It is understandable that my friends in Hong Kong were closely watching the pivotal meeting between President Donald Trump and President Xi Junping following the G-20 meetings in Argentina. The outcome of that session was important to Hong Kong. I would say “so far, so good” – although tough challenges remain.
The other momentous occasion in Argentina was the signing of a new and improved trilateral trade and investment agreement by the leaders of the United States, Canada and Mexico. That agreement will have an important impact on the new shape of trade rules in this century, for North America and around the globe.
The three countries concluded their negotiations on updates to the North American Free Trade Agreement (NAFTA) on September 30.
The U.S. renegotiated NAFTA with two important facts in mind: NAFTA was and is our most important free trade agreement, but it needed an update. We wanted more and better trade with Canada and Mexico. The U.S.-Mexico-Canada Agreement (USMCA) achieves that, while also creating new opportunities for foreign firms looking to invest in North America.
The USMCA includes important improvements in simple market access, for example for agricultural products such as wheat and dairy items. More broadly and of greater interest to non-North Americans, however, will be the ways in which the USMCA brings NAFTA up to and beyond the standards of the Trans-Pacific Partnership (TPP).
Like that agreement, the USMCA provides for greater protection of intellectual property, support for cross-border financial services, facilitation of cross-border data flows, strengthening of labour and environmental standards, and enhancement of rules for science-based regulation of trade in food.
But the USMCA exceeds the standards set by the TPP in several important areas. For example, the agreement provides for 10 years of data protection for biologic drugs and a wide scope of products eligible for these protections. The agreement also puts in place new rules of origin and measures to encourage higher manufacturing wages in the automobile sector, as well as groundbreaking rules to ensure transparency through high-standard commitments on currency management.
Most important, in my opinion, the USMCA leads the way in laying a firm foundation for the expansion of trade and investment in innovative products and services. The agreement puts in place rules to ensure that data can be transferred across boundaries, and minimizes national limitations on where data can be stored and processed. In the 21st century economy, having clear rules of the road that protect data while ensuring its free movement across borders is crucial to encouraging innovation and technological development.
One section of the USMCA that received much attention shortly after the new agreement was announced was article 32.10 – which some people have labeled a “poison pill” clause. This was widely interpreted as a U.S. measure aimed at discouraging our partners from negotiating free trade agreements with Mainland China, because it is still recognized to be a non-market economy.
In reality, there is not much new in this clause – it was always the case in NAFTA that any one of the signatories could exit with six-month prior notification. What is new is a requirement for any one signatory to inform the others if it intends to begin trade negotiation with a non-market economy, and to allow them to review the text of an agreement.
This clause should not be viewed as an offensive measure taken against Mainland China. On the contrary, it is a common-sense measure taken to protect our economy. There is a broad consensus – not just in the U.S. – that China has for a long time engaged in unfair trade and investment practices that distort markets and harm non-Chinese companies and economies. Article 32.10 should properly be viewed as a defensive action, similar to the compensatory tariffs that the United States has imposed on Chinese products under Section 301 of the U.S. Trade Act of 1974.
Much has been written locally about the U.S.-China “trade war.” In the past couple of months, many columns of ink that have been spilled on this topic have focused more on speculation about U.S. strategic intentions towards China, and less on the root cause of the trade actions the United States has taken. It is important to remember that the U.S. tariff actions have a legal underpinning in Section 301. Indeed, such an underpinning is absolutely required in the U.S. legal system – tariffs, after all, are a form of tax that impacts the private property of American citizens, the sanctity of which is guaranteed under the Constitution.
Through its legal investigation, the U.S. found that Mainland China has engaged in systemic, unfair trade practices, discriminating against foreign firms in violation of World Trade Organization principles – while worrisomely, the “reform and opening” process that brought China closer to international norms has stalled. Now our Presidents have set forth an ambitious timeline for agreeing on how China can remedy the situation, which should bring us hope.
The U.S. will continue to try to work with China to build a constructive, results-oriented relationship that includes fair, reciprocal, and rules-based trade, based on mutual respect and mutual benefit.
The USMCA is a concrete example of what free and fair trade in the 21st century should look like, and I encourage Hong Kong business leaders to check it out, and also to explore the opportunities that this new agreement will bring to companies both inside and outside North America.