Turning his attention to China’s domestic economy, the Chinese leader vowed to pursue unspecified “supply‐side structural reforms,” measures to “enable the market to play a decisive role in resources allocation,” and various other actions designed to encourage investment in the country. “An open door allows both other countries to access the Chinese market and China itself to integrate with the world,” he added in a nod toward the mutual benefits of such measures. Meanwhile, at a World Economic Forum event in Dalian, China, in June, Chinese Premier Li Keqiang called free trade a “prerequisite for fair trade” (effectively turning the common refrain that free trade must be fair trade on its head) and called the imposition of unilateral rules “much less advisable than pursuing all‐win outcomes.”3
Less widely reported, Vice Premier Zhang Gaoli (effectively China’s seventh‐highest‐ranking political figure) delivered a keynote speech at the Boao Forum in late March that featured repeated praise for free trade.4 Presumably taking his cues from President Xi, Zhang’s address included calls for reinforcing the multilateral trading system under the auspices of the WTO, making free‐trade arrangements more open and inclusive; and he concluded by urging his audience to “work together to push forward economic globalization and free trade” to create a better future for Asia and the world.
Talk is cheap, and it is entirely possible that such rhetoric from senior Chinese leadership was meant to mollify foreign observers while plotting a very different course at home. However, reasons for encouragement do exist. The March 2017 launch of exploratory talks between Canada and China over a possible free trade agreement (FTA) is one positive signal, indicating both a willingness by Beijing to further open its economy and a tentative vote of confidence by Ottawa that China is serious about its desire for increased foreign trade and economic openness.5 Another seeming indication of China’s commitment is the March announcement by the governments of China and New Zealand that they are launching talks aimed at expanding an existing FTA between the two countries. (In addition to New Zealand, China has also signed FTAs with South Korea, Australia, Iceland, and Switzerland within the past five years and has ongoing negotiations for a trilateral FTA with Japan and South Korea.)6
A meeting among TPP countries, China, and South Korea in Chile in March also revealed a greater degree of enthusiasm by Beijing for trade liberalization. “The Chinese want to be the leaders, the benchmark. That was not like that before,” remarked Paulina Nazal, head of Chile’s international trade efforts.7
Meanwhile, as part of China’s blueprint for development of its domestic automobile industry, the country’s National Development and Reform Commission announced plans in April 2017 to raise the ownership limits on foreign carmakers, which had been limited to 50 percent under local joint‐venture requirements.8 Reason for encouragement is also to be found in the agricultural sector, where the removal in recent years of price supports for corn, cotton, soybeans, and sugar has created additional room for imports to meet the country’s considerable appetite.9 Also of note, in July 2017, China announced that it will allow imports of rice from the United States for the first time ever.10 Such long‐overdue measures are hopeful indications of the Chinese government’s recognition that successful domestic economic reform must include greater openness and increased foreign participation in the economy.
The Regional Comprehensive Economic Partnership Forges Ahead
China’s foremost international trade initiative, of course, is its participation in the Regional Comprehensive Economic Partnership. Comprising the 10 member states of the Association of Southeast Asian Nations (ASEAN) and the 6 countries with which the organization has existing free trade deals (Australia, China, India, Japan, South Korea, and New Zealand), the RCEP is, despite its ASEAN roots, widely described as a China‐driven effort. That, in turn, has led many observers to characterize the RCEP as a Chinese‐led alternative—a rival—to the TPP and a potential economic threat to the United States. However, that characterization is roundly rejected by the governments that are party to both the RCEP and the TPP and that see membership in both as their preference.
