with so-called 'non-market' third-party countries. Critics complain that it gives the US a de facto veto over the extent that foreign actors, be they states or firms, both state and privately owned, can be involved in politically sensitive industries such as energy-most specifically China, which has significantly increased its presence in Canada's oil patch over the past decade.

China's embassy in Ottawa issued a swift and unambiguous response. "We oppose to fabricating the concepts of 'market country' and 'non-market country' outside the framework of WTO, which in essence is the excuse made by some countries to shirk their obligations and refuse to meet their international commitments. This is a dishonest behaviour."

"It took a nanosecond to realise this was aimed squarely at China, which is why they were so furious," says Gordon Houlden, director of the China Institute at the University of Alberta.

Chinese state entities have some C$60bn ($46bn) of energy investments in Canada, particularly in the oil sands. While section 32.10 doesn't preclude Canada from pursuing any trade deal with China, which might stimulate greater Chinese investment, "it certainly throws cold water on the process", Houlden tells Petroleum Economist.

Investment appetite remains

The scrapping in the US and Canada, although not in Mexico, of Nafta's chapter 11 dispute resolution mechanism—which allowed private corporations to seek recompense from respective governments for any negative bottom-line impacts due to onerous environmental policies—is another potential USMCA blow to Canada's energy investment certainty. It was last invoked by Canadian pipeline operator TransCanada, which sued the Obama administration for $15bn over its rejection of the Keystone XL pipeline.

But it's too early to get overly despondent about Canada's investment environment in the wake of USMCA. Shell's October final investment decision on the 14m-tonnes-a-year liquefied natural gas Canada project in British Columbia may have grabbed headlines, but September's announcement that China's Sinopec would join a 167,000-barrels-a-day refinery project in Alberta was also significant in stressing China's ongoing appetite for Canadian investment.

And USMCA's passage may not be smooth. It still must clear the US Congress, which will be more difficult if the Democrats regain control of the House of Representatives, or even the Senate, in November's mid-term elections. Signing off on all aspects of the deal are also likely to stretch beyond the end of the decade and into another presidential election cycle, where a change of US leadership and direction on trade policy is possible.

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