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China’s Economic Diplomacy Since 2012: Focusing on the Asia Pacific Region

Jul 06 , 2015

The past two years witnessed the Chinese leadership enunciating a “Chinese Dream” visions for the nation and offering to share the prospects of prosperity and stability with the entire Asia Pacific region and beyond. The leadership also adopted a “new normal” mode, aimed at stabilizing domestic economic growth and improve its quality. By way of establishing and expanding free trade zones, China demonstrates its commitment to liberalization. The spate of free trade agreements concluded with U.S. security allies, in addition to a commitment to expedite conclusion of a bilateral invest treaty with the United States, point to China’s separation of rule-based trade/investment management from concerns about geostrategic denial.

Chinese initiation of the Asian Infrastructure Investment Bank and integration with economies along a “Silk Road Economic Belt” and a “Twenty-first Century Maritime Silk Road” are bold yet challenging. Other Chinese economic diplomacy initiatives have yet to win broad-based support, too. But in its totality, China is not seeking to re-write established rules of world economic governance.

The Chinese Dream: a vision of inclusion

In December 2012, the 18th Party Congress of the Chinese Communist Party formalized the entry of the fifth generation of Chinese leaders. Amidst expectations of a core strategy for governance, Xi Jinping, the new party secretary and president of the country, popularized the phrase “Chinese Dream” during a speech at the “The Road to Revival” exhibition at the National Museum of History in Beijing, days after he took office. Since then, “Chinese Dream” has become a standard reference in major policy discussions.

In one sense, the notion of a dream is a promise to the general populace of continual improvement in prosperity. As such, the fifth generation of leadership sought to define its mission by reminding itself of sound performance in anticipation of two centennials: the 100th anniversary of the Chinese Communist Party in 2021 and the 100th anniversary of the People’s Republic of China in 2049.


The notion of “Chinese dream” also can be understood as a new principle guiding China’s own development and how China relates to the rest of the world. It builds on the twin concepts of “harmonious society” and “harmonious world”, which emerged at the 16th Party Congress in 2002 and marked the formal transition of an earlier generation of leadership.


At the Asia Pacific Economic Cooperation (APEC) forum held in Beijing in November 2014, President Xi observed that leaders of the region “are duty-bound to create and fulfill an Asia-Pacific dream for our people”. He further elaborated that the Asia-Pacific dream is about staying ahead of global development and making greater contribution to the well-being of mankind. Through having higher levels of economic vibrancy, free trade and investment facilitation, better roads, and closer people-to-people exchanges, countries and peoples of the region can develop a better sense of shared destinies.[1]

Meanwhile, the idea of China offering to share its “dream” of wealth and power has yet to win endorsement by those Western powers already in dominant positions of decision making in global economic governance. A case in point is that by the end of 2014, the US Congress failed to pass legislation to enable voting reform of the International Monetary Fund (IMF). Without Washington’s seal of approval, reform of the IMF and other Breton Woods institutions is virtually impossible.

Free Trade Zones: unilateral, albeit limited liberalization

In August 2013, China’s State Council set up a pilot free trade zone (FTZ) in Shanghai.[2] Though limited in geographical span (29 square kilometers), the creation of the zone is an effort on the part of China to unilaterally liberalize its trade and investment regime, against persistent absence of progress in the WTO’s Doha Round negotiations. The Shanghai FTZ is a bid to reduce administrative interventions, ease restrictions on investments, further open up China’s financial system, and internationalize its currency to booster shipping, logistics, and commerce.[3]

Toward the end of 2014, the central leadership decided to expand the Shanghai FTZ’s geographical scope to include the city’s commercial center where major multinational companies and Chinese banks have their headquarters. It also approved the creation of similar FTZs in three other provinces (Guangdong, Fujian, and Tianjin).

Free Trade Agreements: signing up new partners

For the past two decades, free trade agreement (FTA) has been a popular instrument used by governments around the world to hedge against the slow (and stalled) multilateral trade liberalization process under the WTO. As of this writing, China has 12 FTAs in operation with 20 FTAs under negotiation.[4]

A case in point is the FTA China has in place with economies of the Association of Southeast Asian Nations (ASEAN). By one measure, the China-ASEAN Free Trade Agreement (CAFTA) covers the world’s largest free trade territory in terms of population and is the third largest in terms of nominal GDP after the European Union and the North American Free Trade area.

