How to Deal with China's Bid to Join CPTPP

KAWASE Tsuyoshi
Faculty Fellow, RIETI

On September 16, 2021, China at last applied for accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). When President Xi Jinping expressed China's willingness to consider participating in the CPTPP at the APEC summit in November last year, my frank opinion was that it would in no way be realistic for China to join this trade agreement, which was negotiated under the United States' leadership and which requires the highest level of liberalization, while retaining its socialist market economy (also known as state capitalism).

However, I was convinced of China's "seriousness" about participating in the CPTPP when Professor Mariko Watanabe of Gakushuin University and Professor Tomoki Kamo of Keio University shared their analysis with me at a RIETI seminar, and since then, we have held several sessions of discussion with them, which were also attended by Professor Fujio Kawashima of Kobe University, who is knowledgeable about Chinese trade and competition laws. In early September, the four of us coauthored a policy discussion paper titled "China and CPTPP" (RIETI PDP 21-P-016). The publication of this paper happened to be very timely, as China applied for accession to the CPTPP right after that. Therefore, I, despite being merely the fourth author of the paper who concentrated mainly on coordinating work, am taking the liberty of explaining the key points of the paper in plain language in this column so that we can reach a wider audience for our argument. In this column, I am also proposing what should be done by Japan and other CPTPP signatories to deal with China's bid to join the CPTPP. I hope that readers will also pay attention to what the other co-authors of the policy discussion paper have to say.

WATANABE Mariko (@suneko13)
KAMO Tomoki research office, Faculty of Policy Management, Keio University
KAWASHIMA Fujio's Blog

China's Firm Political Will and Strategy—Expanding Presence as "institutional discourse power"

One of the reasons why we were convinced of China's seriousness about joining the CPTPP is that a political will to that effect was expressed at the top government level—by Premier Li Keqiang, who stated that China was open to participating in the CPTPP (at a press conference after the National People's Congress on May 29, 2020), as well as by President Xi, who expressed willingness to consider joining the trade pact, as mentioned at the beginning of this column. Moreover, China's intention to seek to join the CPTPP was clearly visible in multiple documents deliberated and approved with the involvement of top-level decision-making organizations, including the Politburo Standing Committee of the Central Committee of the Communist Party of China and the National People's Congress (NPC). In particular, China advocated the promotion of the "rule of law" in the Plan on Building the Rule of Law in China (2020-2025) (January 2021), the Work Report by the NPC Standing Committee (March 2021), and the 14th Five-Year Plan (March 2021). This made clear China's stance of using the development and application of international rules as a means of promoting its national interests in the international community. The application for accession to the CPTPP can be regarded as part of this initiative.

Underlying China's strong political will regarding the CPTPP is a quest to expand its presence as an "institutional discourse power." To put it in plain language, China intends to expand its national interests in the international community by increasing its say in the development of the global economic order and by becoming a major power with a decisive influence in the process of developing world order. The motive is China's "sense of insecurity." In other words, China is wary of being subsumed into the existing world order based on Pax Americana, which is not aligned with Chinese interests, so the country is seeking to expand its presence as an "institutional discourse power." With respect to the CPTPP as well, we may say that by participating in the trade pact, China aims to exercise influence over the development of an economic order in the Asia-Pacific region that may lead to the realization of a Free Trade Area of the Asia-Pacific (FTAAP).

Hurdles to Chinese Accession to the CPTPP

Notwithstanding its intentions, however, China, with its socialist economic system, will not find it easy to comply with the existing terms of the CPTPP. For example, the labor chapter of the CPTPP agreement requires the protection of basic labor rights, such as the right to collective bargaining, and the abolition of forced labor. Those requirements pose a very high hurdle for China, a country where organizing an independent labor union is prohibited, with all unions placed under the control of the All-China Federation of Trade Unions. Regarding the e-commerce chapter as well, it will be difficult for China to meet the requirements for the free flow of data and the ban on data localization given the country's data protectionism. With respect to state-owned enterprises (SOEs), China's three-year action plan for the reform of SOEs (2020-2022) indicates the Chinese government's intention to make efforts to ensure competitive neutrality in order to maintain consistency with the SOE chapter, with a view to joining the CPTPP, whereas the plan also emphasizes the importance of SOEs from the viewpoint of national security, and therefore, uncertainty still remains.

