China (PRC)

International Trade & Customs Law Bulletin

By Clifford Sosnow, Peter E. Kirby and Robin Edger, Fasken Martineau DuMoulin LLP

A second round of exploratory talks on the potential Canada-China Free Trade Agreement (CCFTA) concluded in Ottawa on April 27th, following quickly after the first round of meetings in Beijing in February. While much has been written about Canada’s and Canadian businesses’ interests in a potential free trade agreement, there has been little analysis of China’s interests. For Canadian businesses to properly understand and benefit from potential opportunities or take the commercial steps needed to mitigate risks from a free trade agreement with China, it is prudent to understand China’s priorities and motives behind its pursuit of a trade agreement with Canada.

While China does not publish official and detailed policies with respect to free trade agreements, and its government sources offer scarce information on any trade deal negotiations including the CCFTA, an analysis of Chinese language commentary, Chinese language news media and Chinese academic studies reveals that China’s top priorities for a free trade agreement with Canada currently are as follows:

  • Canadian recognition of China as a market economy
  • Promoting maximum access of sophisticated Chinese services and high-value Chinese industries in Canada
  • Liberalize the granting of export licenses on high-tech exports from Canada to China
  • Liberalize investment thresholds Canada applies to China under its net-benefit and national security foreign investment review regime
  • Increase labour mobility of Chinese workers into Canada

Each of these priorities are explained briefly below.

Recognition of China’s market economy status

Article 15 of China’s World Trade Organization (WTO) accession protocol designates China as a non-market economy for up to 15 years after accession. Non-market economy status allows WTO members to select surrogate markets for calculating the normal value of Chinese exports in anti-dumping investigations, which frequently results in high dumping margins on Chinese goods. The 15 year period expired at the end of 2016. China views the end of this 15 year period as indicating that they now have market economy status. This is not a universally held position among other WTO Members.

Some argue that the protocol simply means that the automatic or default designation of China as non-market economy ends after the 15 year period, but that particular Chinese industries can still be identified as non-market economy depending on the particular

situation for that industry. In fact, this is the current Canadian position contained in Section 20 of the Special Import Measures Act used in anti-dumping investigations to determine whether a particular Chinese industry producing goods that are being investigated is operating according to market economy principles. Regardless of the correct WTO accession protocol interpretation, this is an apparent source of concern for China and is expected to be raised in the negotiations.

Promotion of China’s service and high-value industries

China’s industrial strategy is to shift their economy from being driven by low-value goods manufacturing and exporting, towards an economy driven by the service sector, domestic consumption, and high-value industries. In its newly-announced 13th Five-Year Plan for Developing Trade in Services, China prioritizes the expansion of financial services, communications, and transportation into international markets, as well as promoting tourism and the cultural export of media. China will want these priorities addressed in free trade negotiations and better market access into Canada that what Canada currently offers China under the current WTO General Agreement on Trade in Services.

Liberalize granting of licenses on high-tech exports

Chinese government officials have stated publicly that a high priority for them will be increasing the scope of exchanges with Canada in the respective high-tech sectors. In the week prior to the second round of discussions, Chinese Premier Li Keqiang urged Prime Minister Trudeau to liberalize the granting of export permits to Canadian high-tech exporters. China’s Ambassador to Canada echoed this sentiment in a recent speech in Montreal, specifically noting that technological cooperation between the two countries is not an issue of national security. China believes that Canada has been indicating to Canadian high-tech exporters that their applications for export licenses to China may be refused. China would like this changed and is expected during free trade negotiations to place a priority on Canada committing to more readily grant export permits for high-tech items.

Liberalization of foreign investment regime

Under the Investment Canada Act Chinese state-owned enterprises (SOEs) are subject to restrictive rules governing proposed acquisitions , including the opaque “net benefit” test. This also includes the application of the national security review. Outward investment is a priority for China, since it is interested generally in gaining expertise and technologies, and consider acquisitions to be an effective means to achieve this goal.

The most notable Chinese investment, which was in the Canadian technology and triggered a national security review, was the 2015 acquisition of a Montreal-based military technology firm ITF Technologies by O-Net Communications, a Hong Kong company of Chinese background. This transaction was not permitted initially, but then reversed last December. While the Chinese government may consider the reversal of the decision as a signal that Canada is open to Chinese investment in a previously blocked sector, it will be a key priority for China to minimize any investment thresholds that the Chinese government considers are significant barriers to investments from Chinese SOEs.

Labour Mobility

Canada’s temporary foreign worker program has long been criticized by the Chinese business community in Canada as being overly restrictive. In the free trade agreement between China and Australia, which is the most comprehensive trade deal China has signed with a major Western country, Chinese companies who invest over AU$ 150 million are allowed to bring in temporary migrant workers to Australia without local labour market testing. It will likely be a priority for China to address these concerns in the CCFTA negotiations.

Conclusion

Much has already been done to lay the groundwork for the deeper bilateral economic relationship between Canada and China. While the negotiation and ratification of CCFTA won’t be a short process and the potential trade deal will remain controversial for some, free trade talks appear to be well-received by the Chinese and Canadian business communities. As these talks are advancing quickly, time is of the essence for Canadian businesses who see either potential opportunities or risks to be mitigated to understand the legal options available to incorporate commercial interests into the CCFTA. It is also important to understand how to communicate these interests to the federal, provincial, or Chinese governments in order to have them optimally reflected during trade talks and in the Agreement. For Canadian businesses, understanding not just Canadian goals in a free trade agreement, but also Chinese objectives, is integral to protecting important commercial interests and potential opportunities arising from trade between the two countries.

*The authors gratefully acknowledge the helpful assistance of Ms. Yufei Luo.

© 2017 Fasken Martineau DuMoulin LLP

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Tags: Canada, China, FTA
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