Media  Global Economy  2021.03.11

What China is Pursuing by Aiming to Join the TPP and How Japan Should Respond ーChief Referee’s Stance of Remaining Faithful to Neutrality and Impartiality is a Condition for Gaining Trust from the World

The article was originally posted on JBpress on January 19, 2021

Trade Policy China

1What the concept of “dual circulation strategy” indicates

The term “dual circulation strategy” has been frequently used since last year as a keyword to indicate the future vision of the Chinese economy.

It indicates the country’s grand principle in its economic policy operations that aims for the direction in which new economic development phases will be shaped in such a way as to mutually promote both domestic and international economic circulations, i.e., the dual circulation strategy, with the domestic economic circulation being the mainstay.

Many experts in the U.S. interpret the actual purpose of “dual circulation strategy” as an aim to lower the Chinese economy’s dependence on the overseas economy and convert its economic structure into a domestic market-oriented one.

Namely, it means a change from the reform and opening-up policies.

According to their view, behind the change lies the Chinese government's intention to construct a certain economic structure which can prevent the Chinese economy from being shaken by U.S. pressures such as trade frictions and US-China decoupling.

On the other hand, according to my understanding, the future vision of “dual circulation strategy” is an extension of the conventional reform and opening-up policies and its concept basically confirms the basic principle that has supported the development of the Chinese economy for over 40 years.

I believe that no small number of China experts in the U.S. share my understanding.

Out of the domestic economic circulation and the international economic circulation, the Chinese government clearly showed, after around 2005, the principle to aim for economic development in such a way as to have the former take a lead.

At that time, the nation’s target model was converted from the previous export- and investment-driven growth model to the domestic demand-driven growth model, and the principle has basically not been changed since then.

Therefore, in my view, the concept of “dual circulation strategy” does not mean the conversion of China’s economic growth model but rather it indicates the nation’s stance to maintain its conventional economic development model of stressing the opening-up policies while also placing emphasis on internal demand.

In this regard, however, there are a range of ways to interpret the concept of “dual circulation strategy” even in China; in reality, the viewpoints differ from person to person, with some sharing the former’s view and others sharing mine.

2Background causing gaps in understanding of “the dual circulation strategy”

The difference in interpreting “the dual circulation strategy” between me and the above-mentioned many experts in the U.S., who consider the purpose as lowering the Chinese economy’s dependence on the overseas economy, may be attributable to the gap in recognizing the basic structure of the Chinese economy.

The Donald Trump administration criticized the “engagement” principle, which had been adopted by past U.S. administrations since the 1990s as the basic principle for the Chinese administration, achieved nothing.

The “engagement” principle refers to the concept that promotes the marketization of the Chinese economy and furthermore the democratization of its politics by allowing China to join the World Trade Organization (WTO) on slightly lenient conditions, offering the benefits of the market economy in advance and having the nation realize the merits.

The Trump administration argued that nothing had changed since China’s entry to the WTO in 2001, despite the Chinese government’s pledge to promote market opening-up, market-oriented economic reform, financial deregulation, etc.

On the premise of the above recognition, the administration, for its just cause of rectifying China’s breach of the public pledge, provoked fierce trade and investment disputes against China.

If we base ourselves on the recognition in favor of the Trump administration, it is only natural that the Chinese government continues to reject market-oriented economic reform and will keep walking the path of its state capitalism.

If the concept of “dual circulation strategy” is positioned as an extension of the above recognition, it is easy to understand that this concept does not aim for reform and opening-up policies but that it is interpreted as a political principle to defend the nation from U.S. pressures.

However, among China experts in the U.S., many stand against such arguments of the Trump administration, just like me.

Opposing the hardline approach against China that is based on the anti-China sentiment in the U.S., a group of China experts published a statement in the Washington Post in July 2020, and over 100 leading former high-ranking U.S. government officials and international politics scholars supported and signed it.

The important message in the statement is that the U.S. government’s “engagement” with China has not been a failure but has brought about certain changes to the Chinese economy.

(For details on this matter, please refer to pp. 4-5 of my report on the U.S. and Europe online interviews titled “The U.S.-China Relations during the Presidential Election and the Post-Election Outlook” .)

I also share this recognition. If we base ourselves on this premise, we cannot support the interpretation that the concept of “dual circulation strategy” aims to change the reform and opening-up policies and lower the dependence on the overseas economy.

As far as I understand it, this view represents the true intentions of those in charge of economic policies in the Chinese government.

3Intention behind President Xi’s announcement to consider joining the TPP

Immediately after the conclusion of the Regional Comprehensive Economic Partnership Agreement (RCEP) and at the venue of the summit of the Asia-Pacific Economic Cooperation (APEC) forum on November 20, 2020, President Xi Jinping timely announced the intention of China to positively consider joining the Trans-Pacific Partnership Agreement (TPP11).

By early 2018, some sectors that place emphasis on the promotion of the opening-up policies and/or market-oriented economic reform started to argue that China’s entry to the TPP should be considered within the Chinese government.

In 2019, the movement to consider entering the TPP spread across government-related sectors.

So, we can understand that China expressed its positive stance towards joining the TPP based on the principle of emphasizing reform and opening-up policies in light of these considerations within the government.

The reason why President Xi Jinping announced this intention on this very occasion is considered to be as follows: The U.S. may return to the TPP under the Biden administration; if that is the case, unless China joins the TPP ahead of the U.S., stricter conditions for entry might be set, which would make China’s entry difficult over the long term.

Meanwhile, the U.S. Congress has been strongly opposing policies that promote free trade, from the standpoint that the U.S. government’s promotion of free trade had robbed U.S. workers of their employment opportunities.

For this reason, it is unlikely that the U.S. will return to the TPP within at least two to three years. It is inferred that, by taking advantage of this time span, the Chinese government would like to smoothly carry forward negotiations for its entry to the TPP.

Whatever the case may be, in my opinion, the Chinese government is aiming to strengthen the free trade system, and to this end, it is promoting necessary reforms of its domestic economy system and thereby intending to strengthen the economic infrastructure both internally and externally.

This principle should be welcomed by Japan as well as European and other countries that stress the importance of free trade.

What makes the Chinese government want to advance reforms in such a hurry? The answer is that there is little time left until China can maintain stable economic conditions inherent in a high-growth period.

In order for China to join the TPP, it must clear a lot of hurdles, such as the reform of state-owned enterprises, the strengthening of intellectual property rights protection, the reduction of subsidies, and the lowering of tariffs.

In order to clear these hurdles, the necessary reforms will be painful in various ways for people with vested interests.

If economic conditions are unstable, opinions against taking these risks will gain ground, which will clearly make these reforms difficult to carry out.

China is expected to face the end of its high-growth era by late 2020s on the background of the acceleration of an aging population with fewer children, the deceleration of urbanization, the decrease in large-scale infrastructure constructions, and other factors.

If China postpones economic structural reforms now, the efficiency improvement in the overall economy will be delayed and the nation will carry more risks in an unstable phase when its economic growth slows down.

In order to avoid such state of affairs, there is an urgent need to advance reforms in the coming few years when China can sustain high growth so as to establish an efficient and stable economic structure that fits the free-trade system.

In my opinion, the Chinese government is trying to positively work on its entry to the TPP, based on its political decision from the long-term point of view as mentioned above.

Those in charge of policies in the Chinese government have been identifying in advance the challenges that the Chinese economy will face by classifying them into short-term, mid-term, and long-term challenges, and they have been accurately implementing the various measures necessary to avoid the risk of destabilizing the economy.

That is the main reason for China having been able to achieve high economic growth stably for over 40 years since 1980s.

In the face of unexpected fluctuations in the global economy and various structural problems at home, Chinese policymakers have been carefully assessing risks of the Chinese economy and making policy efforts to avoid such risks in advance.

Given the enormous size of the Chinese economy and the complexity of its economic and social structures, it is hard to think that China will suddenly change the reform and opening-up policies, which have supported the basis of China’s economic development, and the elaborately built-up policy operation system based on such policies.

This is because the risk of destabilization is too big.

I strongly believe that China will aim to improve its economic infrastructure comprehensively so that the economic development and achievements of its policy operations to date can be continuously utilized in the future.

We should think that the Chinese government is going to choose to join the TPP in order to strengthen the free-trade system and promote the necessary structural reforms at home, based on the above-mentioned political decision.

4How Japan should respond

If China sounds out Japan about its entry to the TPP, Japan will need to respond while carefully considering Japan-U.S. relations.

What is important on such an occasion is that Japan should take concrete measures that are consistent with its position of neutrality and impartiality based on its firm philosophy that Japan will continue to make its maximum effort to maintain and expand the world’s free-trade system.

Since the end of WWII, while receiving strong support from the U.S., Japan has been contributing to the improvement of the free-trade system with the aim of constructing a global free-trade system. The conclusion of TPP11 is an extension of that track record.

Regrettably, after the inauguration of the Trump administration, the U.S. substantially changed its principles and withdrew from the TPP. And yet, Japan did not move on with such a shift of the U.S. government but firmly maintained its principle of emphasizing the free-trade system and succeeded in concluding the TPP.

Since the end of WWII, this is Japan’s first success case, where the country itself took leadership and realized the construction of an important framework for the international society.

Currently, Japan is in a position similar to a chief referee, from the viewpoint of TPP members or players.

The necessary condition for a chief referee to be trusted by everyone is that the referee should make a correct judgement in an expeditious way based on neutrality and impartiality, no matter what the situation is.

It is also important to explain the reason for a judgement with a resolute attitude and in an easy-to-understand way if the reason is hard to understand.

When judging China’s entry to the TPP, Japan will need to judge in good faith and in accordance with conceivably the most desirable judgement criterion for the improvement and expansion of the world’s free-trade system and then will need to negotiate with China based on neutrality and impartiality that is in favor of neither China nor the U.S.

On such an occasion, if Japan goes with U.S. pressures and sets strict conditions or if it sets lenient conditions based on diplomatic consideration to China, then Japan will lose trust and a movement to oust Japan from the chief referee’s position will surface.

That will undermine the high commendation that Japan has received from countries around the world for its leadership in concluding the TPP, which is the nation’s largest diplomatic achievement since the end of WWII.

Standing on neutral and impartial ground also means gaining trust from the U.S. in the long term.

Owing to the influence of the Trump administration, the U.S. is currently taking an inactive stance towards the promotion of free trade, but many experts in the U.S. continue to strongly support the maintenance and expansion of the free-trade system.

Even if Japan takes a stance that differs from the U.S. diplomatic principle in the short term, its consistent stance of sticking with its firm philosophy to promote free trade will enhance trust from experts in the U.S. towards Japan in the mid and long term.

In addition, Japan’s stance as not to exclusively go with the U.S. will gain trust from countries around the world, which will lead to a greater voice of Japan towards the international society and the U.S.

Meanwhile, consistently taking an impartial and neutral stance also towards China will benefit China in constructing a sound free-trade system and promote its domestic structural reforms.

Based on the above ways of thinking, I would like and expect Japan, as the chief referee trusted by not only the U.S. and China but also countries around the world, to play an important role in continuously maintaining and expanding the free-trade system.