Financial Express | Oct 02 2013

Cavassing China: China’s FTA rush

Amitendu Palit

The new leadership is anxious to avoid the possibility of being left out of important regional agreements.

China’s external engagement policies are showing marked changes under the new leadership. This is evident from the proactive moves being taken for getting involved in various important regional economic agreements.

The foremost example is the Trans Pacific Partnership (TPP). The US-led TPP is in the final stages of negotiations with hopes of being substantially concluded by the end of the year. The agreement includes APEC members from both sides of the Pacific with some important exceptions like China and Indonesia. China has traditionally been hostile to the agreement. Influential views within China have viewed the agreement as a strategic manifestation of the US’s renewed interest in Asia and an attempt to marginalise China by stitching an alliance of American allies and partners from the region. During the Hu-Wen leadership, China was considerably wary of the TPP. Now, however, there are distinct signs of change in perceptions. China is actively considering the possibility of joining the TPP negotiations and studying the pros and cons for doing so.

A strong signal that can be taken as a precursor to China’s formal announcement of its wishes to join the TPP is resumption of negotiations on the China-US bilateral investment treaty. Investment talks had begun between the two countries when President Bush was in office. They were subsequently called off over China’s reluctance to include all sectors of the economy within the ambit of discussions, particularly services, which it was keen on protecting. During the latest Strategic Economic Dialogue with the US in July, China dropped its earlier objections paving the way for recommencement of negotiations.

The radical change in the Chinese attitude took many by surprise. China could well be taking investment negotiations with the US as the first step towards moving to the TPP, which covers trade in goods and services, investment, competition policy, non-tariff measures and a host of ambitious trade policy issues like labour, environment and government procurement. Knowing well that the US is the main driver of the TPP, and that most critical issues in the TPP are being settled through bilateral negotiations between the US and TPP members with whom the US does not have FTAs, (e.g. Malaysia, Vietnam, Japan), China is taking the investment treaty as the stepping stone to more such bilateral negotiations with the US in the TPP.

In addition to following the TPP closely, China is engaging actively in two other regional negotiations. These are the RCEP (Regional Comprehensive Economic Partnership) and the trilateral FTA with Japan and South Korea. The first agreement includes ASEAN and those Asian economies with whom it has bilateral FTAs including India. The group has some members common with the TPP such as Australia, Japan, Singapore, Malaysia and Vietnam. Both the RCEP and the trilateral FTA with Japan and Korea are China’s efforts to protect its access in the regional markets, particularly Japan and Korea, who are among its biggest trade partners but with whom it does not have bilateral FTAs.

It also reflects China’s desire to stay at the forefront of all major regional economic integration efforts being spearheaded from within Asia.

China’s FTA engagements are not limited to the Asia-Pacific. President Xi Jinping recently urged for speedy conclusion of the FTA between China and the Gulf Cooperation Council (GCC), which had begun negotiations in 2004. Developments in the Arab world and the global economic turbulence had affected negotiations since 2009. The new Chinese leadership is keen on wrapping up the talks fast. The FTA will secure China’s preferential access to an important segment of the global crude oil market given that four members of the GCC – Kuwait, Saudi Arabia, Qatar and United Arab Emirates – are important OPEC members. It will also serve considerable strategic benefits by deepening China’s ties with the Arab world.

The new leadership’s active external economic engagement strategy has also included deeper commitment to the BRICS collective and enhancing ties with the African continent. Strong signals for upping the bilateral ante have also been sent to important neighbours and economic partners like Russia, India and Australia. And in what could be a decisive step to formally integrate with the economies in the Western hemisphere, Premier Li Keqiang has endorsed the possibility of creating a FTA with the European Union.

The Chinese leadership appears to be in a hurry to connect to all parts of the world and anxious to avoid the possibility of being left out of important regional agreements. Multiple motivations are triggering the proactivity. Foremost among these is a realistic assessment of the global economic scenario and the intention to maximise all economic opportunities for maintaining a stable rate of growth and facilitating the restructuring of the economy to a less export-dependant, more consumption-oriented model. China also realises the importance of doing ‘business’ with the US for securing economic benefits, notwithstanding several strategic disagreements. The positive orientation towards the TPP and negotiation of the investment treaty vindicate the realisation. Staying out of the TPP in the long run, and going slow on FTA talks with dificult neighbours like Korea and Japan—the new leadership feels—only serves to complicate the economic outlook apart from cramping strategic space. And when it comes to brightening economic outlook, China is prepared to engage all. No wonder the world loves doing business with China.

The author is a Senior Research Fellow with the Institute of South Asian Studies in the National University of Singapore and can be reached at isasap@nus.edu.sg.

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