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China's journey to join the CPTPP will be closely watched

Ng Qi Siang
Ng Qi Siang 3/12/2021 07:00 AM GMT+08  • 9 min read
China's journey to join the CPTPP will be closely watched
China faces many obstacles to joining CPTPP, but a want for trying is not one of them.
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There was perhaps no better occasion to drop a bombshell of international proportions. “China...will favourably consider joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP),” declared Chinese president Xi Jinping via video link at the 27th Asia-Pacific Economic Cooperation (APEC) Economic Leaders’ Meeting last November.

China was never meant to be included in this international framework. The deal was the economic leg of former US President Barack Obama’s “pivot to Asia”, providing economic prosperity to allies and partners to counter China’s Belt and Road Initiative (BRI), where the latter bankrolled numerous infrastructure projects in developing countries ranging from Sri Lanka to Pakistan.

The original plan

The original TPP was drafted to exclude China and also included provisions on issues such as human rights and state-owned enterprises that Beijing would have found difficult to accept. Mainstream discourse pitted the BRI and the Asean-led Regional Comprehensive Economic Partnership (RCEP) as rivals and this has fuelled scepticism about China’s ability to join the CPTPP despite some of the provisions having been relaxed in Washington’s absence.

Naoko Munakata, adviser to the Dai-Ichi Life Research Institute Inc, says the TPP has rules concerning state-owned companies, subsidy discipline and digital rules that are not compatible with either China’s political structure or industrial policies.

“The Xi administration has become heavily involved in the economy by pushing forward rapidly to strengthen industrial competitiveness. I do not believe it is possible for that administration to also take part in the TPP that calls on member governments not to distort the conditions for competition,” she tells Japanese daily Asahi Shimbun.

Still, the thought of China potentially taking a dominant position in Asia’s three largest regional economic initiatives without US representation will likely make Washington uneasy. This is especially given the former Donald Trump administration’s alienation of regional states by not only withdrawing the US from the TPP in the first place, but also by waging a damaging trade war against China, on whom many of these states rely on for trade. Trump’s refusal to attend regional summits have also left states feeling somewhat neglected by Washington.

According to this year’s State of Southeast Asia survey put together by ISEAS-Yusof Ishak, 76.3% of respondents saw China as the region’s preeminent economic power while 49.1% saw it as the leading political and strategic power. The survey was administered to 1,032 regional respondents.

In last year’s Asia Power Index, the US maintained its pole position but also suffered the biggest drop of three points over 2019. But according to Australia’s Lowy Institute , which put this study together, China maintained its score of 76.1 points while Japan is a distant third at 41 points. China lost ground in terms of diplomatic influence but it performed well in terms of cultural influence and economic relationships. Joining CPTPP could possibly accelerate the growth of Beijing’s clout at the US’s expense.

Incomplete without China

While there were lingering suspicions in Beijing that the TPP was intended to constrain its rise, China has never — even from the deal’s earliest days —been completely opposed to the TPP in principle. While structural differences have indeed proven to be an obstacle in realising Chinese membership, this seems to be less of a problem as China advances its goal of structural reforms. Many experts believe that China is quite serious about joining the CPTPP, even if this process is unlikely to be easy.

“We [have] said very clearly that the TPP is not complete without including China, because it is so large an economy in the Asia-Pacific. Very frankly, China and the US are very key players here,” said then Chinese vice-minister of finance, Zhu Guangyao at a talk at the Peterson Institute for International Economics in 2014. He also voiced China’s desire for the TPP’s success and hope to better integrate economically with the international system.

With the worst of the Covid-19 pandemic put behind for now, these reforms are coming in thick and fast. Consulting firm Dezan Shira expects China’s upcoming Fourteenth Five- Year Plan economic strategy — which will be unveiled in March — to double down on economic liberalisation policies like improvements to its national treatment mechanism and negative list system for foreign investment, as well as the opening up of its domestic services industry. Investment management firm Pimco also expects the two-way opening up of financial markets and greater renminbi (RMB) internationalisation to be key thrusts of the plan.

Martin Hennecke, Asia investment director at wealth management firm St. James’s Place, sees the once odious CPTPP rules becoming less of an obstacle over time. RCEP and the US-China Phase One trade deal in the wake of the trade war between the two countries, he argues, have already put China down the path of reform. Nanyang Technological University (NTU) professor Dylan Loh also sees a commitment to such reforms via CPTPP as a catalyst that could prompt the Chinese bureaucracy to further step up economic liberalisation.

