Recent Developments in China’s International Trade Engagement

By Anna Ashton

While the Trump administration’s trade and economic policies remain uncertain, China has doubled down on bilateral and multilateral negotiations and initiatives, with high-level rhetoric to match. At last November’s Asia Pacific Economic Cooperation (APEC) summit in Lima, Peru, President Xi Jinping told delegates, “China will not shut its door to the outside world, but open more.” In an hour-long address to the annual meeting of the World Economic Forum in Davos, Switzerland this January, Xi once again stressed the importance of global trade relations, saying, “No one will emerge as a winner in a trade war … pursuing protectionism is like locking oneself in a dark room.” And in his keynote address to the May 14-15 Belt and Road Forum for International Cooperation in Beijing, Xi called for nations to “defend and develop an open world economy.” Amid US reticence to bear the burden of global economic leadership, China’s active, outspoken diplomacy suggests an attempt to step into the role. But the devil is in the details, and Chinese initiatives reveal the country still has room to grow as globalization’s champion.  

Regional Comprehensive Economic Partnership

Launched in late 2012 by the Association of Southeast Asian Nations (ASEAN), the Regional Comprehensive Economic Partnership (RCEP) would include the 10 ASEAN members, plus: China, India, Japan, South Korea, Australia, and New Zealand. The latest negotiating round was held in Manila from May 8 to May 12, but it remains unclear how much progress was made toward China’s goal of finalizing a deal by the end of 2017. Since the United States backed out of the Trans Pacific Partnership (TPP) in January, divisions have arisen among RCEP participants over the end goal of their negotiations, with some of the parties to both negotiations now advocating for deeper RCEP commitments.

In the wake of Trump’s election, some have suggested RCEP as an alternative to TPP, from which China was excluded. Speaking at a briefing ahead of APEC meetings late last fall, Vice Foreign Minister Li Baodong warned rising protectionism could hinder economic growth in the Asia Pacific and said, “China believes we should set a new plan to respond to the expectations of industry and sustain momentum for the early establishment of a free trade area.” Other parties to both agreements have echoed this notion, characterizing RCEP as a fallback to TPP. In November, Japanese prime minister Shinzo Abe told reporters, “There’s no doubt that there would be a pivot to the RCEP if the TPP does not go forward.” Malaysia’s trade minister, Mustapa Mohamed, similarly told reporters, “Because the TPP is dead, therefore all of us are committed to ensure that RCEP becomes successful.”

A completed and ratified RCEP agreement would be groundbreaking in its creation of closer Pacific trade ties. The 16 nations account for roughly 46 percent of the world’s population and nearly 30 percent of global GDP in 2016. But RCEP’s aims have never been as ambitious as those of TPP. While the TPP agreement would have gone beyond World Trade Organization (WTO) commitments on a variety of fronts, RCEP’s more modest goal is to be consistent with WTO rules and cut tariff and non-tariff barriers to trade between participant countries.

With the future of the TPP uncertain, some of the parties to both negotiations have been advocating for deeper commitments in RCEP. In recent months, Japan, South Korea, and Australia have advocated for stronger intellectual property and investment measures as well as ecommerce disciplines. This push for stronger disciplines could make for a higher-standard agreement but is also likely to slow negotiations. Although the text of the RCEP has not been released, only three key chapters in the 15-chapter agreement had reportedly been firmed up going into this latest round of negotiations — the chapters on small-and-medium-sized enterprises, economic and technical cooperation, and competition. On May 8, Trade Secretary and ASEAN Economic Ministers Meeting Chair Ramon Lopez announced that the parties were considering introducing reciprocity options for nations willing to sign on to some but not all of the RCEP provisions, in hopes that this would help drive negotiations to a speedier conclusion. With the proposed reciprocity principle, countries could sign onto the agreement but opt to temporarily exclude a particular industry sector from tariff reductions, for example. For that particular sector, the country would also be opting out of the opportunity to benefit from RCEP’s reduced tariffs in its trading relations with member countries.

