In recent months, stock market turmoil and currency depreciations have raised concerns about the impact the Chinese economy might have on the wider global economy. If we take a look at China’s emerging trade policies – which have been more open and now embrace a higher standard of market access – we may have reasons to be optimistic about the future shape of the Chinese economy.
As the largest trading nation, China recognizes that it has to move quickly to adapt to the new trends in world trade, namely the so-called mega-regional free trade agreements (FTAs). Originally, Chinese commentators were sceptical of these agreements, including the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). They were particularly concerned about the geopolitical implications of the TPP, which is perceived to be the economic arm of the US “pivot to Asia”. But now they have started to adopt a more proactive approach, and have worked to build China’s network of free trade agreements with a higher standard of market access.
China’s emerging trade policy
To deal with international and domestic challenges, the Chinese government has started forming a new, more proactive trade policy, particularly since President Xi Jinping and Premier Li Keqiang came to power in 2013.
The core principle of China’s new trade policy seems to be very clear: China should not just be a follower of the rules – it should also be setting the rules and playing a leadership role in the emerging regional and global trade order. In particular, China should not stay on the margins and be marginalized as other countries move towards mega-regional FTAs.
Since the new leadership was sworn in, the Chinese government has given serious consideration to applying for membership of the TPP. Although they have up until now decided against it, China may choose to be part of it in the future, especially for its state-owned enterprises.
China has also eagerly sought to be part of a new generation of rules negotiation, especially the new trade in service agreement (TiSA). This is partly because of its fear of being marginalized as new rules are developed, and also due to enthusiastic demand for the development of its services economy.
Boosted by the TPP and other mega-regional FTAs, the Chinese government raised the quality of trade liberalization agreements with Switzerland in 2014 and with South Korea and Australia in 2015. It has also pushed forward with upgrading its FTA with the Association of Southeast Asian Nations (ASEAN), and has received positive feedback from ASEAN countries. In addition, China is determined to speed up talks on the Regional Comprehensive Economic Partnership (RCEP) and set a target for concluding negotiations for the end of 2015.
It also succeeded in sponsoring a Free Trade Area of the Asia-Pacific (FTAAP) among Asia-Pacific Economic Cooperation (APEC) members during the APEC leaders’ meeting in Beijing in November 2014. China and other countries expect that the FTAAP can become the common space to integrate the rules of the TPP and RCEP, and to ensure the integrity of the regional trade order in the Asia-Pacific region.
China is making deals with the world’s major economies, particularly the US, the EU and Japan, which will help reduce or diversify the risks of geopolitical competition. The Bilateral Investment Treaty (BIT) talks with the US have made important progress, and the country is also enthusiastic about the BIT with the EU. It has also decided to speed up talks with Japan and South Korea on a trilateral FTA. These moves are based on the principles of more open market access, and combined together, they will push the global economy to be more stable and open, and to consolidate its foundation.
More importantly, since 2013, China’s leadership has started experimenting with the Shanghai free-trade zone pilot. It is not only about free-trade liberalization, but also involves relaxing regulations on trade in services, capital controls, convertibility of the Chinese currency and improving the standard of intellectual property rights and trade facilitation. Some measures to streamline government structure and procedures have also been adopted. Since then, the state council extended the pilot to other parts of the country, including Tianjin, Guangdong and Fujian, which have been in operation since March 2015. These pilots will definitely help China to be more open to foreign investment.
The New Silk Road initiatives, the Asian Infrastructure Investment Bank and China’s trade policy
In October 2013, President Xi Jinping introduced the New Silk Road economic cooperation. Also known as “One Belt, One Road”, it is made up of the New Silk Road Economic Belt and the 21st-century Maritime Silk Road. Shortly after, the Chinese government established a $40 billion Silk Road Fund. At the same time, the Chinese leader pushed for the establishment of the Asian Infrastructure Investment Bank (AIIB) to help developing countries in Asia finance their badly needed infrastructure projects.
China’s new development initiatives have triggered some dispute and opposition from countries like the US and Japan, the established powers of the existing international financial institutions. However, the AIIB initiative received positive feedback from Asian developing economies, which clearly expect to benefit from these funds. For example, all 10 ASEAN members signed the AIIB’s memorandum of understanding; in March 2015, the United Kingdom and other EU countries applied for status as founding members of the AIIB; they were followed by key US security allies, notably South Korea and Australia. The AIIB is scheduled to be in operation by 2016. The US seems to have moderated its approach towards the AIIB, which will help the new development bank grow and feed the demand for infrastructure investment from Asian developing countries.
The AIIB and New Silk Road initiatives are expected to alleviate the pressure of overcapacity and excessive foreign reserves, giving a boost to the Chinese economy’s “new normal”. The New Silk Road initiatives may also help China push forward higher-standard FTAs with the countries located along the ancient Silk Road that are enthusiastic to participate in China’s new cooperation initiatives. WTO or WTO-plus rules could apply to cooperation between China and partners along the Silk Road in different forms.
Implications for the global trade order: back to the future?
China’s emerging trade policies will deeply influence the future of the global trade order:
- China’s proactive approaches seem to be helping global trade become more open. China has made efforts to negotiate with major trade partners on bilateral FTAs and BITs. The country’s New Silk Road initiatives are expected to open economies in the region that have been relatively slow to embrace free trade, and will boost growth by investing in infrastructure and increasing connectivity among these economies. In fact, the whole world will benefit from these steps advanced by China.
- China’s newfound preference for higher-standard bilateral and regional FTAs will pressure WTO Doha Round negotiations, which have stalled. China would like to assist the WTO in maintaining its authority and reputation, and has made efforts to narrow the differences between different groups.
- China-US BIT talks will help decrease the risks of geopolitical rivalry. China’s rise has caused disputes over territory and tensions in regional relationships among major powers, but closer economic relations between the two largest economies will help to place their relations on a more secure and stable base.
When it comes to China’s trade policy, we may have reason to be cautiously optimistic. As China opens up, it will not only boost its own economy – it will also kick-start the global economy.
The World Economic Forum report, The High and Low Politics of Trade, is available here
Author: Yong Wang, Director, Center for International Political Economy Research, Peking University, China. Member of the World Economic Forum’s Global Agenda Council on Trade & FDI
Image: People walk along an elevated walkway at the Pudong financial district in Shanghai November 20, 2013. REUTERS/Carlos Barria