7 October 2021

Minako Morita-Jaeger is a Policy Research Fellow of the UK Trade Policy Observatory and a Senior Research Fellow of the University of Sussex Business School. Guillermo Larbalestier is Research Assistant in International Trade at the University of Sussex and Fellow of the UKTPO.

Complex geopolitical landscape

Trade policy concerns, national security and defence are increasingly intertwined in the Indo-Pacific region. This is partly driven by geo-political strategic interests and Sino-US rivalry in the Asia-Pacific region, and partly by the shifting economic balance of power towards the region. China formally applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) on 16 September, one day after Australia, UK and the US announced the creation of the new security partnership: Australia-UK-US (AUKUS). This should also be seen in the context of the Biden administration’s China containment strategy and an absence of US leadership in trade policy since the Trump era due to a greater focus on domestic priorities. China is thus trying to use the CPTPP as a tool in the geo-political power game in the Asia-Pacific region. By joining the CPTPP, China aims to cement its lead in trade and economic cooperation following the successful conclusion of the Regional Comprehensive Economic Partnership (RCEP), signed last December though not yet in effect.[1]

CPTPP members are looking at China’s application with scepticism. With geopolitical tension intensifying between China and CPTPP members over China’s territorial expansionism and trade disputes, it is likely that China will find it difficult to get approval from CPTPP members to commence the accession process.^[2] Taiwan’s formal submission of accession (22 September) further escalates the political complexity surrounding the CPTPP.

Growing influence of China in regional value chains

Economically, the CPTPP countries are important trade partners for China. In 2019, approximately 20% of Chinese exports were destined to CPTPP members, of which 50% were in intermediate products. On the other hand, 27% of China’s imports originated from CPTPP members, of which just over 75% were for intermediate products.[3] This significant share of intermediate trade between China and CPTPP members is indicative of China’s important role in Asia-Pacific regional value chains. Moreover, Chinese value-added embodied in each of the CPTPP country’s exports increased between 2010-2015 particularly for Vietnam, Malaysia, and Mexico increase (Figure 1).

Figure 1: Share of Chinese value added content of exports, Source: OECD, %

China’s role in regional supply chains has been changing over recent decades. China’s exports have experienced a shift from labour intensive or input assembly at the last stage, to capital and technology intensive products over the last two decades.[4] In 1999, China’s main exports to the world, and by extension to CPTPP countries, were in products like footwear, T-shirts, and other textile apparel. In 2019, we find that China’s most important export is mobile phones and other electrical machinery and equipment. Most notably, Japan imports just over 5% of China’s mobile phones, Vietnam 4.8%, Singapore 1.8%. Other products of importance exported to CPTPP countries include portable computers, electronic integrated circuits, petroleum oils, and vehicles (Source: UN Comtrade).

China’s role in services trade has also been increasing. China’s export of services to CPTPP countries has increased significantly between 2005 and 2015 (Figure 2). On aggregate, the increase in services exports to CPTPP countries has been driven mainly by an increase in exports of business sector services. During this period, total services exports have increased, on average, by 11% every year.

Figure 2: Value of China’s Services Exports to CPTPP countries, Source: OECD

A high level of market access offers from China is a condition for economic gains

China’s strong position in regional value chains was established through free trade agreements (FTAs) with most CPTPP members. Table 1 shows China’s preferential trade arrangements with CPTPP members. China already has five bilateral FTAs (with Singapore, Australia, New Zealand, Chile and Peru) and two plurilateral frameworks (the China-ASEAN FTA and the RCEP (not yet in force)) which include various CPTPP members. Canada and Mexico are the only CPTPP countries that have no preferential trade relation with China.

