In an April speech to the Peterson Institute for International Economics, Deputy Prime Minister Chrystia Freeland proposed that a wide group of allies adopt a measure similar to the European Union’s anti-coercion instrument as an “insurance policy and a deterrent” against China’s economic coercion. Canada and its allies should do so by creating an economic security pact that constrains retaliation within the principles of restraint, proportionality and engagement.
Defining economic coercion
In retaliation for Canada’s arrest of Huawei CFO Meng Wanzhou in 2018, China imprisoned the “two Michaels” for more than 1,000 days until Meng was released as part of a deal with the U.S. government, which had demanded her extradition. Beijing also used economic coercion in its battle to free her by creating obstacles to pork imports from Canada and suspending the licences of two major canola companies – a ban that lasted for three years and cost billions of dollars in lost export revenue.
Analysts have identified 123 instances worldwide between 2010 and 2022 of Chinese boycotts, administrative barriers and trade restrictions, among other tactics, against governments and companies to achieve policy concessions. While the effectiveness of these measures have been highly variable, they undermine the rules-based trading system that underpins Canada’s prosperity and security.
Canada and Europe’s first line of defence against economic coercion is the rules-based system overseen and enforced by the World Trade Organization (WTO). That system, however, is in tatters. Driven in part by China’s non-compliance with WTO rules, the Biden administration maintains many of former president Donald Trump’s tariffs, dismisses WTO rulings, and continues to block appointments to the WTO appellate body. Without these new appointments, the WTO cannot issue binding decisions in most cases. Because the U.S.’s increasing use of a national security justification for trade restrictions targeting China could open it up to complaints, a functioning appellate body will continue to run counter to American interests.
Even if the appellate body impasse is resolved, experts argue the “WTO’s existing rules and enforcement mechanism have proven ineffective to stop growing economic coercion by both the United States and China.” While Canada and its EU partners should press for reforms, including accelerated dispute resolution and stronger penalties, China would undoubtably block such proposals. In the absence of a functioning and effective WTO, Canada and its European allies should create an economic security pact that models the EU’s response.
The European Union’s response
The EU is in the final stages of legislating an anti-coercion instrument (ACI) that will enable it to impose restrictions on trade, investment, finance, regulation and international obligations when its member states are coerced. While one should worry about further unravelling of the rules-based trading system by “fighting fire with fire,” the ACI illustrates that a collective response can serve as a substitute for binding arbitration at the WTO by constraining retaliation within a set of principles.
The first principle is restraint: countermeasures should be treated as a last resort and deployed only when all other options, including filing an appeal into the void at the WTO, have been exhausted. An economic security pact would provide a forum for prevention measures that a coalition of experts have proposed – including sharing information, developing an inventory of coercive measures, coordinating diplomatic responses, and raising concerns in forums such as the OECD, WTO and G20.
The second principle is proportionality: the severity and duration of countermeasures should mirror that of the coercive measures, preserving the option to ratchet restrictions up or down based on the coercing country’s behaviour. The EU has identified a broad spectrum of countermeasures ranging from excluding companies from government funding programs to restricting trade and foreign investment – an approach that an economic security pact should emulate.
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The third principle is engagement: countermeasures should maximize the incentives for the coercing country to cease its measures, not provide fodder for escalation. Before countermeasures are applied or increased in severity, the pact’s members should make every effort to engage bilaterally and multilaterally with the coercing country to negotiate a resolution.
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Given these principles, the ACI is a far more robust model for an economic security pact than proposed legislation in the U.S. Senate, which would create new powers for the president to “to penalize the foreign adversary” using tariffs and duties, and to support trading partners affected by economic coercion through tariff adjustments and aid. While a March 2023 report by the Center for Strategic and International Studies lays out a more systematic and rules-based proposal, the ACI is poised to enter into force on a far shorter timeline.
Establishing an economic security pact
To ensure the pact’s members are willing to take on the risks of collective solidarity, they should have previously been targets of economic coercion. A February 2023 report by the Australian Strategic Policy Institute therefore recommends that Japan, the U.K., Australia, Canada, France, Germany, South Korea, the Netherlands, New Zealand and the U.S. form the initial membership. While this closely mirrors membership of the G7 and Five Eyes, with some variants, creating an alliance separate from these bodies would allow the pact’s membership to expand to countries that have been coerced by, but are more economically dependent on, China.
As long as the WTO’s appellate body remains in crisis and reforms remain elusive, an economic security pact – if designed according to the principles of restraint, proportionality and engagement – is a tenable substitute. Canada should seize the opportunity at this month’s G7 summit in Japan to garner high-level support for such a pact among Canada’s allies.