International Rules Restructuring and China’s Response

China International Studies | 作者: Wang Jinbo | 时间: 2014-06-20 | 责编: Li Xiaoyu
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 by Wang Jinbo


Currently, a new pattern of regional cooperation in the Asia Pacific is in the making in which the Trans-Pacific Partnership Agreement (TPP), the Regional Comprehensive Economic Partner-ship Agreement (RCEP) and China-Japan-Korea (CJK) FTA run in parallel. How to balance and handle the relationship among these regional cooperation regimes is of vital importance to China’s participation in and promotion of regional integration process, as well as to China’s major position in Asia-Pacific regional cooperation. Meanwhile, the restructuring of international trade and investments rules led by the TPP, the Trans-Atlantic Trade and Investment Partnership Agreement (TTIP) and the Agreement on Trade in Services (TISA) is becoming a new and important external factor for China’s future development, exerting impact on its economic plan, strategic orientation and position in global economic governance.


I. New “Restructuring” Stage for Asia-Pacific Cooperation


Since 2009 when the United States started its pivot to Asia and made the TPP a main pathway for Asia-Pacific economic integration, the regional cooperation has entered a new “restructuring” stage. In the years to come, when regional cooperation process is driven by competition, the TPP, RCEP and CJK FTA will coexist and develop side by side. Changes in the East Asian and Asia-Pacific landscapes triggered by the TPP will inevitably pose new challenges to China’s East Asian integration strategy and to ASEAN-centered progressive regional integration principles. A new model based on dual regimes of a strong TPP and a weak RCEP may come into being in the Asia-Pacific region. The Trans-Pacific track and East-Asia track may develop to same destination, by which the APEC goals for Asia-Pacific economic integration will eventually be achieved. However, there are many problems and challenges concerning whether the TPP will become the preferred pathway for economic integration and whether the RCEP will develop into an integrated architecture for the region.

Serving as an economic base in support of America’s rebalancing strategy to Asia, the TPP, while altering cooperation patterns in the Asia-Pacific region, is exerting various impacts on possible East Asian integration pathways such as CJK FTA and the RCEP. The TPP is a comprehensive, high-level and US-led regional trade arrangement which is based on the free trade agreement reached among four Pacific countries (Singapore, New Zealand, Brunei and Chile known as P4). With Washington’s forceful push and leadership, 19 rounds of negotiations have been conducted, and member states for negotiations have increased from the original 9 to the current 12. Now the member states are still struggling in their final negotiations concerning respective interests in specific sensitive areas such as agricultural products’ market access, the investor-state dispute settlement mechanism, labor standards, environmental protection, intellectual property rights, state-owned enterprises and government procurement. These areas are exactly where American interests are concentrated. However, to reach a TPP agreement is a matter of time for working out a final version of standards. Taking into account of the ongoing progress made in the TTIP and TISA negotiations, to complete the TPP negotiations before the US mid-term election in November and to declare the conclusion of negotiations among 12 members including Japan during the Beijing APEC meeting will be in line with Washington’s global strategy. After all, the fundamental interests of the United States in pushing new negotiations on international trade and investment agreements lie in the reshaping of global trade and investment rules and the maintenance of its dominant position in international economic and trade configuration.

Different from the TPP which focuses on developing standards and rules, the RCEP cooperation concerns effective international division of labor in East Asia. Reconstruction and improvement of production networks in East Asia manifest the true value of the RCEP, and the building of a unified market in the region should most probably be the ultimate goal of the RCEP. At present, the global manufacturing, the most-advanced manufacturing in particular, has evolved from single product competition to industrial chain competition. In international trade, traditional activities among comparative advantage industries have turned to trade activities within industries competing for advantages. In the process of socialization of the region and internationalization of production in East Asia, regional production networks dominated by multinational corporations are becoming key variables in integrating East Asian markets and in the change of regional governance structures. If the RCEP could, on the basis of “10+1”, extend and deepen existing production network in East Asia, and push RCEP members to further integrate into global and regional supply chains, then it will provide new impetus for endogenous development of East Asian economy. East Asian countries can make use of the RCEP’s trade liberalization and investment facilitation measures to readjust their industrial layout and production network in the Asia-Pacific region according to competitive advantage and geographic conditions, so as to consolidate the region’s industrial advantages.

