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Economy

China’s potential in CPTPP

Jan 04, 2021
  • Zhang Monan

    Senior Fellow, China Center for International Economic Exchanges

Great power competition is about seeking an advantageous position in rule-making in international affairs, especially with the escalation of protectionism around the globe.

“China will give positive consideration to joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership,” President Xi Jinping said at the virtual APEC 2020 Leaders Summit.

The remarks indicate that as international rules evolve, China will more proactively join in shaping international rules and enhancing its opening-up at institutional and strategic levels. However, there are tough challenges in China’s joining the CPTPP and becoming an influential rule-maker within its framework.

At present, major free trade agreements are leading to a new round of rewriting global economic and trade rules, and this process is picking up steam. Since the deadlock in Doha round negotiations, and in the face of rising trade protectionism in particular, the WTO has been unable to shape multilateral trade rules in ways that adapt to new realities in the world economy. This has led  to growing regionalism in recent years. Since the 2008 international financial crisis, agreements of all descriptions on regional economic integration have appeared in great numbers, and mega FTAs have emerged as a new force and a focal point of trade policy in major economies.

Since 2018, a host of mega FTAs have been created, including the CPTPP, the EU-Japan Economic Partnership Agreement (EPA) and the United States-Mexico-Canada Agreement (USMCA). These comprehensive and high-quality agreements cover a broad range of sectors and contain provisions that illustrate trends with respect to rules of origin, intellectual property protection, opening up of the service industry, digital trade, environmental and labor policy, competition policy, and state-owned enterprises, all of which pose a new challenge to China’s market system and market rules.

Without doubt, by considering joining the CPTPP, China aims to further enhance its domestic reforms, expand opening-up and establish itself as an active rule-maker in international settings. Some recent mega FTAs are guided by the so-called principle of ABC – “anyone but China” – which is designed to exclude China from international pacts on grounds of concerns over its market economy status, fair competition and industrial subsidies, as well as market and system barriers. These issues not only are at the center of the conflict of rules between China and the developed world but also are the principal focus of China’s alignment and integration with international rules. If these issues are not effectively addressed, China faces the risk of being excluded from international rule-making and even being held hostage to those rules.

 

Hailed as a high-standard trade agreement for the 21st century, the CPTPP has the hallmarks of a new generation of global trade rules. In addition to economic factors, it covers many non-economic elements; also, its emphasis is notably shifted toward “behind the border measures,” such as a nation’s economic and social policies, industrial policies, investment policies, environmental policies and regulatory framework.

Meanwhile, many new topics are included in the agreement, such as trade in services, the TRIPS agreement on IP protection, competition neutrality, e-commerce, government procurement, state-owned enterprises and designated monopolies, small and medium-sized enterprises, transparency and investor-state dispute settlement (ISDS) mechanisms and anti-corruption. Judging from the content, behind the border measures feature more prominently than border measures in the treaty. In fact, all these topics pose a serious challenge to China’s current trade policy.

Take competition neutrality. Its definition in Australia, the EU, the OECD and the U.S. is basically the same, saying that SOEs should act in accordance with market rules and compete against private businesses and foreign-invested enterprises on a level playing field, without receiving any form of preferential treatment. In China, however, the emphasis is on ensuring that all companies compete on a level playing field, regardless of ownership. This principle is applicable to not only SOEs but also companies of other ownership. This is in fact a principle of non-discrimination that seeks to achieve equality of opportunity and treatment for all by avoiding discrimination against private companies, FIEs and SOEs. In reality, however, much remains to be done to achieve competition neutrality in terms of government subsidies, credit support, administrative monopoly and market access.

When it comes to industrial subsidy programs, China has taken robust measures to eliminate market and trade distortions through enhanced domestic reform, thus significantly reducing the scale and coverage of government subsidies. But subsidy programs persist in different ways. For example, programs inconsistent with WTO rules are mostly offered to exporters by governments at the provincial and local levels. Going forward, China’s industrial subsidy policy must be aligned with its WTO obligations. To this end, the country needs to adjust or end subsidy programs in line with the Agreement on Subsidies and Countervailing Measures (SCM), to minimize the risk of conflict with WTO rules on government subsidies.

For China, joining the CPTPP is essentially a leap-ahead initiative that meets its needs. If we look at the China-E.U. Comprehensive Investment Agreement (CAI), which is currently under negotiation, significant progress has been made on many fronts, including transparency of market access and subsidy rules, rules addressing forced technology transfers and rules on sustainable development, making it possible for the two sides to conclude the economic deal in the near future.

More important, this demonstrates China’s strong political will. The same is true for its joining the CPTPP. Although it may fail to reach certain standards set in the agreement soon, China now sees “the establishment of a more open and higher quality economic system” as one of its main objectives in the 14th Five-Year Plan (2021-2025). This means that in priority sectors – except its fundamental socialist system – China is determined to promote reform programs and make institutional breakthroughs.

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