If the United States joins the CPTPP earlier than China, the hurdles for the latter in terms of rules will be further raised. Previously, in the negotiations over TPP12, the United States urged Vietnam and Malaysia to rectify specific problems regarding their labor laws and practices and exchanged bilateral side letters with binding powers with those countries. If the United States joins the CPTPP, it will also likely demand a similar commitment from China (with respect to the problem of forced labor in the Xinjiang Uygur Autonomous Region (XUAR) in particular). Moreover, as is clear from the Party Platform of President Biden's Democratic Party, the United States will place emphasis on labor, the environment, and human rights and seek to ensure a level of regulation similar to that under the United States-Mexico-Canada Agreement (UCMSA). Indeed, the United States has made it clear that it will not participate in the CPTPP without renegotiations over raising the standards regarding those matters. In particular, if the standards related to the labor chapter are raised, it will pose a significant problem for China. That is exactly why China finds it imperative to join the CPTPP before the United States.

Making High-level Commitments and Making Sure to Honor Obligations Are Prerequisites for Chinese Accession

To allow or not to allow China into the CPTPP? In relation to this question, our policy discussion paper views the terms of the CPTPP agreement not as something that stresses the division between the values of the Western world and China but as concrete requirements necessary for ensuring fair competition (pp39-40). In other words, our position is not to groundlessly rule out Chinese accession. Even so, to elaborate on my personal opinion, I believe that if China is to be allowed in, it should be required to meet rigorous conditions for accession. I also believe that it is essential to strengthen the CPTPP's mechanism in order to ensure China’s compliance with the pact.

To be more specific, first, the benchmarks for accession should be maintained. On this point, as mentioned in the policy discussion paper, Article 5.1 of the CPTPP Accession Process, adopted in 2019, requires "aspirant economies" (countries and independent customs territories seeking participation, including Taiwan and Hong Kong) to demonstrate "the means by which they will comply with all of the existing rules"—that is, to present concrete roadmaps and procedures for ensuring compliance with the agreement—and to "deliver commercially‐meaningful market access for each party"—that is, to open markets in a manner that satisfies each and every existing party. Those benchmarks were reflected in the decision made at the fourth meeting of the CPTPP Commission in June 2021 with respect to the start of the accession process for the United Kingdom. As the accession process started, particular emphasis was placed on the United Kingdom's ability and intention to comply with the agreement. If the accession process for the United Kingdom sets a precedent, China will be required to follow similar standards and indicate a clear roadmap for fulfilling its obligations under the CPTPP, and also to almost completely eliminate tariffs, and limit to a minimum, exceptions to SOE regulations and investment and service liberalization rules. The existing parties' strict stance on accession has been made clear in a joint ministerial statement issued at the fifth meeting of the CPTPP Committee, after the publication of our policy discussion paper.

On this point, Dan Tehan, Australia's trade minister, stated that Australia is calling on China once again to address years-long trade disputes sparked by the exclusion of a Chinese supplier from the Australian 5G communication network and the Australian demand for reinvestigating the origin of the coronavirus that caused the COVID-19 crisis. Australia attaches importance to how China will handle those issues when evaluating China's records on compliance with trade rules, according to Minister Tehan (Jiji Press, September 17, 2021). If these problems remain unresolved, it will be difficult to recognize the ability and intention to comply with the agreement in China's case, unlike in the United Kingdom's case.

