By Carlo Dade, Director of the Trade & Investment Centre

China has formally applied to begin the process of joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – news that did not come as a surprise to those who follow the agreement. The Chinese government has signalled its intention for years in policy statements that have been tracked by observers. In the interim, China has done its homework and figured out how to put its application together – what changes and reforms it will have to implement, what concessions it would need, etc., to put forward an application.

In other words, China’s move is not a political stunt. It is serious and needs to be taken as such.

The ascension process is spelled out in annex to the agreement and further insights can be gleaned from the published Decision by the Commission of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership regarding the United Kingdom’s Formal Request to Commence the Accession Process.

Until China puts its complete offer on the table, which will include concessions such as extended time periods to comply, and tweaks or exemptions to existing rules, it is impossible to know what Canada should say. But there are some key points Canada can consider now to set the framework for analysing China’s offer and it needs to cast its vote on whether to accept.

Canada’s CPTPP clout

The starting point to any consideration is that the CPTPP is considered in Canada by the Conservatives who negotiated it and the Liberals who renegotiated and put it into effect, to be the gold standard of trade agreements. This is both for the “hard” trade rules and the “soft” progressive elements. To get China to substantially agree to these rules would be an epic achievement. In a one-on-one negotiation, it is next to impossible to imagine how Canada, again by itself, could get China to agree to this level of economic liberalisation, control on state-owned enterprises and any progressive elements. Canada on its own simply lacks the economic and political weight to gain those – or any – meaningful concessions from China. To have China willingly apply to join the CPTPP gives Canada a new opportunity to attempt to address and negotiate the “next-to-impossible” one-on-one elements it would otherwise not be able to negotiate.

Secondly, having China join the agreement increases pressure for other regional economies such as Indonesia to join and for Malaysia to hurry up its ratification process. Having more economies in the region sign up for these “highest and progressive” standards is a win for Canada.

There are two distinct considerations here. First, the Asia-Pacific region now has two large-scale multi-party agreements: the CPTPP of which Canada is a member, and the Regional Comprehensive Economic Partnership (RCEP) of all ten member states of the Association of Southeast Asian Economies, Korea, Japan, China, Australia and New Zealand, but not Canada. The RCEP is a lower-ambition agreement with weaker rules, smaller tariff cuts and less liberalization. In the context of two agreements, having the CPTPP grow makes more sense for Canada.

The second consideration in this light is that the federal government has prioritised bilateral negotiations with Indonesia and with the ASEAN bloc. But chances of Canada getting Indonesia to agree to what is in the CPTPP by sitting alone across the table from Indonesia is more aspiration than reality as Canada lacks economic or political leverage.

The participation of the U.S. would bring similar pressure for other regional economies to follow suit, but the Americans have yet to begin working up the courage to begin preparing their application.

On the other hand, the current Canadian push for separate bilateral agreements with India, Indonesia, and the Association of Southeast Asian Nations (ASEAN) may actually do more harm than good. The creation of a new set of unique agreements each with its own set of rules and paperwork makes trade in the region more complex and costly, not easier. Cutting a few cents per tonne in tariffs off commodities may help those producers ship more to Asia in the short term but in the longer-term it makes Canada less competitive. Multilateral agreements like the CPTPP that have one single set of rules for several markets allows manufacturing and service firms to set up or join a well integrated regional supply and production chains. Firms can source the cheapest and best inputs from a wider array of suppliers making their products more competitive. A company selling into the region can strike one distribution deal with one firm in one market to service all the other markets.

China’s surprising record of compliance

The elephant in the room with these considerations is how much can China be trusted to follow the rules once it signs up – and does it make sense to sign an agreement with a country that seems to break trade rules as standard operation procedure? The data tells the story. On China’s performance in its existing trade agreement with Canada, the World Trade Organization (WTO) shows that China’s record of compliance is actually much better, than the Americans. The chart below shows both complaints brought against both countries from the time China joined the WTO. In other words, wiping the slate clean for the Americans and starting them at zero complaints. The comparison also starts a couple of years after China joins the WTO on the theory that few if any cases would be brought the day they join.