Table 1: China’s bilateral/plurilateral FTA relations with CPTPP members

Interestingly, China has a weak preferential trade policy framework with its top three major export destinations: Japan (35%, $172,717m), Canada (12%, $57,981m) and Mexico (16%, $79,890m) [5] – only RCEP with Japan and no FTA with Canada and Mexico. This indicates that there may be important economic gains to be made for China in joining the CPTPP. But, for the wider region, these gains depend on how far China can promote trade integration within the region. To achieve deeper integration to support regional value chains, it is important that China offers a higher level of market access commitments than what it has offered under its previous FTAs. For example, RCEP, China’s latest trade deal, is less ambitious as it is based on the ASEAN framework that applies special flexibilities for least developed members and long tariff reduction period of 20 years or more. Under RCEP, China made one tariff schedule for ASEAN members and separate tariff schedules for each non-ASEAN member. These separate commitments need to be levelled up when China offers market access for CPTPP accession. It should be noted that a high level of trade in goods commitment is not enough. Trade in services and investment liberalisation is the key to facilitate regional value chains.

Is China willing to change and abide by the CPTPP rules?

A key challenge for the possible accession of China to the CPTPP is whether China can abide by its rules. One of the original aims of the TPP (the precursor to the CPTPP) led by the Obama administration was as a counterweight to China’s growing economic presence in the Asia Pacific region. The CPTPP aims to promote a market-driven open economy. Hence, China’s state economy model itself does not easily align with some of these principles. Its scope is wider, and its rules are more stringent in comparison with the RCEP. One example is labour rights. CPTPP includes the labour chapter which requires members to comply with internationally recognised labour rights whereas China has never included labour issues in its previous FTAs. Problematic areas are likely to be state-owned enterprises and subsidies, digital trade, labour rights, intellectual property, and competition policy. These are areas where exceptions via side-letters are likely to be hard for China to achieve.

For example, the CPTPP has strong rules to level the playing field between state-owned enterprises and imports or investment from a partner country. Substantial industrial subsidies to state-owned enterprises in its strategic industries (e.g. defence, energy, telecom, aviation and railway systems),[6] are hard to reconcile with CPTPP rules.

Another critical obstacle may be digital trade policy. The CPTPP strongly promotes free cross-border data flow by strictly prohibiting the data localisation requirement and the disclosure of source code; as well as setting a relatively high threshold for government interventions to meet public policy objectives by applying the WTO type general exception clauses.[7] The CPTPP approach is completely different to China’s state-led digital governance, which has a strong notion of data sovereignty with China strengthening its authoritarian power in laws on data over the last several years.[8]

Possible implication for the UK’s accession to the CPTPP

The accession application of China (and then Taiwan) have changed the CPTPP political landscape. The CPTPP is in danger of becoming a geopolitical battleground in the Indo-Pacific. For the UK, there are two possible implications. First, China’s move may incentivise CPTPP members to accept the UK’s application to join the CPTPP as early as possible as a strong Indo-Pacific ally. At the same time, CPTPP members may more strongly insist on the full compliance of the UK to its requirements/rules (and thus be less flexible with regard to side-letters). This would demonstrate to China that there is a high threshold for joining the CPTPP in order to protect the original aim of promoting rules-based open economy.

Footnotes

[1] With RCEP Complete, China Eyes CPTPP – The Diplomat

[2] The challenges for China’s CPTPP membership bid, Financial Times, 20 September 2021.

[3] Source: UN Comtrade & BEC Classification, shares calculated using trade values.

[4] See for example, As China Moves Up The Value Chain, Some Manufacturing Companies Are On The Move |Interact Analysis

[5] Calculated from the OECD Trade in Value Added (TiVA), for 2015 (latest year available).

[6] Among 109 Chinese corporations listed on the Fortune Global 500, privately owned companies accounts for only 15%. See Explained, the role of China’s state-owned companies | World Economic Forum (weforum.org)

[7] Morita-Jaeger, M. (2020). Accessing CPTPP without a national digital regulatory strategy? Hard policy challenges for the UK. UKTPO Briefing Paper 61: Accessing CPTPP without a national digital regulatory strategy? Hard policy challenges for the UK « UK Trade Policy Observatory (sussex.ac.uk)

[8] For example, China Personal Information Protection Law, which will enter into force in November, Data Security Law, and daft regulations on algorithms.

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