As Nafta Tensions Simmer, Canada Pursues Asia Trade

Canada is pursuing expanded trade with China as part of a pivot to Asia that comes as significant differences cast a shadow over negotiations to overhaul the North American Free Trade Agreement.

Prime Minister Justin Trudeau is scheduled to arrive in China on Sunday for a trip that will include stops in Beijing and Guangzhou, and the two countries are widely expected to announce the start of talks on a free-trade deal during his visit. China and Canada wrapped up the latest round of exploratory talks in September.

The trip could help strengthen Canada's hand in Nafta talks by signaling to Washington there are other markets where it can seek freer trade. Still, there are significant hurdles to a far-reaching trade deal with Beijing, including trepidation at home. Plus, Canada risks causing friction with trading partners that Canadian firms rely on for sales.

Ottawa's goal for the trip is to promote a trade agenda aimed at creating jobs and economic growth, Mr. Trudeau's office said this week. Representatives of the prime minister declined to comment about talks on a free-trade agreement.

China's foreign ministry said Mr. Trudeau's visit will help develop a "strategic partnership" with Canada. China's chief envoy in Ottawa, Lu Shaye, said in an October speech in Edmonton, Alberta, that the launch of formal free-trade talks was expected in "the near future."

China made some minor concessions to U.S. President Donald Trump on trade in conjunction with his visit in early November, "and that could also happen with Trudeau," said Shi Yinhong, a professor of international relations at Beijing's Renmin University. "Starting talks on a free-trade agreement is certainly a possibility."

Canada has been meeting this year with U.S. and Mexican officials to discuss changes Washington is seeking in the Nafta deal. The Trump administration's chief trade negotiator, Robert Lighthizer, recently lamented "a lack of headway" in those negotiations.

At the same time, Canada, Mexico and nine other Pacific-Rim nations are working on a revised version of the Trans-Pacific Partnership, a major trade pact Mr. Trump withdrew the U.S. from earlier this year. Mr. Trudeau said in early November that more work needed to be done on the deal, including on its handling of the auto sector.

A spokeswoman for Mr. Lighthizer declined to comment on possible China-Canada free-trade talks.

The Trump administration has expressed dismay over what it sees as China unfairly using Canada and Mexico as a back door to get Chinese goods into the U.S. market. That is one reason the U.S. is pushing aggressively in Nafta talks for new rules that would require half of a North America-built car to originate in the U.S.

The Trump administration "fundamentally believes that China is cheating the system," said Daniel Ujczo, a Columbus, Ohio-based trade lawyer with Dickinson Wright. Launching Canada-China trade talks now would be "an all-risk, no-reward strategy, and sends the wrong message to the U.S. that Canada will continue to be that back door," said Mr. Ujczo, who specializes in U.S.-Canada border issues and has monitored Nafta negotiations closely.

China analysts in Canada say there is no guarantee a trade agreement will be reached, and negotiations could take years. The Canadian government acknowledged challenges to a China-Canada trade deal in a report based on public feedback released Nov. 10.

Nevertheless, launching free-trade talks with China now could serve a strategic purpose in the Nafta talks, said Lawrence Herman, a Toronto-based trade lawyer and former official in Canada's foreign-affairs ministry.

"It will show the White House that Canada has other options on trade and investment matters, and isn't totally tied to the U.S. orbit," he said.

Trade with the U.S. is the lifeblood of Canada's economy. Three-quarters of Canada's exports head to the U.S., or the equivalent of 20% of Canadian gross domestic product. More than $600 billion in goods and services crossed the U.S.-Canada border last year, according to the U.S. Bureau of Economic Analysis.

China is Canada's second-biggest trading partner, with annual two-way trade in goods between the two countries of more than 85 billion Canadian dollars ($66.4 billion), according to Canada's foreign ministry. The share of Canadian exports headed to China has surged this decade, from 0.9% in 2000 to 4% last year, a compound annual growth rate of 11.5%.

Under Mr. Trudeau, Canada has aimed to secure closer ties with China as part of broader plan to bolster trade links with faster-growing emerging markets, said Roland Paris, the prime minister's former foreign-policy adviser and now a political-science professor at the University of Ottawa.

That marks a significant shift from the former Conservative government under Prime Minister Stephen Harper, which introduced rules limiting the ability of Chinese state-owned enterprises to buy assets in Canada's energy patch and alleged that China was responsible for a cyberattack targeting a federal research agency. China has denied any involvement.

Mr. Trudeau "has always felt that Canada should be more closely engaged with China and [has been] more reluctant than Mr. Harper to explicitly embarrass China by publicizing Chinese state behavior that's inconsistent with Canadian norms and values," said Charles Burton, a former Canadian diplomat in Beijing and now a political-science professor at Brock University in St. Catharines, Ontario.

Gordon Houlden, a former Canadian diplomat based in Asia and now director of the University of Alberta's China Institute, said the Trudeau name carries weight in China. Mr. Trudeau's father, former Prime Minister Pierre Trudeau, formally established diplomatic ties between China and Canada in 1970, roughly two years before U.S. President Richard Nixon's historic trip to Beijing.

--Chun Han Wong and William Mauldin contributed to this article.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

December 01, 2017 08:14 ET (13:14 GMT)