The Future of Chinese Trade and Investment: At the TPP Crossroads
After nearly seven years of negotiation, twelve nations across the Pacific Ocean
finally reached on an agreement to establish the Trans-Pacific Partnership (TPP) on
October 5th, 2015. This trade agreement aims to promote economic activities and
improve business standards in twelve countries including the United States and its
rallies in Asia. The TPP agreement is a success to reduce trade barriers and hence
boost transnational trade among the member countries. However, it has excluded
China, the second largest economy in the world, from joining it. On November 27th,
China Economic Forum (CEF) in Yale invited Wallace Cheng, the founder and
managing director of International Center for Trade and Sustainable Development
(ICTSD), to speak about the consequences of this trade agreement on China’s
economy and the counter-strategies that China could possibly use to alleviate the
negative effects.
Part 1: Consequences of TPP on China’s economy
With facilitated trading procedures, reduced trading barriers and hence increased
trading between member states, it leads to inevitably diminished trading activities
with external countries such as China and Russia. After calculation and projection, Mr
Cheng estimates that TPP will inflict a loss of 0.2 percent of its current GDP for
China as a result of losses in export with its trading partners, for which the top is
actually the United States. He believes that this is rather insignificant because it only
takes up 11.2 days for Chinese economy to make up for the losses. Furthermore, he
thinks that TPP might instead have positive effects on Chinese business and
management standards if Chinese investors or companies choose to establish overseas
investment in those twelve countries. TPP has set a high standard for business
operation in terms of environmental protection, employee and labor welfare, and so
on. Chinese companies could learn much from that and incorporate those high
standards into their own regulations. This is important for Chinese companies to
expand into overseas market and establish a good international reputation.
Part 2: China’s global counter-strategies
Mr. Cheng discussed mainly two external strategies that China is using to counteract
the effects of TPP, namely the Regional Comprehensive Economic Partnership
(RCEP), and the “one road, one belt” initiative. The RCEP is a Free-Trade Agreement
(FTA) between sixteen countries, comprising of ten ASEAN countries along with six
other countries including China that have existing FTAs with ASEAN countries.
While the TPP nations contribute nearly 40 percent of the Global Gross Domestic
Product (GDP), countries in the RCEP covers around 30 percent. The RECP is
definitely important for China’s economy because eight of China’s top fifteen trading
partners are in the RCEP. However, the RCEP is distinctly different from the TPP and
covers much less economic or social aspects than TPP. For example, the RCEP does
not concern itself with environment and labor regulations. This shows that the RCEP
is less effective at minimizing trading barriers and improving business standards. Mr.
Cheng also explains that the Silk Road Economic Belt and the 21st -Century Maritime
Silk Road will enhance cooperation and connectivity between Chinese economies and
other Eurasian countries; however, he believes that Chinese foreign investment in
continents such as Africa, America and Oceania is still very limited – representing a
net percentage of less than 10% of Chinese total Outward Foreign Direct Investment
(OFDI), and China’s investment is still mainly concentrated in Asia. The “One Belt,
One Road” initiative will help China invest more globally. He cites the example of
Huawei, a Chinese transnational telecommunication and networking company, which
expands into global markets, employs local residents and benefits both sides through
the so-called process of “Glocalization”. Furthermore, the “One Belt, One Road”
initiative could help China engage the rather undeveloped western regions through
globalization. This reduces regional inequality and brings new opportunities for
business in inland China.
Part 3: China’s domestic issues
Mr. Cheng has emphasized the importance of four ongoing reforms—namely reforms
related to State-Owned Enterprises (SOE), the Hokou system (Chinese household
registration system), excessive investment by local governments, and the creation of
an entrepreneurship-friendly environment. These areas contain many
efficiencies—wastes of resources and limits on growth in productivity in the
economy, hence hindering the economy to grow sustainably. He believes that those
four issues should be addressed immediately.
In conclusion, Mr Cheng states that initially the TPP is indeed “a piece of bad news”
for China, however if China could use the opportunity to improve its management and
business standards, it might be a blessing as well. He concludes by saying that “the
TPP has limited economic effects on China. It rather has large systematic effects.”
