China's Trade Agreements: The Inside and Outside Strategy

The WTO’s 159 members reached a landmark agreement on 9 December, 2013, a “trade facilitation” deal, which will streamline customs procedures at a World level. However, despite this far-reaching achievement, the WTO’s authority has been sapped by numerous bilateral agreements or initiatives from a closed group of countries. The United States for example has created a triple front of negotiations to sign trade agreements with Asia-Pacific countries (TPP, Transpacific Partnership), Europe (TTIP, Transatlantic Trade and Investment Partnership), and a group of so-called "really-good-friend" countries (TISA, Trade in Service Agreement).

This new wave of preferential trade agreements takes place amid persistently weak global trade, exacerbation of trade disputes, frustration with the WTO’s achievements, and the need to adapt to a multi-polar world marked by the increasing power of China. Confronted with the risk of being isolated in terms of trade, as well as being engaged in its own cycle of negotiations with the RCEP (Regional Comprehensive Economic Partnership), China has to develop both an “inside” and “outside” strategy dedicated to TPP and TISA. The “inside strategy” means a direct participation in the TPP and TISA to avoid the negative impact of trade traffic diversion and benefit from access to US energy resources. The major components of the inside strategy are:

• Use the size of its market as a bargaining chip to be accepted into the negotiations, and later shape the structure of the TPP and TISA.

• Actively conduct bilateral or multilateral dialogues with the TPP members and seek approval to join or influence the negotiations.

• Participate in the TPP and TISA with a negative list approach, preserving the most strategic sectors of the economy such as electronics and financial activities.

• Accompany domestic economic reforms with the TPP and TISA. The rebalancing of the economy justifies an adapted program of convergence toward TPP standards.

• Finalize the formation of the FTAAP (Free Trade Agreement Asia pacific) via a joint participation in the TPP and RCEP initiative.

• Accelerate the establishment of a Free Trade Zone as a pilot program of the TPP and TISA and expand the program at an appropriate pace, to better prepare the economy for higher standards of trade and services.

The “outside strategy” is to strengthen alternative trade agreements outside of the US-led initiatives. The aim is to use these agreements to preserve China’s structure of specialization and factor endowments. The major elements of the outside strategy are:

• Promote the RCEP, which could boost China’s GDP by 0.5% by the year 2025, compared to a shock of -0.09% of GDP linked to TTP’s potential trade diversion.

• Use the RCEP to gradually increase domestic standards and therefore retain its competitive advantage in terms of labor, which is less exclusive and more economically integrative compared to the TPP.

• Promote the active participation of Japan and Korea in the RCEP via bilateral arrangements as their participation in the TPP only would be a game-changer in terms of size of the market.

• Identify the strategy of traditional US partners inside the RCEP to avoid a hollowing out of the agreement.

• Foster and complete the RCEP with the creation of an Asian infrastructure bank, as well as initiatives on food, climate change or disasters, energy, security and safety in the South China Sea.

• Actively prepare to create FTAAP with a RCEP-based approach.

• Continue being an active member of the WTO.

• Continue developing bilateral agreements when large trade blocks try impose unacceptable conditions.

With respect to the TPP, China theoretically faces the triple threat of trade diversion, exclusion from negotiations on the future shape of trade in the Asia Pacific, and a diminishing geostrategic role in this area. However, the “inside strategy”, consisting of progressively integrating the TPP and the “outside strategy”, consisting of developing competing agreements, represent the best approach to reduce these threats and optimally exploit the flexibility of these new forms of trade cooperation. The two strategies are complementary as they have the same long-term objectives, i.e. the promotion of free trade in Asia Pacific, promote structural reforms, as well as being more adapted to the structure of the Chinese economy and more integrative for the whole region.

Synapsis of China's Strategy to Surf the New Wave of Preferential Trade Agreements, Yifan Hu, unpublished manuscript, December 2013.