In November 2014, the Chinese government did surprise a good many skeptics by signing a declaration of intent on a bilateral FTA with Australia. This means the two have practically concluded bilateral negotiations, with only technical details to be worked out. The China-Australia FTA deal came after more than 20 rounds of negotiations over the past nine years. .Also in November, Beijing and Seoul announced the conclusion of their substantive FTA talks.


Together with the China-Canada foreign investment promotion and protection agreement, which went into force October 2014, China demonstrates that it is moving fast in upgrading its economic ties with major economies in the Asia-Pacific region. In a geostrategic sense, each of the three FTA partners are strategic allies of the United States, which is usually viewed to be locked in competition with China in the region. It is thus interesting to note that China does not seem to see the US-led security alliance as an obstacle to trade liberation and investment protection.


A significant FTA under negotiation for China is that with the Gulf Cooperation Council (GCC).[5] Formal launching of the China-GCC FTA dates back to 2004. The two parties have held five rounds of talks and have reached agreements on the majority of issues concerning goods trade. Negotiations on service trade are also ongoing. By the end of 2014, Chinese trade officials are quoted as committed to accelerating the conclusion of those negotiations.[6]


Still, for China, a Bilateral Investment Treaty (BIT) is arguably the most far reaching in terms of challenging itself in moving towards a rule-based management of inflows and outflows of foreign direct investment. In July 2013, Beijing and Washington agreed to expedite conclusion of their BIT negotiations, which had by then gone through a dozen rounds. By the end of 2014, Chinese and American negotiators were reported to be finalizing text checks on the BIT, with a pending formal exchange of negative lists in 2015. The reported aim is to complete negotiation within the term of the Obama presidency.[7]

The TPP and FTAAP: gaps to narrow

The most representative of the geostrategic nature among various multilateral FTA schemes in the Asia-Pacific region is the Trans-Pacific Partnership (TPP). By March 2013, with Japan becoming the 12th negotiating party, TPP was fast becoming the most powerful trade bloc of the entire Asia-Pacific region. Many observers point to the TPP membership as a manifestation of post-Cold War US grand strategy in East Asia. China is the most notable exclusion from the negotiation process.[8]

A change of diplomatic atmosphere came at the end of May 2013. The spokesman of China’s Ministry of Commerce remarked that China was going to “analyze the advantages, disadvantages and the possibility of joining the TPP, based on careful research and principles of equality and mutual benefit”.[9] This change in position may as well be a response to earlier comments by US trade negotiators that so long as China is “capable of meeting the high standards that we’re negotiating”, the United States leaves its options about the eventual TPP membership open.[10]

Over the TPP, little else since then has materialized between Beijing and Washington. But the two sides are not that far apart in terms of the texts of treaties under negotiation. The China-US BIT is envisioned to include all stages of investment and all sectors. Contents in the BIT are the same as those in the investment chapter of the TPP. Then, what is holding Beijing and Washington apart in the TPP process? The short answer is that neither Beijing nor Washington was ever for sharing the negotiation room with the rest of the TPP negotiators. Geopolitical considerations certainly play a role. As American analysts argue, the TPP is as much about leadership competition as it is about trade and investment.[11]  

Inclusion of Japan in the TPP reinforces suspicion in China about a return of a US-led containment or a roll-back of China’s rise. Political relations between Beijing and Tokyo went on a definite downward spiral, most notably after 2012, when Tokyo moved to ‘nationalize’ the disputed Diaoyu/Senkaku islands in the East China Sea.

Taking advantage of hosting the 2014 APEC economic leaders’ meeting in Beijing, China chose the Free Trade Area of the Asia Pacific (FTAAP) as its landmark initiative for the annual gathering. This builds on President Xi’s call at the 2013 APEC summit in Bali, Indonesia, for ‘open and inclusive’ trade agreements with APEC playing a ‘leading role’.

China’s endorsement of FTAAP can be seen as a geostrategic statement. No lines will be drawn in the middle of the Pacific, in contrast with the US insistence on prioritizing association with its ‘like-minded’ countries. But also in Beijing, the United States effectively eliminated any reference to a specific timeline for FTAAP conclusion, but China managed to secure the launch of a collective strategic study on issues pertaining to FTAAP’s realization. It remains to be seen whether this compromise will hold in the long run.

