Trade tensions between the United States and Canada have never been higher. Amidst the back and forth, many policymakers in Washington and Ottawa have not yet grappled with the full significance of Canadian Prime Minister Mark Carney’s recent trip to China.
On January 16, Carney announced a preliminary trade deal in Beijing with Chinese Communist Party leader Xi Jinping. The Canada-China deal came amid stalled bilateral trade talks with the Trump Administration and the ongoing trilateral joint review to determine whether the U.S.-Mexico-Canada Agreement (USMCA) lasts beyond 2036.
With Canada sending more than 70% of its exports to the United States, Carney’s trip to Beijing was a gamble that increasing Canadian exports to China could reduce Canada’s dependence on the United States and create negotiating leverage. In reality, Carney’s flirtation with China threatens to derail the joint review and, with it, the future of USMCA.
One of the key U.S. objectives in replacing the North American Free Trade Agreement (NAFTA) with the USMCA was strengthening protections from China’s economic practices. Article 32.10 of the agreement allows any two parties to replace USMCA with a bilateral agreement if the third party concludes a free trade agreement (FTA) with a non-market economy (read: China). This was a clear acknowledgement that any one country significantly increasing its trade with China could negatively affect the entire continent by exposing the other markets to Chinese dumping of goods and manufacturing inputs.
While Carney’s agreement-in-principle is not an FTA that would formally trigger Article 32.10, President Trump still threatened to impose a 100% tariff on Canada if Carney goes through with the deal. Trump’s threat is a recognition that Carney’s China deal would increase U.S. exposure to Xi’s economic policies.
The CCP is pursuing an explicit economic plan that utilizes state subsidies and other policies to boost production far above China’s domestic demand and dump that excess supply on foreign markets to gain market share and increase dependence. The result is a global Chinese trade surplus of nearly $1.2 trillion and what the U.S.-China Economic and Security Review Commission has called China Shock 2.0, devastating industries in developed and developing economies around the world.
Despite this, Carney proudly stood beside Xi and proclaimed a “new strategic partnership” with China. Canada will aim to increase exports to China by 50% by 2030, and China plans to lower tariffs on Canadian canola and other major exports.
With Xi, however, everything comes with a price. Carney agreed to begin the process of lowering Canadian trade barriers that protect Canada’s economy, and, in turn, North America, from Chinese excess capacity, starting with the auto sector. Canada will exempt up to 49,000 Chinese electric vehicles a year from Canada’s 100% tariff on Chinese EVs, actively inviting these companies to expand in the North American market. While there were no announcements on Canada’s 25% tariff on Chinese steel and aluminum, Xi could target those sectors in future talks.
Another concern for the United States is Chinese investment in Canada. Canada has made notable progress in strengthening its screening of foreign investment for national security and economic risks through the Investment Canada Act (ICA). Recent changes made the ICA a strong counterpart to the Committee on Foreign Investment in the U.S. (CFIUS) if fully implemented by the Canadian government. With a Mexican equivalent of CFIUS under development, the USMCA joint review presents an opportunity to enhance North American cooperation on investment security.
In Beijing, however, Carney touted his efforts to “accelerate Chinese investment opportunities in Canada.” Canada will seek Chinese joint ventures and two-way investment in electric vehicles, clean energy, and agriculture, inviting China into sectors where President Trump and members of Congress from both parties have explicitly sought to reduce Chinese investment in the United States. Realizing this vision would be a significant step backwards for efforts to strengthen North American collaboration against harmful Chinese investment.
Meanwhile, Mexico has taken a different approach to China’s export policies and U.S. economic security concerns. As U.S. Trade Representative Jamieson Greer reported to Congress in December, the Mexican government is taking “significant concrete steps” to address issues raised by the Trump Administration.
One of these steps was enacting legislation to increase tariffs on nearly 1,500 categories of imports from China and other countries that do not have a free trade agreement with Mexico. Imports of electric vehicles, auto parts, steel, and other goods from China will face a tariff of up to 50%. Mexico remains a major conduit for Chinese transshipment, but these tariffs will make it more difficult for Chinese companies to circumvent U.S. trade barriers. More importantly for Mexico, the tariffs on Chinese imports help protect Mexican manufacturing from the new China Shock.
Carney received global attention for his pronouncement at the World Economic Forum that so-called middle powers like Canada should “actively take on the world as it is, not wait around for a world we wish to be.” For that reason, the Prime Minister’s China gamble is all the more shocking. Carney might believe the turn to China is a strong move against President Trump, but in reality, it flies in the face of nearly a decade of U.S. economic security policies across administrations of both parties and Canada’s own China policy in recent years.
While President Trump continues to seek leverage through the latest tariff threat and recent comments that “I don’t really care about [USMCA],” Greer’s report to Congress includes a long list of U.S. trade issues that can only be resolved through successful negotiations with Mexico and Canada. In that context, the USMCA joint review is an opportunity for a negotiated bilateral solution for Ottawa. Now, that already-contentious process becomes even more difficult.