Free Trade Agreements

The lack of bilateral trade agreements between some of the non-ASEAN parties (especially between China and India, China and Japan, and Japan and South Korea) is often cited as a hindrance to the RCEP negotiations. The negotiations were originally slated to be concluded in 2015, but they have dragged on, in part because these countries have continued to struggle to arrive at common ground.

China has gone to work on this front, seeking to upgrade its existing free trade agreement (FTA) with New Zealand via renewed negotiations that began in April, and holding a 12th round of trilateral FTA talks with Japan and South Korea that same month. Vice Minister of Commerce Wang Shuowen said at the trilateral meetings that the negotiating efforts of the three parties would contribute to RCEP negotiations and project a positive anti-protectionist signal to the world. Still, the trilateral talks between China, South Korea, and Japan have made slow progress since their inception in 2012, periodically put on hold as a result of political tensions between the parties. And although China’s ambassador to India, Luo Zhaohui, proposed this month that China and India restart negotiations of an FTA, India has yet to indicate receptivity to this proposal.

China is also aggressively pursuing exploratory talks for a free trade agreement with Canada, a major US trading partner not party to the RCEP negotiations. In late April, Chinese and Canadian officials met for a second round of discussions. A poll released in early May shows a spike in Canadian support for a China-Canada FTA, with more than half of Canadians now behind the effort. The poll suggests support has been fueled by uncertainty surrounding the US path forward with NAFTA and with regard to trade generally. But while Canadian support for a trade agreement with China has grown, another recent poll indicates that 9 out of 10 Canadians remain uncomfortable with a potential provision in such an agreement, allowing Chinese state-owned enterprises greater access to the Canadian economy.

Belt and Road Initiative

Complementing China’s soft power efforts to champion the RCEP and negotiate new FTAs is its Belt and Road (B&R) infrastructure initiative, a rebranding of One Belt One Road (OBOR). President Xi on May 14 hosted a B&R forum in Beijing, an event that drew world leaders, officials from more than 100 countries, and 29 heads of state, including Russian President Vladimir Putin, Turkish President Recep Tayyip Erdogan, Pakistani Prime Minister Nawaz Sharif, and Philippines President Rodrigo Duterte.

The B&R initiative promises massive infrastructure investment, building railways, ports and pipelines to enhance links between China, Central and Southeast Asia, Africa, and Europe. Five main projects currently highlighted under the initiative include construction of a railway linking China to London; routes linking China to Pakistan’s Gwadar port; a railway to Iran; a set of Central Asia-China gas pipelines; and a railway connecting China with Kazakhstan. In 2014, China established a $40 billion Silk Road Fund to help finance the initiative, and on May 15, Xi announced an additional 100 billion RMB investment in the fund. The BRIC Development Bank and the China-led Asian Infrastructure Investment Bank (AIIB) are also financing B&R-related projects, and China has pledged to invest more than $4 trillion in B&R efforts over the long term.

Some US companies have successfully won small parts of B&R-related contracts, but it remains unclear to what extent the initiative’s projects will be made available to US companies. Neither the United States nor most European countries sent their heads of state to the forum. As part of last week’s US-China trade agreement, the United States did send a small delegation to the B&R forum, including National Security Council Senior Director for Asia Matthew Pottinger and Deputy Assistant Secretary of Commerce for China and Mongolia Alan Turley.

Pottinger told conference attendees that the US embassy in Beijing and US companies have formed a B&R working group, and urged China to ensure transparency in bidding processes. Some critics also contend that financing favors Chinese companies, and argue that China’s continued domestic restrictions on foreign investment contradict its global messaging. Hans Dietmar Schweisgut, EU ambassador China, summed up this sentiment during remarks to reporters in Beijing on May 9, saying, “We obviously also hope that China will implement domestically what it is preaching globally.”