Second, I would like to propose the adoption of an accession protocol similar to the one adopted at the time of China's accession to the World Trade Organization (WTO) in 2001. The WTO accession protocol for China was not only intended to make sure China honored its obligations under the WTO agreement but also required commitments to securing consistency with the agreement regarding specific measures, such as the right to trade and price controls, and compliance with "WTO plus" obligations including the abolition of export taxes and treatment as a non-market economy in anti-dumping duty investigations.

In the CPTPP's case, one possible option is to prepare a similar accession protocol that would require more stringent or additional commitments than obligations under the CPTPP agreement as necessary, in addition to detailed commitments to comply with the agreement. For example, regarding SOEs, possible options include: requiring China to secure competitive neutrality with respect to government-affiliated investment funds to which the neutrality requirement is not applicable under the CPTPP rules in force, and local SOEs, for which a broad range of reservations are currently allowed; realizing non-discrimination between SOEs and private enterprises under regulations including anti-monopoly and environmental laws; and, regarding the digital trade rule, clarifying and limiting the scope of governmental access to data. To ensure that those terms for accession are met, it is necessary to develop a separate monitoring mechanism. The Transitional Review Mechanism (TRM), which was intended to monitor China's implementation the terms of accession to the WTO, failed to function adequately because of the country's uncooperative stance and an institutional flaw, that is, the absence of a provision for the imposition of effective sanctions against non-compliance. In this respect, the side letters regarding labor issues exchanged between the United States and Vietnam, for example, link tariff reductions on the U.S. side to the development and revision of labor laws in Vietnam. In China's case, introducing a mechanism to ensure compliance by linking the implementation of commitments by China and existing parties is an option worth considering.

Dealing with Chinese accession in this way may appear to be harsh or even discriminatory against China. However, given that China is adopting an economic system entirely different from the one adopted by most CPTPP signatories and is the world's second largest economy in terms of GDP, Chinese accession cannot be discussed in the same context as accession by countries with a well-established market economy or with a smaller economic size. In my personal opinion, which might not be necessarily shared by the other co-authors of the aforementioned RIETI paper, dealing with Chinese accession in this way is essential in order to encourage China to carry out structural reforms, to develop an environment that fosters fair and free competition within the CPTPP area and to give existing parties a worry-free incentive to welcome China, at least on the economic front. Otherwise, it will be difficult for existing CPTPP parties with their open economic systems to obtain mutual benefits that they may be expecting from China's participation in the trade pact.

Finally, it is necessary to strengthen the CPTPP's fragile enforcement and monitoring systems. The WTO has an administrative system whereby compliance with the WTO Agreement is monitored on a routine basis by the Trade Policy Review Body, standing councils and committees, and the secretariat, although the effectiveness of the system is being seriously questioned at present. On the other hand, the CPTPP has a ministerial-level commission, subcommittees established under the provisions of individual chapters, and subcommittees established by the fiat of the CPTPP Commission (e.g., the subcommittee on e-commerce set up in August 2021), and it seems that these subcommittees are convened as appropriate on the occasion of meetings of the CPTPP Commission. However, those meetings are not held as frequently as meetings of the various WTO organizations, and the administrative support that the CPTPP organizations receives is limited, provided only by the chair and depositary countries. The CPTPP's dispute settlement procedures are also inferior to the WTO's quasi-judicial procedures in terms of prompt appointment of panelists and effectiveness in securing compliance. In addition, as some details of the procedures have yet to be fixed, it is necessary to enhance their effectiveness and increase their usage by developing review procedures and rules regarding other practical affairs.

A Stand and Strategy to be Taken by Japan

On China's bid to join the CPTPP, Jen Psaki, a U.S. presidential spokeswoman, commented that the United States defers to the opinions of CPTPP parties given that it is not a party. Meanwhile, Psaki said that "we’re looking at a range of options to forge stronger economic partnerships in the Indo-Pacific. Trade is not the only one." As indicated by these bland statements, the United States, as an outsider, intends to maintain a wait-and-see stance, at least on the surface. Even though the Chinese accession issue has come this far, the United States has consistently retained a careful stance on joining the CPTPP itself at an earlier time because the environmental and labor standards of the pact fall short of the levels demanded by the Biden administration (Nihon Keizai Shimbun, September 17, 2021).

