The Wire | 16 January 2017
Will China become a leader in global trade during the Donald Trump administration?
In trade, when you stand still, you fall behind. US president-elect Donald Trump’s decision to shelve the Trans Pacific Partnership (TPP) agreement may relegate the US to the sidelines for a while. This not only increases the importance of the Regional Comprehensive Economic Partnership (RCEP) but also enhances its significance manifold, more so because it has been initiated by Japan and ASEAN countries, and is now led by China. In RCEP, China has an opportunity to be an agenda-setter and demonstrate leadership on global trade. The big question, however, is whether China will be able to grab the opportunity and be a torch bearer if the US loses its position under Trump’s leadership? Does China have the willingness to do so and is it ready as yet?
Latest reports on the Chinese economy suggest that its economic growth is expected to slow down in 2017. The Chinese Academy of Social Sciences forecasts China’s economic growth will decelerate to 6.5%, which would be its slowest growth rate in more than 25 years. This slower growth is coupled with tighter monetary policy and further measures to crack down on asset price bubble, especially in the property market. Importantly, this slowdown is coming at a time when anxiety about the Yuan is persistent as it fell to an eight-year low on speculation of capital outflows after Trump’s US election victory. Moreover, China is sitting on a debt bomb that could well detonate, taking with it broad swaths of the global economy.
On the trade front, Chinese Premier Xi Jinping stated in the in Asia-Pacific Economic Cooperation Summit that “openness” is the lifeline of regional economy. He also defended the system of global governance that was built largely by the US. This appears to be the onset of a paradigm shift. China, who had joined the World Trade Organization (WTO) about 15 years ago, now hopes to be leader in this space.
The world today, however, has changed and many developed economies are increasingly leaning towards regional trade agreements as opposed to multilateral agreements. Therefore, China’s intention to revive the engine of economic growth and globalisation is commendable at this juncture. Despite slow domestic reforms, China has sought not to follow but to help set trade rules similar to how the US and EU had done in the past. The question that arises is whether China has enough flexibility?
Firstly, at the WTO, China is still grappling to get ‘market economy’ status from the US and other major economies. Besides, some commitments as part of China’s accession are still work in progress. Without this status, it is difficult to see how China can effectively champion the liberal regime of the WTO. It also remains to be seen how China will lead the global free trade regime when large sectors of its industry and investment are closed to foreign investors. For instance, China has been buying and targeting hi-tech companies in the EU. Yet, foreign buyers are either barred from entering strategic Chinese industries/sectors or face what they consider unreasonable restrictions.
The Enabling Trade Index published by the World Economic Forum in 2016 echoes the above and ranks China at 61st position stating it to be relatively closed to exports from other countries. The Report states that with average applied tariffs of 11.1%, China ranks 121 out of 136 countries for domestic market access. Nonetheless, China would still need to convince other WTO members of its ability to lead in global trade.
Secondly, in regional trade agreements (RTAs), China is now leading the RCEP agreement, which would be the first pan-Asian trade agreement, supposedly covering nearly a third of the world’s GDP and half of its population. Reportedly, after conclusion of recent round of RCEP in Indonesia, not only China but also countries which are member to the TPP and RCEP are keen to move forward with RCEP in case of non-ratification of the TPP by the US. However experts already feel that RCEP may not be as ambitious as TPP given the differential developmental levels of various member economies of the RCEP. Yet, countries like Japan want to make it as ambitious as TPP. To make the RCEP a success and to benefit from the US’s likely abandonment of TPP, China will need to make significant concessions to its trading partners.
Thirdly, hitherto, the US has opened its market to imports and has been running a consistent trade deficit thereby attracting other countries to follow the pursuit of reducing barriers to trade. China, on the other hand, has trade surpluses, making countries wary of reducing barriers to trade as these countries fear exposure to a flood of imports without compensatory access to the vast Chinese market. In that case, it is pertinent to ask – should China then let imports soar? RCEP could be a one way of doing it.
Fourthly, RTAs have become more about market access. China has potential to offer a bigger boost to the rest of Asia, as it already a bigger export market than the US for large parts of Asia, and its projected growth prospects are much better as well. RCEP primarily focuses on cutting tariff barriers, though most countries in Asia already enjoy preferential access to the Chinese market. For instance, China-ASEAN free-trade agreement in 2010 cut the average tariff rate on ASEAN exports to China to 0.1% from 10%. The free-trade deal between South Korea and China in 2014 had China’s promise to eliminate tariffs on 91% of its imports from South Korea. It is in this context that the RCEP agreement will become interesting along with other subjects such as intellectual property, services and investment.
While China would like to lead a completed RCEP agreement, the success of RCEP also leans on other countries, which are external to TPP agreement and heavily depend on exports and therefore would certainly show interest in the RCEP. These countries, external to TPP have a strong export base aiding their GDP growth and China could benefit from this. For instance, as per the Enabling Trade report, ASEAN is more open than the US and the EU, which will certainly have implications for China’s role as a trading nation.
Nonetheless, China will have to rise to the opportunity and be open in its approach However, such openness would require a fundamental shift in economic thinking and it would need to play the role of last importer which has been played by the US for decades. Lastly, if China has to attain leadership position, it must accept, at least initially, an asymmetric outcome in RCEP negotiations by convincing its partners that they stand to gain from reducing trade barriers.