However, faced with challenges from the TPP, common efforts from China, Japan and the ROK are needed and supports to ASEAN’s coordination are required if the RCEP is to become the main pathway in East Asian integration. This is because the current ASEAN economic integration and trade liberalization could hardly reach the level of the RCEP target, so if CJK FTA could combine the TPP’s high standards and wide coverage with the RCEP’s progressiveness and inclusiveness, it will not only boost the RCEP, but also provide intrinsic motivation and solid foundation for the East Asian integration process. Similarly, if ASEAN could first reach some consensus on issues of the RCEP agendas and degree of market openness on the basis of ASEAN Free Trade Area and in the ongoing negotiation of the ASEAN Economic Community, ASEAN will greatly remove internal resistance in promoting the RCEP. To put it in another way, the future of the RCEP lies in strategic coordination between China and Japan and the building of ASEAN Community itself. Objectively speaking, under the conditions when the current Sino-Japanese relations are extremely unstable, the East Asian cooperation, based on industrial chain’s “vertical” cooperation and common interests, could hardly ensure that East Asian economic integration will develop smoothly along pathways of CJK FTA and the RCEP. This requires RCEP members to give up, from the initial stage of negotiations, the traditional “offensive and defensive” postures and try to avoid the situation in which the TPP prospers while the RCEP dwindles. In fact, if the building of the ASEAN Community and RCEP framework agreement could not complete on schedule, we cannot rule out the possibility that some ASEAN members such as Thailand and the Philippines will join the TPP, and the possibility that ASEAN will turn directly to Washington or Brussels for bilateral free trade agreements. This probably means that ASEAN itself is a “short plate” in determining whether Asia-Pacific regional cooperation will be based on a dual-framework or on double-track operation.

Currently, TPP, RCEP and CJK FTA negotiations are still underway with their final texts and the extent of trade liberalization yet to be determined. However, because the TPP is evidently exclusive and closed in nature from the outset, once it is completed, it will pose tremendous challenges to China’s current economic operation mechanism, and exert in particular negative impacts on state-owned enterprises, no matter whether China joins it or not. China’s economic development model at this stage determines that the state-owned enterprises, which are “closely related to the role of government”, occupy the dominant position in the bulk trade and (overseas) investment area, and they are considered “the main source of Chinese national competitiveness.” For this reason, the TPP intends to regulate government and business behaviors through “behind-the- border measures” and multilateralization of competitive neutrality principles. TPP terms stipulate removal of subsidies, removal of special preferential financing measures for state-owned enterprises, revocation of government procurement preferences, investments and trade status of state-owned enterprises and so on. All these provisions will give new challenges to China’s state-owned enterprises and their overseas investment performance. They will also have huge and potential systematic effects on China’s major industries and the current economic operation mechanism.

Similarly, in CJK FTA and RCEP negotiations, strategic demands on the making of rules and standards by the developed TPP members will exert substantial pressures on China for further opening. Trade in services and investments are the areas where the interests of the developed TPP and RCEP members focus and where they have more common interests than with China. In CJK FTA negotiations, Japan and the ROK once proposed specifically to include pre-establishment national treatment and negative list in the chapter of trade in services and investment in CJK FTA Agreement, involving service, investment, high-end manufacturing and other areas where Japan and the ROK have their vital interests and competitive edge. While in the RCEP negotiations, China also faces above-mentioned demands from Japan, the ROK, Australia and other developed members of the TPP. At present, there are 26 FTA agreements in the Asia-Pacific region in which investment provision contains the pre-establishment national treatment and reserves the non-conformance measures in the form of negative list, involving most of the TPP and RCEP members. While in 130 bilateral investment treaties and 12 free trade agreements China has already signed, none of them touched on the issue of pre-establishment national treatment and negative list. In the existing five “10+1” FTAs, only China-ASEAN FTA does not grant pre-establishment national treatment to foreign investors. Therefore, in the future China will face pressures on the ways of commitment in trade in services and investment in TPP, RCEP and CJK FTA negotiations. It is necessary for China to make manageable and high-level commitment in the fields of trade in services and investment with the chance of CJK FTA and RCEP negotiations. This might help China get the strategic initiative in the new rules-making of the subsequent Asia-Pacific/ East Asian integration.