If the United States regards the growth of China's influence in the Asia-Pacific region as a threat and wants to prevent Chinese accession to the CPTPP despite being not a party itself, it could enlist support in keeping China out from Canada and Mexico by threatening to pull out of the USMCA under a "poison pill" clause and from Australia through arm-twisting under national security frameworks such as the Quad and AUKUS. As Japan is also sure to come under similar pressure from the United States, it will have to engage in a difficult balancing act between its mutual economic dependence with China and its security alliance with the United States.

Indeed, some people speculate that China's application to join the CPTPP is a deceptive ploy to drive a wedge between Japan and the United States (the electronic version of Nihon Keizai Shimbun, September 17, 2021). The timing of the application—one week after the news about the United States' planned Section 301 investigation of Chinese subsidies and the same day as the announcement of the launch of AUKUS—appears to suggest that the accession application has a deceptive purpose (World Trade Online, September 17, 2021). The United States is likely to become more wary if it detects political intentions in the timing of the Chinese application. However, perhaps the timing was merely accidental: on September 13, the ASEAN+3 economic ministers' meeting set the target date of the entry into force of the Regional Comprehensive Economic Partnership (RCEP) as January 2022, and the fixing of this timetable may have prompted China to apply for accession to the CPTPP, which the country regards as the next step after RCEP on the road to FTAAP.

I will refrain from elaborating further on these geopolitical and geoeconomic matters, which are outside my area of expertise. However, regardless of whether a position is taken to accept Chinese accession or not, setting high standards for accession and discussing this as a matter of rules should be at the centerpiece of Japan's China strategy for the moment. China, which has been in a confrontation with the United States at the WTO over the special and differential treatment that it receives as a developing country, may demand easing of some obligations and an expansion of exceptions, citing the cases of countries like Vietnam, Brunei and Peru. However, if China uses a variety of political pressures to coerce parties into accepting its accession without fully implementing its own commitments, or if the country seeks to evade obligations through exploitive, expansionary interpretations of exception clauses, it is necessary to take a firm stand against the country. Seiko Noda, deputy secretary-general of the ruling Liberal Democratic, says that she supports Chinese accession "for the sake of the stability of the global economy" (Jiji Press, September 17, 2021). If Chinese accession is to contribute to the stability of the global economy, it can only be under the conditions that China is made to develop an interface with the highly open economies of CPTPP parties and ensure fair competition despite maintaining its socialist market economy system.

For the moment, the issue is the timing of the decision whether or not to start the accession process for China. Under Article 2.1 of the CPTPP Accession Process, a decision on whether or not to start the accession process for an applicant must be made within "a reasonable period of time" after the date of the application. In the United Kingdom's case, the waiting period was about four months. However, Article 1.1 of the accession process stipulates that applicants are "encouraged to engage informally with all CPTPP signatories." In this respect, between Japan and the United Kingdom, U.K. compliance with CPTPP-level rules is assured to some degree because of the conclusion of the Japan-U.K. Economic Partnership Agreement. Moreover, the two countries have had official contact at the ministerial level (e.g., a meeting between Japanese Minister of Economy, Trade and Industry Yasutoshi Nishimura and U.K. Trade Secretary Elizabeth Truss). In the meantime, China is also reported to have had contact with some signatories and parties (Toyo Keizai Online, May 19, 2021), but there is no evidence to indicate that the country has held consultations with all or most of the 11 signatories. At least, it has not been confirmed that Japan and China have had any official contact. In light of these circumstances and the current situation of China's economic and other systems, one option at this time may be sending the application back to China, with a view to inviting a possible re-application some time in the future.

September 22, 2021

October 22, 2021

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