'Driving the blade inwards': Why China may join the CPTPP

With Brexit now official, a pushback against European integration is a foregone conclusion and de-globalisation has become an evident trend. Cooperation between the US and China, the two largest economies, in rebuilding the global economic order will have a decisive impact on post-Covid-19 global economic development. Unfortunately, the two countries have not strengthened their cooperation but confronted each other instead in recent years. This state of affairs casts a pall over the prospects for global economic recovery and development.

However, there seems to be a glimmer of hope as the new year 2021 approaches. Fifteen nations in Asia-Pacific have signed the Regional Comprehensive Economic Partnership Agreement (RCEP), forming the largest trade pact that accounts for 30% of the global economy. Chinese President Xi Jinping has also indicated at the APEC Economic Leaders' Meeting that China would favourably consider joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Why is the CPTPP "progressive" and how is it different from the RCEP? What is the significance of China joining the CPTPP for the future of global economic cooperation? How willing is China and what is the possibility of China joining the CPTPP?

It is often seen in newspapers, magazines and the internet that the CPTPP is currently the highest standard multilateral trade agreement, while the RCEP is of a lower standard. What exactly does the standard of a trade agreement mean?

The early trade agreements emphasised free trade, targeting trade protectionist policies such as tariff and non-tariff barriers and import quotas, to open up domestic markets for fair competition between imports and domestic products. The RCEP belongs to this type of free trade agreement. The World Trade Organization (WTO), the successor to the General Agreement on Tariffs and Trade (GATT), also focuses on free trade through its negotiation and dispute settlement mechanisms.

However, many in developed nations believe that such trade agreements have not brought about fair competition. When the WTO met in Seattle in 1999, unemployed workers from the US footwear industry marched in protest against being victims of unfair competition, because footwear manufacturers in developing nations could hire low-paid child labourers. I have a deep impression of the words of a teenager who was interviewed by a reporter at that time. He said that his Nike shoes were a few dollars cheaper, but his father who worked in a Nike factory lost his job. Since then, more people started paying attention to the unfair competition caused by differential cost structures in production. They found that manufacturers in developed nations were at a competitive disadvantage as they faced higher compliance costs in meeting and fulfilling social standards including labour rights protection, environmental protection and intellectual property rights (IPR) protection.

Conversely, in developing nations, workers' welfare and labour protection standards were lower, and environmental protection and IPR protection were not taken seriously. Manufacturers' lower costs in this business environment became a relative competitive advantage. Comparing two similarly competitive enterprises in the same developed nation, once one of them relocated to a developing nation, the one that did not relocate would immediately face strong pressures from competition. In the same developing nation, manufacturers gained cost advantages when they relocated from areas with high social standards to areas with lower standards. As a result, manufacturers from developed nations took advantage of globalisation and rushed to relocate, causing the hollowing out of domestic industries and large-scale unemployment.

Consequently, those who were negatively affected by free trade voiced out and demanded, through trade unions and environmental protection organisations, that fair trade clauses be added to trade agreements to align social standards among the signatories and prevent a harmful race to the bottom in competition. However, such voices were ignored for a considerably long time. Developing nations believed that their circumstances and priorities were different, and that their social standards could not be consistent with those of developed nations. Enterprises of developed nations did not see the need to emphasise fair trade because they could relocate to developing nations for greater profits. The elites believed that globalisation was inevitable in the realisation of a unified global free market, and ignored fair trade advocacy which they considered to be trade protectionism.

With deepening globalisation, income inequality in developed nations has become increasingly severe. As strained public finances are unable to compensate globalisation losers, the original social contract is broken and social conflicts are intensified. These gradually evolve into political polarisation that undermines the institutional foundations of democracies. Clearly, the current global trading system that emphasises free trade but ignores fair trade is no longer sustainable.

The calls for fair trade have been heeded in developed nations, as evident in the increasing emphasis on protection of labour rights and environmental protection clauses in bilateral trade agreements. According to a study published in 2020 by Bastiaens and Postnikov, adding social protection clauses to trade agreements will increase public support for free trade in developed nations. Therefore, the demand for fair trade cannot be ignored if trade is to continue between developed and developing nations. From this perspective, the new generation of trade agreements that emphasises fair trade is of a higher standard and "progressive", relative to the older trade agreements that are concerned only with free trade.

The CPTPP is the first multilateral trade agreement with emphasis on fair trade and sets new standards for the protection of labour rights, environmental protection and IPR protection. It also ensures an open internet and the free flow of data across borders, as well as addresses the distortion of fair competition by state-owned enterprises (SOEs) and government subsidies. It more clearly stipulates mechanisms for dispute settlement too.

The precursor to the CPTPP is the Trans-Pacific Partnership Agreement (TPP). After the US withdrew from the TPP negotiations, the remaining 11 nations concluded the negotiations and signed the CPTPP in 2018. With the withdrawal of the US, some provisions that were priorities for the US in the original negotiations have been excluded from the CPTPP. However, the un-amended chapter on SOEs, requiring signatories to share information of their SOEs and expressly prohibiting and restricting preferential treatment for SOEs, is included.