II. Standards and Rules: Core Content in Negotiations


Currently, new trade or investment agreements represented by the TPP, TTIP and TISA are leading the formulation of new rules, new standards and new paradigms for global trade and investment. The TPP, TTIP, TISA or the US “2012 Model of Bilateral Investment Treaty” (BIT2012), all of them tend to offer broader national treatment on mutual basis on trade in services and investment access, and to reserve non-conformance measures in the form of negative list. Pushed constantly by the US “sequential negotiations” and the EU strategy of “promoting bilateral negotiations by multilateral ones”, the third generation of trade and investment norms, with the “pre-establishment national treatment plus negative list” as its core content, has evolved into strategic approaches by the US and Europe in their reshaping of international trade and investment as well as world economic pattern. Trade in services and investment agreements then have become the core content in the new round of international trade and investment negotiations and rules-making, while WTO multilateral trading system has the risk of being marginalized.

As a new benchmark for rules of international trade in services, the TISA, in addition to advocating a comprehensive national treatment given to foreign investors, will put forward new and higher standards and requirements in the rules, norms, areas and modes. They are related to the rules-making in new areas such as finance, telecommunications, professional services, shipping, e-commerce, information and communication, state-owned enterprises, government procurement, services subsidies and movement of natural persons, covering 2/3 of the total global trade services. Similarly, as the highest standard templates in the field of international investment, BIT2012 not only covers all topics in traditional international investment agreements (such as minimum standards for the treatment of investment, MFN, collection, transfer, subrogation, loss compensation, and settlement of investment disputes), but also includes new provisions on pre-establishment national treatment, state-owned enterprises, labor, environment, and performance requirements. Both of them involve exactly the same contents as in the TPP and TTIP, and their standards and rules are not only higher than other free trade agreements either currently negotiated or already signed, but also higher than the current WTO standards. The US and the EU, as the world’s largest economies, are trying to expand US-European standards to global standards through the integration of the TPP and TTIP, in order to achieve the fundamental objective of reshaping international trade and world economic patterns. In other words, the United States and the EU, by using US-EU regional integration and by allying with the TPP, work hand in hand to harmonize two largest economies’ standards and regulations and incorporate with international standards. With this, they want to attract or force other economies to accept their rules and standards, and ultimately achieve their objectives of reshaping the world trade system (WTO) and building a new international economic order.

There is no doubt that the new standards and rules guided and established by the TPP, TTIP, TISA and BIT2012 will provide a new framework of guidance to the new round of global trade negotiations, and will lay a foundation for the United States (and to some extent, the Europe) to play a “dominant” role in developing global rules. In a nutshell, both the TPP and TTIP serve as platforms for Washington, in its attempt, to develop “the next generation of trade rules and standards” outside the WTO framework, and they are major initiatives through which the United States seeks to create new opportunities for “trans-Pacific” and “trans-Atlantic” trade and investment. With the TPP and TTIP, the United States can not only stipulate fresh global trade and investment rules, but also maintain its core position and leadership in the global economic governance. As the biggest beneficiary in current international rules and global governance mechanisms, Washington’s continued dominance and leadership in the rules-making of global trade and investment constitute pivotal part of its foreign trade strategy. To gradually upgrade and extend the bilateral rules to the global level by “selective” negotiation, the “externalization mechanism” or spillover effect of the TPP, TTIP and TISA, Washington’s genuine purpose of the “competitive trade policy” and “sequential negotiations” will be served.

