China in Transition

China Seeks to Join the TPP

Chi Hung KWAN
Consulting Fellow, RIETI

The Japanese government aims to join in the Trans-Pacific Partnership (TPP) as a way to facilitate structural reforms, but there is still strong opposition among the public. In China, too, there are discussions for both the pros and cons of becoming a member of the TPP. The Chinese government was reluctant to join the TPP during the previous administration led by Hu Jintao and Wen Jiabao, but it has turned to a positive attitude under Xi Jinping and Li Keqiang.

Confrontation of arguments about the entry

In the discussions for and against becoming a member of the TPP in China, attention has focused on the tug-of-war over the establishment of trade rules and the impact on trade and direct investment, in addition to the impact on domestic industries and structural reforms.

Opponents argue that China should not hurry to join the TPP on the grounds that the rules created at the initiative of the United States would be detrimental to China. More specifically, they claim that, first, Chinese agriculture, which is not internationally competitive, could suffer a fatal blow if customs duties were eliminated. Second, as the financial system in China is still vulnerable, the opening up of the financial sector to the world could lead to the destabilization of the macro economy. Third, as China needs time to improve environmental and labor standards, the decline of its manufacturing industry could accelerate, and labor problems could worsen if China were to be geared to U.S. requirements before it is ready. Fourth, as the high-tech and high-end service industries are still nascent, it is too early to open them in full scale as they need appropriate policy protection.

In response, supporters of the TPP offer the following counterarguments.

As China's entry in the World Trade Organization (WTO) in 2001 showed, the stricter the international standards are, the stronger the power to drive domestic reforms will become. Although there were concerns at the time of China's ascension to the WTO that immature domestic industries would be hard hit, economic development in fact accelerated as a result of progress made in deregulation and institutional reforms in China driven by the entry into the WTO. Given that China is aiming to change its pattern of economic development, reforms in areas such as agriculture, finance, environment and labor standards, and high technology, which are considered as the major barriers for joining in the TPP, are precisely the steps needed in the first place.

In addition, as the purpose of the negotiations to join the TPP is to change the old rules for the international economy and trade and, in turn, establish a new system, China will be able to have its say and influence the negotiations in a way that creates rules to its advantage only if it participates in the negotiations. Unless China does that, the country will not only be excluded from this process, but also be placed in a disadvantaged position in which it has no choice but to accept a new system that has already been created.

Moreover, if the TPP comes into effect with China remaining a non-member, China will find it difficult to compete with member countries that will receive more favorable treatment from preferential policies such as the reduction and exemption of customs duties. As a result, not only will China lose market share in some export products, but also the transfer of manufacturing to TPP member countries will accelerate. On top of that, if the "rules of origin" (rules to limit the added value of raw materials and intermediate goods of a non-member country included in the covered products to a certain percentage in order to receive preferential treatment such as the reduction and exemption of customs duties) advocated by the TPP is applied, in addition to the production of final products, the production of intermediate goods, such as parts, could also be subject to transfer overseas.

Government stance changing from inactive to positive

Viewing the TPP as a tool for the United States to contain the rise of China, the Chinese government was initially uninterested in becoming a member, but its stance has become more positive after the administration led by Xi Jinping and Li Keqiang was inaugurated in the spring of 2013. Driving this shift appears to be the fact that the new government is putting a greater focus on pro-market reforms and cooperation with the United States and the government's judgment that the cost for China of being excluded from the TPP, which from China's perspective is becoming like a free trade agreement (FTA) between Japan and the United States, will be increasingly high as the possibility that Japan will join has become very real.

As symbolized by the shift in China's policy towards joining the TPP, Premier Li Keqiang said at the 10th China-ASEAN Expo and China-ASEAN Business and Investment Summit held on September 3, 2013 in Nanning of Guangxi Zhuang Autonomous Region in China that the government wanted to consider regional cooperation schemes including the TPP ("Li Keqiang vows China-ASEAN 'diamond decade'," Xinhua News Agency, September 3, 2013). Following this, the Ministry of Commerce of the People's Republic of China also made the following statement at a press conference: China is interested in the progress in the negotiations among the member countries of the TPP and hopes to exchange information. At the same time, China will consider the possibility of joining the TPP after gathering opinions from domestic industries (a statement of the Ministry of Commerce spokesman Shen Danyang at the press conference on September 17, 2013, the website of the Ministry of Commerce, People's Republic of China).

In addition, the China (Shanghai) Pilot Free Trade Zone, created in September 2013 as a new trial with the aim of opening up to the world, seems to be a strategic move that paves the way for China to join the TPP, which will not only have an impact on the manufacturing industry, but also have far-reaching ramifications for a wide range of sectors such as services, including finance, and IT. The Chinese government is particularly concerned about the extent to which services such as finance will be influenced by inclusion in the TPP. To dispel the concern, China will check the impact by moving forward with deregulation and liberalization for certain companies and industries inside the Pilot Zone first.

Meanwhile, the United States indicates that it would welcome the participation of China, albeit on the condition that "China will assume an obligation for liberalization at as high a level as for the precedent member countries" ("TPP Negotiations 'Existing Agreements Beneficial for Japan,' Shoring up the U.S. Manufacturing Industry, Under Secretary of Commerce Francisco J. Sanchez," Nihon Keizai Shimbun, May 17, 2013).

Thus, both the United States and China have indicated their willingness to compromise. Although it will still take time for China's entry in the TPP to become a reality, it can be said that the doors have already opened.

The original text in Japanese was posted on January 8, 2014.

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January 8, 2014