Favourable access

Sherry Madera, chief industry and government affairs officer at Refinitiv, is particularly excited about CPTPP provisions surrounding services and data. Dealing with issues of data security and privacy not accounted for in traditional trade deals, she sees CPTPP as an important bulwark against data localisation, facilitating the growth of the digital economy. Still, she warns that the presence of a new trade deal does not mean that trade flows will necessarily increase correspondingly with it in place.

Yet, the barriers to Chinese entry are very real. EIU’s Marro warns that existing members will be concerned that the potential entry of China would dilute the quality of the trade agreement; they will also wonder if Beijing will not deliver on its commitments once accepted into the deal. There is some unhappiness about the fact that China has yet to fully comply with many of the protocol commitments it made when it joined the World Trade Organisation (WTO) in 2001.

Existing members could make concessions to bring the large Chinese economy into the deal, prioritising the economic heft of China over its difficulty in complying with the rules. But considering that China’s main rivals in the deal Australia and Japan already have preferential access to China via RCEP, says ESSEC Business School professor Cedomir Nestorovic, they perhaps have less of a reason to make allowances for Beijing. Both are already looking to cut their economic reliance on China in the wake of US-China geopolitical rivalry.

Trade influence

However, liberalisation could also potentially remove some of the controls safeguarding structural weaknesses in the Chinese economy. Bloomberg Economics’s chief economist Tom Orlik points out, for instance, that China’s high levels of debt are currently kept in check by capital controls while state-owned enterprises absorb unemployment, and are a key source of counter-cyclical stimulus in lean years. It will take time for China to reduce its reliance on these safeguards and hash out suitable terms of accession with existing members.

Marro also sees the actual economic benefits of Chinese membership on Asian countries being smaller than expected. With tariff rates already low in Asia, non-Asian signatories like Chile, Mexico or even the UK — which has recently officially indicated its intention to join CPTPP — will benefit more. Madera, formerly Minister-Counsellor for the UK’s Department for International Trade in Beijing, sees CPTPP allowing China to spread its trade influence beyond Asia, even if Chinese synergies with other Asian economies remain central to the deal.

Joining CPTPP could also socialise China more deeply into the norms of international trade. NTU’s Loh also sees China’s participation in the deal potentially helping Beijing gain a better appreciation of the interests and positions of its members on various issues. At the very least, CPTPP could also be a useful platform for engagement with China at a time when US allies and partners are increasingly suspicious of its intentions.

Countering Beijing

The instinctive response for US politicians might be to rejoin the CPTPP to counter Beijing’s rising influence. Having lost credibility abroad following its TPP withdrawal, Richard Haas, president of the Council of Foreign Relations, argues in a Foreign Affairs article that negotiating a “follow-on pact” to the TPP would help partly restore US “street cred”. CPTPP members have kept the door open to a US return whenever it wishes to do so, in part perhaps to ensure that Washington and Beijing serve as a check on one another in the region.

Sadly, any desire on the Biden Administration’s part to re-join CPTPP will likely be stymied by domestic political pressures. “CPTPP is a relatively poisonous word in the US,” observes Marro, who says that Trump’s decision to withdraw the US from the deal was met with bipartisan approval, with no consensus to re-join the deal forthcoming since then.

Still, Marro expects the US to seek alternative ways of engaging Asia, with this likely to come in the form of bilateral agreements, security cooperation with the Quadrilateral Security Dialogue (an informal strategic forum between US, Japan, Australia and India), and alternative multilateral fora. This “division of labour” between security and trade could however, warns ESSEC’s Nestorovic, increasingly force Asian states into making a general choice between Chinese economic largesse and US security provision, even as Loh notes that the situation is more nuanced than this. Few countries —especially Singapore, as clearly repeated by various government leaders —want to make this binary choice.

“A lot of things in the [CPTPP] really represents the US view of what free trade looks like. It was only relatively slightly toned down when the US left,” says Hennecke of St James’s Place, which could pave the way for the US and China to find common ground on trade. Refusing to engage could see the US losing regional influence and the benefits of economic integration. But with President Biden barely into his first hundred days in office, Refinitiv’s Madera will not rule out a future change of heart.

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