Is Canada's trade outreach to China driving a wedge into the NAFTA talks?

Donald Trump's trade representative said Tuesday that "a fair amount of distance" remains between the Canadian and U.S. sides in the NAFTA talks — but it was pretty obvious that it's China, not Canada, dominating Robert Lighthizer's thoughts lately.

"There's still a fair amount of distance between us," the U.S. trade representative said at the Concordia Summit, a non-partisan event on the sidelines of the United Nations General Assembly in New York. "There are a number of things we have to come to grips with." 

Lighthizer said that although the two countries are "running out of time" to send text for a trilateral deal to Congress at the end of this month, "we're certainly not going to give up," suggesting talks with Canada, "a huge trading partner of the United States," would continue even as the Americans proceed with a bilateral trade pact negotiated with Mexico last month.

But by the end of Lighthizer's question and answer session, it was evident that the fate of the trilateral trade deal isn't what's preoccupying him.

China is "a major, major threat to the future of the U.S. economy," Lighthizer said, justifying the Trump administration's escalating tariff war by pointing out how multiple dialogues with China — 68 so far — haven't worked to the Americans' benefit on everything from intellectual property enforcement to opening new markets for U.S. products.

The U.S.–Canada tit-for-tat steel and aluminum tariffs imposed earlier this summer look modest when placed beside the hundreds of billions of dollars in tariffs the U.S. and China are slapping on one another.

Canada's not on board with the American tactics against China, saying all these tariffs violate the rules for members of the World Trade Organization.

At a different New York event hosted by the Council on Foreign Relations Tuesday, International Trade Diversification Minister Jim Carr was asked whether he agreed with the American argument that China has exploited the WTO in ways that weren't anticipated when its membership was negotiated in 2001.

"Boy, I wouldn't want to agree to that without having a very close examination of what it might mean," Carr said, sitting beside Prime Minister Justin Trudeau and Foreign Affairs Minister Chrystia Freeland for the discussion.

"China is a very important economy, and it's an economy that we think has much to offer investors into Canada and the movement of goods and services between our two countries," Carr said.

Canada playing a double game?

As if to prove his point, Mary Ng, Canada's minister of small business and export promotion, was in Beijing Tuesday on a marketing mission.

"Free trade is really important to Canada," she said in an interview with a Chinese television network, reminding viewers that Canada is also suffering from U.S. tariffs.

"We have benefited from a rules-based system," she said. "It's really important for us to keep opening access."

"We've already entered into discussions and we will continue to ... find ways to work together, perhaps towards a free trade agreement."

Canada has been hoping to have it both ways — by modernizing NAFTA with the Trump administration while still expanding its trade with China.

That may not be practical. It's an especially risky strategy when it comes to lifting those U.S. steel tariffs, something Canadian officials have indicated is a precondition for agreeing to any NAFTA concessions.

"We started off originally trying to have some kind of overall agreement that would accomplish that," Lighthizer said Tuesday, when asked about exempting Canada or Mexico from the steel and aluminum tariffs.

"I think our view is now we'll turn to that as a next stage when we get NAFTA done," the USTR said, echoing President Trump's own view that the tariffs serve as leverage in the NAFTA talks. 

TPP-plus

Officials like Lighthizer — who used to work for the U.S. steel industry — are determined to stop cheap Chinese steel from displacing American jobs in a U.S. domestic industry operating far below capacity.

Even after anti-dumping tariffs started limiting Chinese steel imports, China turned to other countries, like Vietnam, to serve as conduits to the North American market.

This "transshipment" of steel was an issue when the U.S. was negotiating the Trans-Pacific Partnership, which included Vietnam as one of the 12 countries in the Pacific Rim trade agreement.

Critics said the deal didn't do enough to stop transshipment, and Lighthizer has promised that any new NAFTA deal will meet or exceed what the Obama administration negotiated, something the USTR refers to as "TPP-plus."

The Americans pulled out of the TPP under Trump, but Canada and Vietnam remain in the modified Comprehensive and Progressive Trans-Pacific Partnership now being ratified by the remaining countries.

Canada's International Trade Tribunal found in late July that China, South Korea and Vietnam dumped and subsidized cold-rolled steel shipments, interfering in Canada's market. But beefed-up Canadian efforts to investigate and crack down on cheap foreign steel may be coming too late to reassure the Americans.

Finance Minister Bill Morneau's office says Canada is still considering whether to use an emergency safeguard measure against foreign steel.

"Given the Trump administration's goal of closing transshipment loopholes, it shouldn't be altogether surprising that the U.S. is seeking for its free trade partners to apply a like-minded approach toward so-called non-market economies," said Mark Wu, a professor at Harvard Law School who studies the strategy of state-owned industries in China.

"Without it, there's the danger that foreign producers benefiting from unfair trade practices could use a revised NAFTA as a back door to circumvent U.S. tariffs."

At the moment, the U.S. doesn't seem to trust Canada's lock.

'Weirder and weirder'

The European Union and the U.S. actively object to the WTO now evaluating Chinese prices in dumping cases as if it's operating like a market economy.

But Canada hasn't joined this fight. Does it now face consequences at the NAFTA table as a result?

The talks are getting "weirder and weirder," said Debra Steger, a former Canadian trade negotiator and WTO director who now teaches at the University of Ottawa.

"This is not a free trade negotiation at all. This is the most protectionist nonsense I've ever seen."

She said she wonders if Lighthizer is pressuring Canada to stop recognizing Chinese industries as operating like a market economy as a precondition for lifting steel tariffs. Such a statement could be included in a NAFTA side letter, although side letters are hard to enforce, she said.

Doing that, she said, would amount to "forcing Canada to violate WTO rules openly." Adding text that's contrary to the WTO to NAFTA "makes it even sicker," she added.

Mexico's side letter with the U.S., which the Mexicans call their "insurance" against auto tariffs, also may not comply.

"In our judgment the WTO is in need of reform," Lighthizer told his New York audience Tuesday, adding that the WTO remains an "important body."

"Non-market economies in that structure ... the rules aren't designed to deal with it," he said.

Maybe so. But for now, it's the only structure the world's got.

Canada is hosting talks in late October so like-minded trading partners, including the EU, can discuss WTO reform proposals.

"We're very good at calling meetings," Carr quipped at his New York event. "We know [the WTO] is not perfect, but it's good and we seek to make it better."