Many are surprised by China's willingness to join the CPTPP because China has always believed that SOEs are the main feature of its economic model. A nation's choice of economic model is sovereign, which has neither been prohibited by the WTO nor should it be subject to trade negotiations. China's position on this has been very clear and resolute even in the China-US trade negotiations. If China were willing to negotiate the issue of SOEs with the CPTPP signatories, it would show its acceptance that the inclusion of SOEs in trade negotiations and agreements is reasonable. This undoubtedly is of major significance to the future of global economic cooperation.

From as early as the 1990s, developing nations have dismissed labour and environmental issues from the WTO agenda. As a result, the US has lost confidence in the WTO and its ability to effectively resolve trade issues. As the global trade governance under the WTO regime is unable to uphold fair trade, the US has begun to establish new trade rules through alternative channels. China, on the other hand, has always believed that revisions of the existing trade rules, if needed, must be multilateral and through WTO reforms. Any approach that disregards the WTO is an abandonment of trade multilateralism and an act of trade protectionism. China's willingness to negotiate fair trade clauses with the CPTPP signatories would show its awareness of the difficulty in WTO reforms and its willingness to seek to improve trade rules in multilateral negotiation frameworks such as the CPTPP. This has major significance for the evolution of the governance framework for global trade.

Overall, China joining the CPTPP indicates an important direction for the future. If China can achieve consensus on issues such as social standards and SOEs with Japan, Canada, Australia and other developed nations, its position on fair trade and reforms of the governance framework for global trade will be closer to that of the US. The prospect of global economic cooperation will be greatly improved.

Many are sceptical about China joining the CPTPP. Some wonder whether it is merely China's endeavour to dominate the formulation of the rules of competition, which will ultimately lower the standards of the CPTPP. This view, however, does not stand up to scrutiny because joining the CPTPP requires the unanimous consent of the current signatories. To the seven countries among the 11 CPTPP signatories which are also RCEP signatories, lowering the CPTPP standards is unattractive.

Others believe that China is being coerced by global circumstance to join the CPTPP. The global environment for China will not significantly improve after the end of the Trump administration and will worsen because President-elect Biden is more adept at uniting Europe, Japan and other nations in a unified position against China. On the one hand, if China is overly insistent on its views on the issues of SOEs and industrial policies, the international community may view it as China's reluctance to undertake reforms and further isolate China. On the other hand, China's insistence on the WTO platform for multilateral negotiations is ineffective. Since the EU and Japan share the US's criticisms of the WTO, without the support of these major trading nations the WTO will only suffer the same fate as the paralysis of the Doha Round of trade negotiations.

There are also domestic considerations for China joining the CPTPP. As a middle-income country that has alleviated poverty, Chinese people have increasing needs and demands for improving ecology and the environment. They are beginning to be concerned and vocal about the intensity of the "996" work culture (working from 9am to 9pm for six days a week) and the problem of "death by overwork" (过劳死). As innovation has become more important in recent years, there have been increasing calls to strengthen IPR protection from within China. Responding to public opinion regarding protection of labour rights and interests, environmental protection and IPR protection, China's central government has implemented the Labour Contract Law in 2008, launched several rounds of enforcement of the Environmental Protection Law since 2013, and revised the Patent Law again in 2020 by introducing a system of compensation to penalise IPR infringements.

More importantly, joining the CPTPP can also facilitate the reform of China's SOEs. Reforms usually happen when they are imposed. In the mid-1990s, China's state-owned sector as a whole suffered losses, and the central and local governments were unable to continue subsidising SOEs, forcing a major reform to "restructure and support large enterprises that are competitive in the global market, and leave small and medium enterprises to fend for themselves" (抓大放小). Several years later, when the reform achieved some measure of success as the profitability of SOEs improved, the willingness of SOEs to undertake further reforms waned. This resulted in the dominance of SOEs at the expense of private enterprises (国进民退). Currently, the state-owned sector is once again in the doldrums.

According to the International Monetary Fund, although China's SOEs enjoy preferential treatment and hidden subsidies from the state in terms of land and capital, their return on assets has been below 2% since 2015 and productivity is only about 40% of that of private enterprises. If SOEs can be made to undertake reforms through external pressure, it will be crucial for improving capital efficiency, enhancing the economy's vitality and realising the transformation to a new mode of economic growth. Therefore, China's consideration to join the CPTPP may be strategic, to force SOEs to undertake reforms.

To sum up, China has a strong will and a solid foundation of domestic impetus to join the CPTPP. However, "driving the blade inwards" (刀刃向内) to bring about reforms involves vested interests and will encounter opposition from within the system. Success will depend on the political wisdom and courage of the reformist leaders as well as China's interaction with the CPTPP signatories to build mutual trust.

The recently concluded China-EU Comprehensive Agreement on Investment (CAI) serves to improve market access and represents a consensus on issues such as levelling the playing field, regulating SOEs' behaviour, stipulating government obligation to transparency of subsidies, and prohibiting obligatory technology transfer. The conclusion of the CAI enhances the possibility of China joining the CPTPP. In the next five years, the smooth implementation of the investment agreement and China's efforts and progress to join the CPTPP will be important in indicating the directions for post-Covid-19 global economic cooperation.

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