AIIB, Belt, Road: bold but challenging

Arguably, the boldest Chinese attempt at playing a leadership role in international investment and trade came in two proposals unveiled in 2014. One was China’s offer to create the Asian Infrastructure Development Bank (AIIB). The other is a focused promotion of trade and investment along a “Silk Road Economic Belt” and a “Twenty-first Century Maritime Silk Road”. The Belt scheme envisions closer economic ties between China and economies spanning from Central Asia, the Middle East and on to Europe. The Road scheme is more about relating to Southeast Asia.

What are the possible motives behind China’s initiation of the AIIB? Fair-minded observation should acknowledge existence of geo-economic and geo-strategic motives, as is true of all such endeavors by any country. But dissatisfaction with the U.S.-led institutions alone cannot be a sufficient explanation. First, today China can choose to invest part of its foreign reserves of US$3.9 trillion on commercial terms rather than putting them in US treasuries where the real value is shrinking. Second, the AIIB will contribute to the internationalization of the Chinese currency. Third, the bank will help secure contracts for Chinese firms to boost employment opportunities at home. Fourth, in recent years, China has funded numerous infrastructure projects all over the world through China Development Bank and Ex-Im Bank despite local resentment. Through a multilateral institution, China stands a better chance of reducing malpractices by its own corporations and shouldering less of the communal acrimony against perceived Chinese economic intrusion.[12]

As for the Road and Belt conceptualizations, indeed, on the side of the 2014 APEC, President Xi pledged US$40 billion to a new Silk Road fund for investing in infrastructure, resources and industrial and financial cooperation across Asia. This is without doubt a demonstration of leadership resolve both domestically and internationally. But the real test down the road is whether the initiative turn out to be a spending spree without due considerations of project feasibility in terms of either business or social feasibility.


A number of broad observations can be made from the previous stock-taking of China’s initiatives in economic diplomacy since 2012. First, the thrust in the new leadership’s economic diplomacy can be generalized as an attempt to proactively shape the external environment. Under this approach, the Chinese leadership made an ideational offer of sharing dreams of prosperity and stability across the Asia Pacific region, in addition to acknowledging a ‘new normal’ of more sustainable mode of economic growth.

Second, the purported geo-strategic competition between China and the United States and its security allies needs to be put in proper context. Too often, that competition is said to be mutually exclusive. But in the past several years, Beijing and Washington have kept alive the pursuit of rule-based governance of investment flows through negotiating a high-standard bilateral investment treaty. China and the United States do differ over the TPP and FTAAP. Yet, the recent spate of China’s conclusion of FTAs with Australia, Canada and South Korea (all U.S. security allies) can be seen as manifestation of the limits of difference. The lesson for other countries in the region and even beyond is that they do not have to choose between China from the United States as the party to collaborate with. All parties, in the end, cooperate on those issue areas where they can share the lowest common denominator of interests.

Third, the fifth generation of the Chinese leadership is clearly demonstrating that China, too, can be innovative in handling multilateral trade and investment initiatives and further liberalizing China’s own trade and investment regimes. Though limited in scope and depth, the country’s new FTZs are based on innovation in investment and trade policies, rather than a repetition of conventional methods of project-based concession for attracting investment and tariff reduction for trade promotion. The AIIB and offers of deeper integration with economies along the Road and Belt are bold. The true challenge for China is to prevail in the regional competition for attraction as a source of foreign direct investment.

Last but not least, China is still in a process of domestic reform and opening to the rest of the world. Changes in the past two years, both in domestic economic governance and in economic diplomacy, should be seen as a continuation of the same orientation that has guided the country for the past three decades. References to “the Chinese Dream” and a “new normal” of the Chinese economy are in reality recognition of limits to willful action. It is true that China is beginning to take some bolder steps – including some institutional changes – to pursue new opportunities in the world. But, China is not in a position to alter the landscape of the world economy. Nor does it seek to rewrite established rules of world economic governance. As repeated indicated throughout this paper, what the Chinese leadership has sought to achieve is to try enlarging its space for autonomy in international economic decision making.














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