The RCEP should be seen for what it is: an agreement that reduces trade barriers, promotes economic growth, and does not preclude members from joining other agreements, including ones with the United States.11 The RCEP would provide a much‐needed boost to regional trade liberalization efforts in the wake of U.S. withdrawal from the TPP. The Asian Development Bank estimates the potential increase in global income from RCEP implementation to be in the neighborhood of $260 billion over 10 years, which is significant although smaller than the expected benefits from a TPP that includes the United States.12 The Peterson Institute for International Economics (PIIE) estimates global income gains from such a TPP of $492 billion through 2030.13
Moreover, the RCEP could advance U.S. interests by further integrating Beijing into the rules‐based international order, by providing additional counterinfluences to market‐distorting policies, and by further incentivizing the reform and liberalization of China’s economy. As the PIIE’s Sean Miner has noted, China—like other countries—uses international agreements to “overcome vested interests and push for domestic reforms” and has used such deals in the past to push through economic reforms that were “strongly opposed by powerful groups that profited from the status quo.”14
The RCEP could also serve as a steppingstone toward an FTAAP, which many regard as the ultimate goal of U.S. trade policy architecture in the region. The connection between the RCEP and FTAAP has already been highlighted by China, with the need to advance both efforts noted by President Xi during his Davos speech. The Chinese leader also cited the need to advance both initiatives during a keynote address to the Asia Pacific Economic Cooperation forum held in Lima, Peru, in November 2016.15
The leaders of that forum have designated the RCEP as an officially sanctioned pathway to achieving the FTAAP, and a November 2016 analysis published by the organization cited the initiative as a “key pathway for broader economic integration.”16 Meanwhile, an October 2014 paper by Peter A. Petri and Ali Abdul‐Raheem described both the RCEP and the TPP as “represent[ing] foundations for an FTAAP” and wrote that both agreements would “provide essential way‐stations for economies on the path to region‐wide integration.”17
RCEP critics have derided the agreement for its lack of ambition and relatively low standards, particularly compared with the TPP. This critique has merit, with the TPP covering a much broader set of topics (30 chapters versus roughly a dozen) and featuring a wider scope of tariff reduction and service‐sector liberalization. It is unclear, however, that Beijing is a prime culprit for the lack of willingness to engage in deeper and more widespread tariff reductions. As PIIE’s Jacob Funk Kirkegaard points out, China actually desires further tariff liberalization in sectors such as manufacturing and light industry but has encountered resistance from a number of its trading partners in the RCEP who have seen their trade surpluses with China turn into deficits in recent years.18 That factor suggests that Americans who favor a more liberalized international trading regime should perhaps be fearful not of excessive Chinese clout in the RCEP but rather a lack of it.
Furthermore, with the RCEP yet to be concluded, its more modest standards and scope are far from set in stone, and the agreement’s ambitions could still be raised. Indeed, with the TPP’s future now clouded by the U.S. exit, it is conceivable that TPP members who are also participating in the RCEP may devote new energy to improving the deal as the best near‐term prospect for liberalizing trade in the region. If the praise for free trade and economic integration from senior Chinese leaders is reflected at the negotiating table as talks progress, it could generate momentum for broadening and strengthening the RCEP’s standards.
Former president Barack Obama and others, meanwhile, have warned that, should the RCEP advance and the TPP stumble, it will allow “countries like China” to “write the rules of the road for trade in the 21st century.”19 Such language is commonly interpreted as an oblique reference to the FTAAP or other broader initiatives to advance trade in the Asia‐Pacific region, and it assumes that either the RCEP or the TPP will be used as the starting point for such efforts.
This type of thinking, however, suffers from at least two possible flaws. First, despite the U.S. withdrawal from the TPP, the initiative is not moribund, with Japan and others attempting to rally the remaining members—the so‐called TPP-11—to press ahead toward concluding the deal. Second, even if the TPP meets its demise, it is unclear why the RCEP would serve as the model or likely finishing point of any FTAAP or similar style agreement. Beyond the United States, numerous other countries—including Australia, Japan, New Zealand, and the Pacific Alliance countries—have signaled their interest in more expansive, higher‐standards agreements, and such desires would almost certainly be reflected at the negotiating table. The RCEP might set a floor for future negotiations, but there is little reason to view it as some kind of ceiling.
Furthermore, the simultaneous pursuit of both the RCEP and the TPP could have a salutary impact on the advancement of free trade in the region. As a July 2017 report from the Center for Strategic and International Studies (CSIS) notes, a rivalry between the two agreements has the “potential to create a virtuous competition for trade liberalization and needed reform within China.”20
China’s Infrastructure Push
Beyond its expressions of interest in leading regional efforts to liberalize trade, the Chinese government has also taken the initiative to begin the process of building the infrastructure linkages necessary for expanded trade and integration in Asia. To that end, China has taken what appears to be a largely two‐pronged approach through the Asian Infrastructure Investment Bank (AIIB) and the One Belt, One Road (OBOR) initiative, both of which were proposed in 2013 (and the AIIB was officially established a year later).