More recent data comes from China’s performance of its obligations under the US-China Phase One Partial Trade Agreement. Here, the important metric is its adherence to removal of non-tariff trade barriers. We did an extensive analysis of this in our deep dive into China-Canada agricultural trade When Interests Converge: Agriculture as a basis of reengagement with China. In the Phase One Agreement China agreed to be bound by a series of very specific actions without the usual wiggle room found in trade agreements. Its adherence to these rules is more of a test of its reliability to follow rules than are commitments to purchase commodities where availability, price swings and other factors provide wiggle room. On adherence to the new rules on NTBs established by the Phase One Agreement, China has simply met every test to date. This suggests that, for the CPTPP, the type of commitment to which China is held may require more attention.

To determine whether it’s worth it to sign an agreement with China, it is useful to examine Canada’s trade relationship with the U.S. If Canada can sign and manage a trade agreement with the country that has more of track record for not following the rules, then it should be able to manage a country with a less egregious rap sheet. Close to $2 billion a day crosses the Canada-US border, the vast majority of which passes without problem and much of which is facilitated by the North American trade agreement. Occasional or even persistent lapses such as softwood lumber or crippling blows like Country of Origin Labelling (COOL) have not derailed the steady progress of trade and investment. The increase in American unilateralism and rule breaking during the Trump era has occasioned some rethinking of risk in the U.S. market but that has been an adjustment not a panicked abandonment of the whole enterprise of building supply and production chains and linking to the U.S. market. The risks in the two countries, such as winding up in jail, are of course different, but the point is that business is able to calibrate these risks – throw out the bath water without throwing out the baby. Having China in the CPTPP gives companies the same ability as their competitors (with agreements) to do this.

Canada’s trade with China continues to grow

The larger is question of whether Canada should be dealing with China at all after what has happened. Here the larger view is key. China is the world’s largest economy (at purchasing power parity) and Canada is extremely dependent on foreign trade; exports are three times more important for our GDP than for the Americans and more important than for Australia. It’s not a question of whether we should deal with China, the reality is that we already do and will continue to do so. Trade with China has been growing at roughly 4.5% per year over the past few years when relations have been at their worse. China is a presence, the dominant presence, in many markets into which Canada sells. The question is not whether to deal with China, it’s how. And here having China in the CPTPP, having China make domestic reforms to adhere to the rules of the CPTPP, having allies in the same agreement to help China adhere to its word, is the best possible outcome for Canada. That might be tough to hear after recent trade and political frictions including dealing with China’s hostage diplomacy, but at the end of the day, reason not emotion has to guide policy.

Another way to think about this is what happens if the other parties to the agreement wish to at least form a working group to consider China’s application? If Canada chose to chair or co-chair the CPTPP ascension working group of parties to the agreement it would be in a better position to drive discussions of parties and signatories to the agreement on these issues. The UK ascension working group is chaired by Japan with Australia and Singapore as vice-chairs. If these roles are rotated throughout the roster of parties to the agreement, not a requirement but a not unreasonable assumption, then the list of potential chair and co-chairs for a China ascension working group would be – Vietnam, Peru, New Zealand, Mexico and Canada. If Canada choses to abstain from taking a leadership role in a China ascension working group, there is a good chance that leadership of the group could be dominated by countries more favourable to China joining.

The U.S. factor

The final point is worry over what the U.S. will think of all of this and will this imperil access to our largest market. This was a worry that preoccupied Canadians during the negotiations for a new North American trade agreement two years ago. The Americans inserted a last-minute clause into the agreement meant to warn Canada not to think of negotiating with “non-market countries” a U.S. concept that applies most notably to China. While Canadian politicians and the media were working themselves into a lather about what this meant, the Americans were, behind Canada’s back, negotiating their own trade agreement with China, one that undercut Canada and specifically Canadian farmers. Bottom line is that the Americans will not hesitate to run Canada over if there is money to be made. They will prioritize their economic interests and their producers over their allies. Having China in the CPTPP is one small way to start to get back some of what the Americans have taken. It gives Canadian exporters a larger set of advantages, the ability to build supply and production chains throughout Asia including with China, that the U.S. does not yet have. If this offer were on the table for the Americans, Canadians would be lamenting how and how quickly they were once again abandoned by the U.S.

Of course, all of this just a framework for thinking about an eventual Chinese offer. Once that is on the table, then the decision can be made.