Carney Rules Out China Free Trade Deal Amid Trump’s 100% Tariff Threat

Canadian Prime Minister Mark Carney clarified that the country has “no intention” of pursuing a formal free trade agreement (FTA) with China, moving to de-escalate a burgeoning trade war with Washington. The statement follows a weekend of sharp warnings from US President Donald Trump, who threatened to impose a 100% tariff on all Canadian goods if Ottawa deepened its economic ties with Beijing.

Canada Rules Out Free Trade Deal With China

Speaking to reporters in Ottawa, Carney emphasized that recent negotiations with China were narrow in scope, intended only to “rectify issues” from the past two years rather than establish a comprehensive trade pact.

The tension stems from a trade arrangement concluded on January 16, 2026, during Carney’s visit to Beijing. The deal was designed to ease a cycle of retaliatory measures that began in 2024. Key terms of the agreement include:

• EV Import Cap: Canada will allow 49,000 Chinese electric vehicles annually at a significantly reduced tariff of 6.1% (down from 100%). Lowering the barrier for entry-level EVs is seen as essential for meeting national emissions targets, as high costs remain the primary hurdle for Canadian EV adoption.

• Agricultural Relief: In exchange, China will lower tariffs on Canadian canola seed oil (from 85% to 15%) and exempt products like lobster, beef, and hay from anti-discrimination duties through 2026.
• Investment: China is expected to begin investing in the Canadian automotive sector within the next three years.

Prime Minister Carney characterized the deal as a “reversal toward predictability” in response to an increasingly volatile trade relationship with the United States.

Responding to a question on whether China has been a reliable partner compared to the US, Carney said, “In terms of the way our relationship has progressed in recent months with China, it is more predictable, and you see results coming from that.”

Trump’s Reaction: “The 51st State” Rhetoric

President Trump reacted aggressively to Canada opening up its economy to China, taking to social media to accuse Carney of attempting to turn Canada into a “Drop Off Port” for Chinese goods to bypass U.S. trade barriers.

“If Canada makes a deal with China, it will immediately be hit with a 100% Tariff against all Canadian goods and products coming into the U.S.A.,” Trump posted on Truth Social.

The President further suggested that Canada was “systematically destroying itself” and even quipped about the country being absorbed into the U.S., a recurring theme in his recent rhetoric regarding Canadian sovereignty.

The trade spat is the latest chapter in a strained relationship between the two leaders. Relations soured further last week following Carney’s speech at the World Economic Forum in Davos, where he warned against “economic coercion” by great powers, a comment widely interpreted as a critique of Trump’s “America First” policies and his recent interest in acquiring Greenland.

USMCA Virtually Blocks Member States From Signing Free Trade Deals With China

Notably, Article 32.10 of the USMCA (United States-Mexico-Canada Agreement), often called the “China Clause” or the “Poison Pill” provision, essentially gives the three member nations a “veto” over each other’s ability to sign trade deals with countries they don’t consider “market economies.”

Under this rule, if Canada, Mexico, or the U.S. wants to start trade talks with a “non-market economy” (a term directed almost exclusively at China), they must follow a strict set of rules. They must notify the other two partners at least 3 months before even starting negotiations.

They must provide the other partners with as much information as possible about the potential deal’s objectives. No later than 30 days before signing, they must provide the full text of the agreement for the other USMCA members to review.

Importantly, if one partner signs a deal with a non-market economy, the other two can terminate the USMCA with six months’ notice and replace it with a bilateral agreement between themselves.

USMCA is Up For Review This Year

The primary goal is to prevent China from using Canada or Mexico as a “back door” to get products into the U.S. market duty-free. It forces North America to act as a unified trading bloc against economic models that rely heavily on state subsidies and government intervention rather than market forces.

As the CUSMA (as USMCA is known in Canada) agreement faces a mandatory review this summer, the stakes for the Canadian economy could not be higher. For now, Carney is walking a tightrope: attempting to diversify Canada’s trade to “hedge against uncertainty” while trying to keep the world’s largest economy from closing its doors.

China Is Witnessing a Growth Slowdown

Notably, exports have been a savior for the Chinese economy, which is otherwise facing some structural issues, including a worsening real estate crisis and an ageing population. Last week, China’s National Bureau of Statistics (NBS) reported that the world’s second-largest economy expanded by 4.5% year-on-year in the fourth quarter of 2025. This figure represents a slight deceleration from the 4.8% growth recorded in the third quarter, marking the slowest quarterly pace in three years.

Despite the cooling year-end performance, the Chinese economy grew by 5.0% for the full year of 2025, successfully hitting Beijing’s official target of “around 5%.” The achievement was largely driven by a record-breaking export engine that offset a persistent slump in the domestic market

The 2025 data highlights a growing “K-shaped” divergence within the Chinese economy. On one side, high-tech manufacturing and exports reached historic highs; on the other, domestic demand and real estate continued to drag on the national average.

Chinese manufacturers defied significant global trade tensions, including renewed US tariffs under the Trump administration, by aggressively diversifying into emerging markets in Asia, Africa, and Latin America. China reported a record trade surplus of $1.2 trillion in 2025, a 20% increase from the previous year.

China Is Expected to Announce More Stimulus Measures

“The fourth-quarter slowdown is the ‘tell’—suggesting China enters 2026 with fading momentum rather than a fresh upswing,” noted Charu Chanana, chief investment strategist at Saxo.

To maintain growth in 2026, Beijing is expected to pivot toward more aggressive fiscal stimulus. The central government has already signaled a “proactive” stance, likely focusing on strengthening the social safety net to encourage households to trade their “precautionary savings” for active consumption.

China has now entered its new 15th Five-Year Plan period with a decisive shift toward a “moderately loose” monetary policy. Reeling from a multi-year property downturn and tepid domestic consumption, Beijing is doubling down on targeted stimulus measures to kickstart the year.