The consequences of Justin Trudeau’s Chinese trade decision

As published on TVO.org:

By Sarah Reid and Linda van der Horst

Prime Minister Justin Trudeau faces a tough decision on Canada’s relationship with China: Will Ottawa agree to Beijing’s demand that Canada stop treating China as a “non-market” economy under the World Trade Organization?

The stakes are high. Refusing the Chinese would likely end the chances of a far-reaching trade deal with Canada’s second-biggest trading partner. A recent report puts the value of a Chinese trade deal at $7.8 billion in new economic activity for Canada. But experts say China will come to the table only if Canada first grants it market economy status.

The outcome could have a big impact on many Canadian businesses, including some with a major presence in Ontario. One of the main reasons why China is pushing for “market” economy status is that such a classification would crimp Ottawa’s ability to slap punitive duties on cheap imports from China. That could expose Ontario’s steelmakers, among others, to fierce competition.

More than 80 per cent of all steel made in Canada comes from Ontario. The industry directly employs more than 17,000 people in the province. In Europe, steelworkers have taken to the streets to protest against China’s market economy status.

When China joined the World Trade Organization in 2001, other members were allowed to treat it as a non-market economy for 15 years as a way of protecting domestic producers threatened by low-cost Chinese imports. But this provision expires in December 2016.

While the issue has been fiercely debated in the European Union, Canada dealt with this deadline via a backdoor. Canada repealed the WTO deadline in a 2013 amendment to the Special Import Measures Act, allowing Canada to apply anti-dumping duties beyond this date.

“The issue has not come up in public debate because we have not come to a consensus on whether Canada should negotiate a free trade agreement with China,” says Yuen Pau Woo, distinguished East Asia fellow and former president of the Asia-Pacific Foundation. “If we do decide to proceed with free trade negotiations, the question of market economy status almost certainly will come up.”

The Canadian Steel Producers Association, in co-operation with similar lobby groups in the U.S. and Mexico, produced a report in late 2015 on what it would mean to the NAFTA economies if China were granted market economy status. It concluded that in Canada, there could be an $8 billion loss in total economic output (with 50 per cent of the impact in manufacturing) and a loss of up to 60,000 highly skilled jobs.

China is the world’s largest steel producer, and the Chinese treat the industry as a social security program, employing hundreds of thousands of workers. Chinese steel is subsidized and sold abroad at a discount to domestic production costs, a practice known in international trade as dumping. Last week the United States hit China with a 266 per cent anti-dumping levy on steel. China has responded to massive overcapacity and dumping penalties with plans to lay off 1.8 million workers, 500,000 of whom work in the Chinese steel industry.

“We’re hopeful that they follow through with what has been announced, because clearly there is significant overcapacity there,” says Joseph Galimberti, president of the Canadian Steel Producers Association.

On the other hand, many other Canadian industries—and consumers— would gain from a trade deal that could make Chinese goods even cheaper than they are now. Lower prices on Chinese steel would mean lower raw-material costs for the Canadian construction industry, for example. “There are people in the construction industry that use a lot of steel for major infrastructure projects who would be happy to buy steel at low prices,” Woo says.

The construction industry itself takes a more cautious approach.  “Yes, it would probably mean cheaper inputs for the construction industry, but it has to be looked at in the context of what’s best for the national interest,” says Bill Ferreira, vice-president at the Canadian Construction Association.

“We know that China has overcapacity right now in its steel market and that it has been offloading some of that capacity at subsidized prices, and that obviously is a concern because we have domestic suppliers that would be hurt by those kind of practices,” Ferreira says. “That’s not something frankly that we would ever support. Everybody has to play by the rules.”  

Galimberti says Canada should continue enforcing non-market economy provisions until China can demonstrate it is trading in accordance with WTO obligations. 

Whether the Trudeau government will be willing to grant China market economy status as the price for a free trade deal is unclear. A spokesperson for Trade Minister Chrystia Freeland says: “Canada looks forward to taking a rigorous, step-by-step approach to enhancing our relationship with China, including engaging with Canadians on this issue.”

Sarah Reid and Linda van der Horst are journalism fellows at the Munk School of Global Affairs at the University of Toronto. 

Update: This article was amended to clarify comments made by Joseph Galimberti.