Considering the size of the two economies of Europe and the US (accounting for 45.0% of the global economy) and their dominant position in the global industrial chain and international trade division of labor, the high standards and new rules of the TPP and TTIP will inevitably exert a profound impact on international trade patterns, and China as an emerging country naturally cannot stay aloof. Furthermore, “TTIP is the free trade agreement negotiations conducted between China’s first and second largest trading partners (accounting for approximately 26.6% of China’s total foreign trade),” hence China becomes a stakeholder in trans-Atlantic TTIP negotiations. The concept of “free market economy + grouping” and the contents of state-owned enterprises, government procurement, ownership and market transparency embodied in the TPP, TTIP or TISA are closely related to China and obviously targeted on the emerging economies. The contents, objectives and final results of those negotiations will become major external factors that affect the future development of China.

Since the ultimate goal of the TPP and TTIP is the harmonization of international rules and standards, their essence is to “build rule and standard barriers externally”. This will have a direct impact on China’s positioning in future regional and global governance, and also pose a clear checking effect on China’s rising momentum in the global competition and international trade division of labor. In view of this, once the TPP, TTIP or TISA are put into practice, China will have to withstand duel pressures from the US’ “two-ocean strategies” at regional and global levels, and China is expected to face, in its peaceful development, a more complicated external environment and international situation. American “sequential negotiations” will also increase difficulties for China in multilateral trade negotiations. If the TPP and TTIP’s rules on investment, environment, labor standards, intellectual property rights, competitive neutrality rules and state-owned enterprises are raised to be global standards, Chinese (state-owned) enterprises in the future will be confronted with a new international business environment, thus challenging China’s existing trade, investment and development models. No matter whether it is the TPP or TTIP, any commitment to reserve the pre-establishment national treatment in the form of negative list will bring about substantial pressures for opening up China’s sensitive sectors such as finance, telecommunications and legal services, and China’s development of emerging industries as well as technology pathways will face great uncertainties. This definitely requires China to adopt a “broader perspective” in dealing with developments and changes in international rules and multilateral and regional systems, and to take corresponding measures that are most suitable to its own interests. As an emerging power with global vision, China needs to have a clear understanding of the impacts brought about by new international rules on its participation in the regional and multilateral systems. China’s future regional economic cooperation must have “clear guidelines” and must be conducted in a “well-defined strategic framework.” Only by so doing, can China have its place in future regional and global governance and obtain its necessary voice in the restructuring of the international rules.


III. China’s Policy Options


In its strategic cooperation strategy, China at present is engaged in China-ROK, China-Japan-ROK, China-Australia and RCEP FTA negotiations for trade liberalization arrangements. Given China’s economic size, its geographic advantage and important position in the global industrial chain, without China’s in-depth participation in the TPP or RCEP, there will be no Pareto Optimality in any regional cooperation mechanisms in Asia Pacific to speak of. Since China is the country which has the capacity for system selection in East Asia, the direction of future integration in East Asia will fundamentally depend on the growth of China’s own strength and her policy options.

China should make full use of its geographic advantage and major economic status to give supports to and bring into play the coordi-nating and promoting role ASEAN plays in East Asia cooperation. While accelerating the building of China-ROK, China-Australia and CJK FTAs, China should actively promote the RCEP, push forward the building of trade liberalization or institutional integration among Chinese mainland, Taiwan, Hong Kong and Macau, and complete as soon as possible China’s FTA strategy layout, so as to create space and win time for China’s forthcoming participation in next higher-level FTA negotiations. Meanwhile, taking into consideration of the latest TPP and TTIP developments and reforms and industrial development at home, China should explore at the proper time the possibility of signing trade and investment agreements with the developed economies of the US and the EU and emerging economies, in particular the BRICS countries. Objectively speaking, the new trend of international trade and investment represented by the TPP, TTIP and TISA is not inconsistent with next reform ideas and strategic direction of China. The high standards of the TPP, TTIP or TISA should not become obstacles to China’s efforts for FTAs and intensified regional cooperation.