China’s rationale for launching the AIIB was the need for financing to close a yawning infrastructure gap in the region. Addressing the “daunting infrastructure needs across Asia” is listed by the bank as one of its key objectives.21 Indeed, the Asian Development Bank claims that $1.5 trillion must be spent per year by developing countries in the region through 2030 to meet their infrastructure needs ($1.7 trillion if one includes the cost of climate change mitigation), compared with current expenditures of $881 billion.22 Less officially, Chinese frustration with its lack of influence at the World Bank and the organization’s funding priorities are suspected to have played key roles.
One Belt, One Road, meanwhile, is the name given to an effort to inject renewed life into ancient trading links between China and Eurasia. Consisting of the land‐based Silk Road Economic Belt and the sea‐based Maritime Silk Road, OBOR is essentially a series of infrastructure projects designed to build and expand rail, road, energy, and maritime linkages.
In the AIIB and OBOR, China’s motives go beyond those officially stated to include an expansion of regional influence and to create demand that might soak up the excess capacity in China’s economy. Whether those goals will be realized is unclear, but neither should be viewed as aggressive or otherwise problematic from a U.S. perspective. If China succeeds in expanding its influence in Central Asia, it is likely to do so at the expense of Russia—a trade many U.S. policymakers would likely be perfectly willing to make. That said, having a bigger economic footprint does not necessarily translate into greater political influence. China’s role as the top foreign investor in Vietnam, for example, has not prevented outbreaks of anti‐Chinese protests in the country;23 its attempted construction of a dam in Myanmar has actually proved a source of contention in bilateral relations;24 and development of a Chinese‐run port project in Sri Lanka has been met with violent demonstrations.25 As author and China analyst Tom Miller notes, “China will struggle to convince its neighbors to embrace a new regional order centered on Beijing, precisely because they fear its immense economic power. No one wants to become a Chinese vassal.”26
Meanwhile, Louis Kuijs, the head of Asia economics at Oxford Economics, notes that OBOR projects are unlikely to figure prominently in resolving China’s overcapacity problems because their magnitude is too great and the costs of transporting cement, steel, and other overproduced Chinese products to where they are needed will prove uneconomical.27 Indeed, to the extent that the initiative should provoke worry, it is that the lack of market forces at work will result in projects that generate poor economic returns.28 As a consequence, China could find itself facing even more debt, which is already one of the primary risks to the country’s—and, by extension, the world’s—economic outlook.
U.S. businesses, workers, and consumers, bearing no direct financial risk from OBOR or the AIIB, stand to benefit from those initiatives to the extent that they succeed in spurring more trade and greater prosperity in the region. Although the jury is out on how successful those Chinese‐backed initiatives will prove to be, U.S. officials have reason to be at least cautiously optimistic. David Dollar, an economist and China expert at the Brookings Institution, has applauded the twin initiatives as providing the “hardware” of trade and investment that will serve as a counterpart to the “software,” which consists of regional trade agreements.29 Pieter Bottelier, a visiting scholar of China studies at the Johns Hopkins School of Advanced International Studies, calls OBOR a “very positive initiative and a major vision of how China can collaborate with countries in its neighborhood.”30 Moreover, McKinsey & Company’s Asia chair Kevin Sneader says that OBOR “has the potential to be perhaps the world’s largest platform for regional collaboration.”31
These individuals are hardly alone in their optimism. Michael Swaine, a China expert at the Carnegie Endowment for International Peace, calls himself a “big supporter” of OBOR, adding that it is “not threatening American interests” and “could be very beneficial” for both China and the countries involved.32 The July CSIS report, meanwhile, notes that OBOR “compliments [sic] many U.S. interests in the region.”33 Citing the vast infrastructure needs of the Asia‐Pacific region, meanwhile, Financial Times columnist Martin Wolf says that “additional Chinese resources should be helpful.”34
More fundamentally, policymakers should recognize that, although China may not be operating directly out of the preferred U.S. playbook, its efforts could serve to advance the broader U.S. objectives of peace and prosperity in Asia. At the very least, Beijing should be given the opportunity to succeed before its efforts are placed under a cloud of suspicion. Those who insist on seeing ulterior motives in China’s economic initiatives should be wary of self‐fulfilling prophecies and of provoking a breakdown in U.S.-China relations that observers almost universally agree would be wildly counterproductive.
Focusing on the AIIB, PIIE Senior Fellow and Director Emeritus C. Fred Bergsten effectively summarized the issue in a 2015 opinion piece: