Media  Global Economy  2021.10.08

Easy compromises must not be made as China applies for admission to the TPP  

Why did China apply at this time?

The article was originally posted on RONZA on September 21, 2021

Trade Policy

On September 16, China applied for admission to the TPP.

In November of last year, at the APEC summit meeting, President Xi Jinping had already stated that China was proactively considering participating in the TPP, so the Japanese government probably expected China to do so.

China’s intention of participating in the TPP

The important question is why at this time. The answer clarifies China’s aim and intention of participating in the TPP. Wasn’t China, which had already decided to apply for admission, seeking the most effective timing to do so? One explanation is that in order to achieve further economic growth, it is important that China not only develops its domestic market but also has access to overseas markets, but if so, China should have applied for admission earlier after Xi Jinping’s statement.

In Asia and the Pacific, China conflicts with the United States and other liberal countries. As exemplified by the British move to dispatch an aircraft carrier, European countries have expressed their concern about China’s expansion in the ocean. In particular, by hastily withdrawing from Afghanistan, the U.S. is concentrating its various resources in this region as China aims at dominating there.

In order to counter China, the U.S. emphasizes a four-way framework called “Quad,” which consists of Japan, the U.S., Australia, and India. On September 13, the White House announced that the first Quad face-to-face summit meeting would be held in Washington, D.C., the capital of America, on September 24. From Japan, Prime Minister Yoshihide Suga will attend the meeting. White House Press Secretary Jennifer Psaki stated, “The summit meeting indicates that the Biden administration emphasizes America’s involvement in the Indo-Pacific region through a new multilateral framework as the U.S. is faced with challenges in the 21st century.”

China’s application for admission to the TPP came three days after this statement. Since the U.S. presidential election in 2016, the argument that free trade deprived Americans of employment has dominated in the U.S. In particular, Democratic Senator Bernie Sanders asserted that the TPP was problematic, and in the presidential election in 2016, taking advantage of his remark, the Republican candidate Donald Trump defeated Hilary Clinton, and immediately after inauguration, President Trump withdrew America from the TPP. The current President Joe Biden was the Vice President under the Barack Obama administration, which promoted TPP, but under the present circumstances, it is difficult to reinstate the U.S. in the TPP overriding the sentiment of Americans in general. China probably fully recognizes this situation.

In November 2020, China signed the Regional Comprehensive Economic Partnership (RCEP) agreement, whose signatories were ASEAN countries, Japan, China, South Korea, Australia, and New Zealand. It seems that by expressing its intention of joining the TPP, China is attempting to give the impression that rather than the U.S., China is going to create a multilateral framework in the Indo-Pacific region.

Will negotiations for admission start?

It is not certain that China will be admitted if it applies for admission. One special reason in this case is that the United States-Mexico-Canada Agreement (USMCA) stipulates to the effect that if Mexico or Canada enters into a free trade agreement with a non-market economy, the U.S can notify it that it will terminate the USMCA. The U.S. market is much more important to Canada and Mexico than the Chinese one. The U.S. may put pressure on both countries. Canada and Mexico are likely to oppose negotiations with China for admission themselves.

Even if there is no such provision in the USMCA, the problem is not easy. China has opposed Australia’s official demand for an international investigation into the origin of COVID-19 and imposed sanctions against Australia, including higher tariffs on barley and wine. A member of Quad, Australia shows disapproval of China’s participation in the TPP. This is a natural response. If a country that openly violates international rules (WTO agreements) for political reasons is admitted, it may breach TPP rules, too.

Extremely high hurdles for China’s admission

Like the WTO and the EU, the TPP is fundamentally a club-like organization. Applicants need to satisfy the requirements suitable for membership. Examinations of an application are conducted by Japan and other countries that are already TPP members.

In this process, China must meet two requirements:

One is whether China can observe the discipline and obligations stipulated in the TPP agreement. As far as China is concerned, the important discipline and obligations involve state-owned enterprises, labor, electronic commerce, and intellectual property rights. In terms of a conclusion, it must be said that these hurdles are extremely high.

It is unfair if enterprises operating in the Chinese or international market have to compete with China’s state-owned enterprises, which are protected by subsidies and regulations. The discipline for state-owned enterprises is intended to ensure that foreign enterprises can compete with state-owned ones on the same terms. But state-owned enterprises occupy a major position in the Chinese economy. Reforming state-owned enterprises is a difficult question for China itself. The RCEP agreement has no provision of discipline for state-owned enterprises. At the WTO, China clearly refuses to introduce discipline into its state-owned enterprises.

The TPP agreement demands that its members perform the obligations of members of the International Labour Organization (ILO): (1) approval of the freedom of association and the right of collective bargaining, (2) abolition of forced labor, and (3) prohibition of child labor, but China has not ratified (1) and (2). China’s acceptance of these obligations may affect the foundation of its regime, and therefore, probably, it is considerably difficult to accept them. Nor is there any chapter of labor in the RCEP agreement.

In terms of electronic commerce, the TPP prohibits its members from demanding the disclosure of source codes – the design of software – but negotiators of the RCEP, in which China participated, were unable to provide for such prohibition. In addition, like the TPP, the RCEP agreement stipulates that members shall be required to approve cross-border transfers of electronic information and that they shall be prohibited from requiring computers and other types of equipment to be installed in their territories, but members are permitted to take exceptional measures for public-policy reasons, and the effectiveness of these stipulations cannot be expected.

The other requirement is to open the Chinese market and economy in terms of trade and investment. TPP members can demand that China immediately eliminate tariffs and other trade barriers. They can freely decide what demands they make to China and whether to approve China’s admission if they determine that the country fails to meet such demands.

Nonetheless, easy acceptance of China’s application for admission to the TPP is worrying

What worries us is that China uses its political and economic prowess as well as its enormous market as a weapon to demand substantial compromises from the TPP members.

Around 1995, as the head of the office in charge at the Ministry of Agriculture, Forestry and Fisheries, I took part in the negotiations with China as it applied for admission to the WTO. During these negotiations, a person who was of the opinion that Japan needed to maintain favorable relations with China suggested to me in Japan that the WTO members should relax its demands and that as the U.S. had helped Japan to join GATT when the latter applied for admission to it, Japan should give American agricultural products greater access to the Japanese market by lowering its tariffs on behalf of China.

Since it did not seem that both suggestions had been made earnestly, I took no notice of them, but in the actual negotiations, various forces different from reason and principles in terms of trade and investment easily come into play. In particular, China has so far expanded its economy and increased its political and economic power more remarkably than at that time. It cannot be denied that China may approach some of the TPP members which are politically and economically forced to listen to China’s demands to undermine the unity of the partnership. These countries may be obliged to withdraw from the TPP if China is not allowed to join.

In negotiations for its admission, China will demand substantial exceptions to the application of rules to state-owned enterprises and so forth. Many exceptions to application requirements are allowed for Vietnam. Allowing these exceptions means that most of the TPP’s advanced clauses of discipline will not be imposed on China.

Will China honor its promises?

Another problem is that China does not honor what it promises.

China has failed to fully meet what was demanded by the WTO agreement and accession protocol. China is criticized for its subsidies for the iron and steel industry because they brought a global oversupply of steel, but it did not even fulfill its duty of informing the WTO of its subsidies. Since details of such subsidies are unknown, the WTO cannot demand corrective measures. In terms of tariff-rate quotas, China was supposed to allow private firms as well as state-owned enterprises to import agricultural products but has not done so. If this occurs within the TPP, too, its members would not understand why they allowed China to join the partnership. China will benefit from it unilaterally while other members will observe the clauses of discipline sincerely.

China’s sanctions against Australia are an obvious violation of the WTO rules. China has implicitly and explicitly utilized trade measures in an effort to realize its political intentions. There is a danger of political intentions coming before international rules.

The WTO has a dispute settlement mechanism to correct violations. This process has been suspended owing to disapproval by the U.S. of members of the Appellate Body, but the WTO has a secretariat, which executes hundreds of pages of legal instruments. The TPP practically has no secretariat functions, however. If it cannot hold its members to their promises, the TPP agreement is simply a gentlemen’s agreement. There is no guarantee that China will behave like a gentleman.

Significance of the TPP

To begin with, what value does the TPP have?

The following is part of my essay entitled “Do not miss the golden opportunity of the United Kingdom joining the TPP: the future of the TPP as it expands its membership as a domino effect in an effort to prevent China from participating in it easily (Ronza, February 7, 2021).

“The TPP was the framework by which America’s Obama administration attempted to win China over to the partnership of free countries.

The WTO is faced with difficulties in establishing agreements that suit the new economic situation as developing countries have made stronger arguments against the promotion of free trade since China joined the organization. There are newly concluded minor agreements, but basically, the various WTO agreements reached in 1993, over a quarter century ago, are still applicable.

The U.S. paid attention to the TPP as it became disappointed with the WTO and desired to create a new trade agreement that was suitable for the 21st century. Through the TPP and without China, it intended to make high-level rules first. China did not participate in the TPP negotiations, but fortunately, among the TPP participants there was Vietnam, a socialist country, which had many state-owned enterprises. The U.S. viewed Vietnam as a hypothetical China to negotiate discipline for state-own enterprises. The demands the Trump administration made to China, including the protection of intellectual property right and discipline for state-owned enterprises, had already been included in the TPP agreement.

Broad free trade zones like the TPP, of which the U.S. is a member, attract participants quickly because countries failing to participate suffer the disadvantage of being excluded from such zones. If the TPP expands, China will be obliged to join it. The U.S intended to impose discipline on China at the time. For the Obama administration, the TPP was a mechanism not to exclude China but win it over to the framework of new trade rules.”

China had participated in TPP negotiations as a shadow negotiator.

Today, when it is difficult to lay down new trade rules at the WTO, it becomes possible to apply the rules established by the TPP at the WTO if more and more countries and territories participate in the TPP. If making new rules at the WTO is called “Plan A,” utilizing the TPP can be called “Plan B.”

Allowing China to join the TPP under easy conditions may lead to the denial of Plan B.

What is an appropriate policy toward China’s application for admission to the TPP?

The first basic principle can only be expressed in four words: make no easy compromises.

One way of doing so is to allow no exceptions to the TPP agreement in negotiations with the United Kingdom for admission to the TPP, which will soon begin in earnest, and urge the country to accept a high level of liberalization in trade and investment. Success in doing so will provide a precedent for China’s bid to join the TPP.

It is no small number of countries that wish to join the TPP, including not only the U.K. but also South Korea, Taiwan, Thailand, and the Philippines. If these countries apply for admission, it will become difficult for China to demand exceptions. In its negotiations with Taiwan for admission, the WTO left Taiwan’s admission pending for a long period of time until negotiations with China ended, even though those with Taiwan had been completed. Such consideration would not be necessary for the TPP. Taiwan is studying the TPP agreement hard. Negotiations with Taiwan will not take long. If Taiwan accepts the high-level agreement and China fails to do so, the latter could not save its honor.

Furthermore, TPP negotiators for admission will not only determine whether China’s systems and other institutions are consistent with the TPP agreement. If they judge that China’s activities are problematic, the existing TPP members can also make demands additional to the TPP agreement. In its negotiations with China for admission, the WTO reduced the upper limit to agricultural subsidies in the accession protocol to 8.5% of agricultural output rather than 10% as stipulated in the WTO agricultural agreement. (But it is not even known whether China is complying with the limit because it does not notify the WTO of its subsidies.)

The second basic principle is that it does not matter how much time is spent on negotiations until China satisfies the requirements of the TPP agreement and meets the demands of TPP members. Negotiations with China for admission to the WTO took 15 years. China might have thought that advanced countries made exorbitant demands, but one of the reasons for that was China’s uncompromising attitude in the negotiations.

If negotiations take about five years, it may be expected that the U.S. will return to the TPP sometime during that period. If the U.S. returns to TPP before China is admitted to it, the former can exercise its veto against the latter’s admission to the TPP. Those of the provisions of the current TPP agreement which are demanded by the U.S. are suspended until its reinstatement. If the U.S. returns, the obstacles to China’s admission will become even higher. The TPP agreement of which the U.S. is a member will enhance its charm not only in the TPP’s relations with China but also as Plan B.

The third basic principle is to revise and evolve the TPP agreement itself according to economic changes. To China, this may mean that the goal posts are moved, but the evolution of the agreement should not be delayed in a way that meets the pace of negotiations with China.

The fourth basic principle is to improve the functions of the secretariat so that it can perform the dispute settlement process, not to mention relations with China. Without this, the agreement would become a dead letter no matter how good it is.

Finally, negotiations with China for admission to the TPP should be utilized actively. If Japan exports rice, China is the most promising market. However, for the quarantine-related reason that there is the harmful buffalo bug insect in Japan, China limits rice imported from Japan to rice that has been processed at certain rice-cleaning mills. This represents a non-tariff trade barrier. In addition, Japanese rice, which can be bought for \500 per kilogram, is sold for \1,700 in China. This is because state-owned enterprises monopolize rice distribution, collecting high margins, but this is a violation of WTO rules because they exceed the upper limit to tariffs China promised the WTO. Furthermore, another problem is that Koshihikari and other Japanese variety names cannot be used in China because they are registered as trademarks in the country. There are many other sectors than agriculture, including intellectual property right, in which the TPP members should demand corrective measures from China. It will be all right if they are determined not to approve China’s admission unless it takes corrective measures in such sectors. Negotiations provide major opportunities to correct China’s various activities. The TPP members should take this opportunity to use negotiations for admission cleverly rather than remaining passive.

The foregoing is not intended to harass China. Accepting advanced international rules of discipline and performing them sincerely will contribute to reforming China’s economic systems and ensuring its new development.