It should be noted that the focus in TPP and TTIP negotiations and difficulties in RCEP integration are also embodied in the TISA or US BIT2012 framework. Therefore, China should, by taking the opportunity of negotiating bilateral investment treaties with the US and the EU and by taking into account its reform and industrial upgrading circumstances, engage in careful consideration and make an overall plan over the sensitive issues such as pre-establishment national treatment, negative list, state-owned enterprises, investors-state dispute settlement mechanism, cross-border free data flow, finance, taxation and compensation standards, intellectual property rights, labor rules and environmental protection in the areas of investment access, fair competition and interests protection where China has differences with the US and the EU. This will help create favorable conditions for China to build a mutual investment order in the future. Needless to say, any positive interaction and stable development of relations between China and the US serves as basic prerequisite for a trouble-free advance in East Asia cooperation. Even if there is no TPP or bilateral investment agreements, Beijing and Washington should maintain a minimum level of cooperation. Their bilateral coordination concerning specific policies will provide new opportunities and strategic guarantee for East Asia cooperation. Any regional cooperation between China and the US in traditional, non-traditional or functional areas may help provide new inputs to the building of a new- type relationship among major countries.

China should correctly understand the TPP, TTIP and TISA and make objective evaluation over these arrangements. At the same time, China should pay more attention to its sustainable economic growth at home, and make greater efforts to convert Chinese economic influence to the strategic influence. In the long term, the building of national endogenous development institutions holds the key for China to face up to the TPP and TTIP challenges, and it also plays an important role in China’s efforts for the integration process in East Asia. The strategic maneuvering between China and the US in the Asia-Pacific region will be a long process. It takes time for China’s neighboring countries to gradually adapt to, recognize and accept China’s status as a rising power psychologically and in action. In East Asian cooperation, haste makes waste. To deepen East Asian cooperation does not mean to abandon the trade liberalization process under the multilateral framework.

With the growth of China’s economy and overseas interests, for some time to come, China will have more and pressing demands for external markets and resources. Meanwhile, countries in the world will have intensified contention for market, energy and resource security, climate change, the development of standards and regulations and other global issues. Developed countries work hard to formulate new rules of the game for the global economy and the emerging strategic industries by setting stringent emissions rules and technical standards, so as to raise the access cost for the developing countries or emerging economies. China, therefore, should re-evaluate potential strategic gains brought about by the pre-establishment national treatment and full post-establishment national treatment. In the meantime, it is necessary for China to take advantage of regional trade negotiations, and actively participate in formulating more open regional or multilateral investment rules while reconstructing regional mutual investment order and unified architecture, so as to ensure worldwide space and overseas investment security for China’s economic development in the future. Proceeding from a strategic vision and taking into account of the latest trend in new international trade negotiations and regional trade agreements, China should formulate its strategy and action plan which are based on its real ability and focused on the future commanding heights in the process of reshaping world economic rules. This will enhance China’s rule-making capacity in the regional and global governance and increase China’s voices in global standard-making and the reconstruction of Asia-Pacific regional cooperation framework.

From a pragmatic perspective, China may promote high-standard opening in some areas with limited scope within China-ROK and China-Australia regional trade arrangements and the RTAs among Chinese mainland, Taiwan, Hong Kong and Macau. Technically, China could restrict the conditions and scope of pre-establishment national treatment by defining the “related investments”. China could also, on the basis of negative list experimented in the Shanghai Pilot Free Trade Zone, give pre-establishment national treatment and “access unless banned” a trial run, drawing on European and American experiences in the “national security review” and “critical infrastructure protection” and other non-conformance measures. Meanwhile, China could, in line with the progress in the negotiations on bilateral investment treaties with the US and the EU, explore to take the lead in trying to reserve the full post-establishment national treatment in the form of non-conformance measures in cross-strait trade arrangements or the RTAs among Chinese mainland, Taiwan, Hong Kong and Macau. Because “Cross-Strait Economic Cooperation Framework Agreement” (ECFA) and the “Closer Economic Partnership Arrangement” (CEPA) between Chinese mainland and Hong Kong have already signed, trade in services and investment cooperation will be important growth drivers in the cross-strait economic and trade relations and in economic cooperation among Chinese mainland, Taiwan, Hong Kong and Macau in the years to come. Since Taiwan and Hong Kong are participating in TISA negotiations under the WTO framework, to accelerate trade integration of the four places might create new conditions and lay a good foundation for them to participate in the Asia-Pacific regional cooperation in the name of “common market”.


Source: China International Studies March/April 2014 85-98