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China eyes further reform and opening-up to break isolation in global trade
Photo: Guoshizhitongche
 
As the Trump administration ratchets up efforts to exclude China from global trade, it would be in China’s best interest to improve trade practices, reform its state sector and improve protection of intellectual property rights as part of its efforts of speeding up reform and opening up, which could also boost confidence in China’s private sector. Once China has succeeded in transforming itself into a genuine market economy, the US and its allies would lose much of the ammunition to launch trade wars with the rising power.
 
US President Donald Trump has apparently shifted his trade war ploy from indiscriminate fight with all major trading partners simultaneously to establish a new united front with Europe, Japan and Canada to counter China as a rising power. Under the latest United States-Mexico-Canada Agreement (USMCA), a "poison pill" provision has been added to prevent any of the three countries from entering a trade deal with a “non-market country”.
 
The "poison pill" provision effectively give Washington veto power over Canada and Mexico’s trade sovereignty to reach deal with other partners, or China in particular. The US can now block potential “backchannels” for Chinese products to enter US markets via its neighbors. In Commerce Secretary Wilbur Ross's words, the provision was “another move to try to close loopholes” in trade deals that had served to “legitimize” China’s trade, intellectual property and industrial subsidy practices. He further warned the “poison pill” provision could be replicated with additional trading partners.
 
Among US major trading partners, if the EU and Japan signed on to a "poison pill" provision akin to the one in USMCA, it would send a strong signal the west are fully aligned with each other in trying to increase pressure on China to profoundly reform its economy and open up its markets, otherwise it threatens rebuilding a US-led trade system with fundamental realignments of international economic relations and global value chain that excludes China. It would be the worst-case scenario for China. 
 
The question is how feasible it is?
 
The US efforts to unite its allies to confront China in terms of trade is mainly based on the perceived China’s lack of intellectual property protection and its subsidies and preferential treatment to state sector. EU and Japan also share US concerns about Beijing's maritime assertiveness and its Belt and Road Initiative.
 
For Japan, business ties with China are vital thus it would balk at swallowing the "poison pill" provision. Abe and Trump have agreed to kick off talks on a new Japan-US trade deal with the aim to cut Washington's trade deficit, while averting higher tariffs on Japanese auto exports. A US push to get Japan to join efforts to isolate China would present Tokyo with a dilemma.
 
China is Japan's biggest trading partner. Japan is China's second largest trading partner, after the United States, and the fourth biggest investor. Japan's direct investment in China rose in 2017 for the first time in five years, a trend that continued in the first eight months of 2018, the Japan External Trade Organization said in a report that also flagged growing Japanese exports to China. "To ensure that Japan has sustainable economic growth, you cannot ignore economic relations with China," said a Japanese foreign ministry official, who spoke on condition of anonymity.
 
On the other hand, many conservative politicians in Japan are deeply wary of China, as are many Japanese voters. A public survey showed 86 percent of Japanese had a "bad image" of China. Above all, security alliance with the US and geopolitical rivalry with the China will prevail over economic interest, it's not hard to imagine a situation in which Japan would accept such a "poison pill". Especially when the US and EU reach a free trade deal, Japan can't afford not to follow suit otherwise it would be seen by the US as a show of disloyalty and may leave it in a big disadvantage when competing with EU for the US market. 
 
But EU's in no better situation than Japan. China is EU's second largest trading partner and EU has become the most favorite destination for Chinese investment which amounts to 35 billion Euros in 2017. To avoid isolation amid the trade war, China has tried to get closer to Europe. In fact, both Europe and China are currently working on exchanging some market access and speeding up negotiations towards an investment agreement.
 
Considering the huge strategic divergence Trump has created in the US-EU ties nudging the EU towards more self-reliance, any trade deal at the expense of China and EU’s trade sovereignty would be drawn out of thin air. That’s the reason why the US and EU fail to eliminate issues concerning China when they have reached a nascent trade agreement in July.
 
China is not entirely helpless
 
China is by no means alone in this fight. It has bilateral free trade deals with Australia, New Zealand, Iceland, South Korea, Singapore and the 10-member Association of Southeast Asian Nations. Together, they account for about a quarter of China’s total trade. China is currently in talks for free-trade agreements with 27 countries. It is also involved in multilateral trade negotiations such as a China-Japan-South Korea deal and the Regional Comprehensive Economic Partnership (RCEP) between 16 nations that is expected to be signed before the end of this year.
 
On top of that, China is also looking into joining a trans-Pacific trade deal that it was previously shut out of by the US. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is a morphed version of the TPP, which had stronger environmental and labor standards than the CPTPP. However, after Trump pulled the US out of TPP, the deal has been in a limbo and Japan has since taken the lead in saving the deal. 
 
Joining the wide-ranging agreement between 11 nations – including Japan, Vietnam, Malaysia, Canada, Mexico and Australia – would allow Beijing to avoid being economically isolated by the US.
 
Japanese Prime Minister Shinzo Abe is due to visit Beijing at the end of this month. Trade issue is believed to be high on his agenda, though it is unclear whether Abe plans to raise the idea of China joining the CPTPP when he meets with Chinese President Xi Jinping.
 
However, despite being a watered-down version of TPP, it would not be easy for China to join the CPTPP. China may face tough negotiations over aligning its industrial and intellectual property policies with the agreement which still upholds “gold standard” in labor, state subsidy, intellectual property protection and the environment.
 
Against all odds, it would be in China’s best interest to join the CPTPP sooner rather than later as the move will show the outside world that it is serious about speeding up reform and opening up and that could also boost confidence in China’s private sector. Once China has succeeded in transforming itself into a genuine market economy, the US and its allies would lose much of the ammunition to launch trade wars with the rising power.
 

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