NZ, U.S. Trade Experts Discuss Prospects for China, Taiwan CPTPP Accession

Simon Lester -

At a Washington International Trade Association (WITA) webinar on the CPTPP yesterday, Tim Groser, formerly New Zealand's ambassador to the United States, and Wendy Cutler, formerly of USTR, both offered thoughts on various aspects of the applications by China and Taiwan to join the CPTPP. They made a number of points in this regard:

Groser:

  • Current CPTPP members are not likely to water down the obligations for China.
  • China was serious about joining the original TPP.
  • Some officials within MOFCOM see the CPTPP's state-owned enterprise (SOE) obligations as a way to generate domestic reform.
  • It is possible that people will be tempted to move more quickly with Chinese Taipei because it "would be much more manageable" as they are "much more a market economy than China," but "I would counsel great caution."

Cutler:

  • China's decision to apply to join the CPTPP was something they've given a lot of thought to and was a strategic decision.
  • You don't really have to water down the commitments if there's a real desire by CPTPP countries to somehow bring China in; there are ways you can, on the face of it, make the commitments look as strong as ever, but give China breaks in ways that won't be entirely obvious.
  • In areas such as IPRs, services liberalization, and the investment negative list, China is moving in a market opening direction, and a senior MOFCOM official recently said that China would offer CPTPP countries more market access than any country so far has enjoyed through any other trade agreement with China; however, there are so many tough issues and "it's just difficult to see how China could live up to that standard without major market opening and reform."

The full text of their remarks on these issues is below.

Groser:

I don't think there's even a remote chance of the existing members being prepared to water down the SOE provisions and the other provisions that do create some real issues for a Chinese membership of this set of trade rules. I'd say there's zero chance of that.

But there's some bigger questions that I think are really interesting. The question is, what script are the Chinese following? Well, we know that it's a different script than the 1978 Deng Xiaoping script, which you know, summed up in that famous statement that it's glorious to be rich, in which they committed to market reform on a step by step basis. We know they're moving backwards, but how far backwards?

... the original TPP was a lovely little double act. US power with New Zealand as the Secretariat or repository of the agreement. So, you know, I was always working hand in glove with the American team for that reason. And the Chinese, because of New Zealand's special role in TPP, had several discussions with me at a political level about joining TPP and eventually I persuaded Mike Froman that, I think they're serious, and Mike eventually agreed with me.

But that was the end game in an agreement that was meant to be anchored by the power of the United States. Without the United States there, this is a very, very problematic issue for us. Now, this issue on SOEs to me is really interesting, going back to my point about what script are they following. Because, paradoxically, the more technocratic members of the Ministry of Commerce, they were interested in this but no political decision had been taken in Beijing to pursue this at the time. They were very interested in the SOE chapter, not because they thought it would create difficulties and therefore they didn't like it, but exactly the opposite reason. They knew that the SOE sector is the weakest part of the Chinese economy. I mean, we can reference, I always do in this discussion, Nicholas Lardy's brilliant work on this, which points out that in 2018, 45% of Chinese exports were from private Chinese companies, 45% of Chinese exports were from foreign companies based in China like Apple, and only 10% from SOEs. The SOEs are hopelessly inefficient.

And these more technocratically minded, very senior officials, but following the old 1978 script, they wanted those disciplines, they didn't have a problem with them. They absolutely positively wanted them because they told me ... our reform through the WTO process has run out of steam. We need some fresh external impetus. So clearly that has changed dramatically for the worse in the last three years.

But I'm always wary of those who say nothing will change in China. I mean I just think that's a ridiculous statement when we've seen absolutely ... huge change in China over the last 40 years. I just don't know how far backwards they're going to go.
Cutler:

I think when we look at Chinese application to join the CPTPP, we shouldn't just be looking at kind of the end game, like will they succeed in acceding to the agreement, will the negotiation successfully reach a conclusion? I think it's the front end also that's very important to focus on. I think the bid that China made was a long time coming, they've given a lot of thought to it, it was a strategic decision. Some people say, oh, it's just a PR move. I couldn't disagree more. I think they know exactly what they're doing. And as Tim mentioned, they've been thinking about this for many many years. And so I think by even the establishment, for example, of a working group to formally start negotiations, that for China would be, I think they would hit a milestone there. They would become part of the TPP, albeit not a full member, but they'd be kind of brought into more meetings, when people make decisions. They'll think about China's input more. And so I think that we need to think about this as, you know, the front end and not just the end game.

With respect to kind of weakening the provisions, I would just turn to what Tim said at the beginning of this negotiation, the lesson he learned from Arthur Dunkel, look at the side letters, look at the footnotes, because you don't really have to water down the commitments if there's a real desire by TPP countries to somehow bring China in. There are ways you can on the face of it make the commitments look as strong as ever, but give China breaks in ways that won't be entirely obvious.

And then the third area, you know, we're focusing, and I couldn't agree more with what Tim said about state owned enterprises, although given the direction China's going, it's really not just state owned enterprises anymore. It's really the role of the state now in private companies as well. But in certain areas that TPP covers -- IPR, services liberalisation, the investment negative list -- I mean, China is moving in a market opening direction. And I noted a comment by a senior MOFCOM official just a few weeks ago, where he said that China would offer TPP countries more market access than any country so far has enjoyed through any other trade agreement with China. And so I think they're ready to put some cards on the table in a negotiation, but I think there are so many tough issues, we mentioned SOEs, I would add labor, I would add e-commerce and environment and IPR to that list of issues that are -- it's just difficult to see how China could live up to that standard without major market opening and reform.
Groser:

I just want to raise a very sensitive issue here that I haven't heard any comment on internationally, and that is the issue about, let's use the WTO word Chinese Taipei, because it's a trade agreement that's appropriate, coming in at the same time.

First of all, this is the 21st largest economy in terms of nominal GDP. And as all of those who have worked in the WTO know, it has an independent status in the WTO because of the strange historical accident that the membership of the GATT, the foundation stone of WTO, was not countries but customs territories. And in 99% of cases that is one and the same thing as a country, but not in the case of China. There are three different WTO members that occupy the one space.

But I do think there's a very delicate issue here. If the Chinese moves inevitably become incredibly complicated across multiple technical and political areas, what about Chinese Taipei?

I'm very conservative on this. I think that the risks now going well beyond trade into the security situation, the risks of a major mistake in cross straits relations, are real. Most wars start against the background of tension and then a horrendous miscalculation by one or other party. I would be strongly opposed to any move by the existing members to expedite Chinese Taipei's entry ahead of China. In my opinion, the one China policy that all of us follow in TPP or CPTPP is a bedrock principle that is therefore far more important reasons than international commerce. And I can just see people being tempted to move more quickly with Chinese Taipei because I think it would be much more manageable. They are much more a market economy than China, but I would counsel great caution.