On September 16, China formally requested to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) comprising Australia and 10 other members. The free trade pact is the largest in the region and represents almost 14% of global GDP. Prior to pulling out in 2018, the United States initially led the design of the agreement to counter elements China’s state-dominated economy through transparency requirements and disciplines against state-owned enterprises. The aim was to integrate a 21st century rules-based trading system in the region. China was only welcome if it met these standards.
However, under President Xi Jinping, China’s increasingly frequent cases economic coercion as punishment for countries whose political actions Beijing does not like, to undermine confidence in its willingness to play by the rules. CPTPP members Australia, Canada and Japan have all experienced such coercion in recent years, with Australia is expected to suffer an estimated A $ 23 billion loss in export earnings to China through 2021. In response to China’s request to the CPTPP, Australian Trade Minister Dan Tehan was unsurprising explicit linkend coercive tactics against Australia with Canberra’s support for China’s accession.
During Xi’s reign, the public sector has been strengthened rather than weakened, and state-owned enterprises are seen as tools for the state to implement policy.
Some analysts argued that this is the wrong approach, that it is better to resolve these issues during talks rather than as conditions for the talks. They argue that current members should use the CPTPP to lock China into a market-based rule of law deal that demands high transparency, a level playing field and controls over state-owned enterprises. Membership can provide a “opportunity to work with China and involve a growing China in new rules, disciplines and the international marketâ. It is further argued that membership would give the Chinese leadership an external pressure tool to push for domestic reforms.
If this argument sounds familiar to you, it’s because it’s an instance of the “engagement strategyThat underpinned US support for China’s accession to the World Trade Organization in 2001. The commitment was based on the assumption that China was on a reform path towards regulated markets of more and more competitive and a more liberal policy. While that was a reasonable hope back then, the scenario is very different today. We now know that the engagement strategy was based on incorrect underlying assumptions about the direction of China’s reforms – assumptions that are now blatantly inaccurate.
During Xi’s reign, the public sector has been strengthened rather than weakened, and state-owned enterprises are seen as tools for the state to implement policy. That is why Article 7 of the Chinese State Constitution declares that “The public sector of the economy, that is, the sector of the socialist economy owned by the whole people, will be the driving force of the economy.” Chinese state-owned enterprises are about a quarter of GDP in a US $ 15 trillion economy, dominate key sectors such as finance, telecommunications, and energy, and receive permanent subsidies and other preferential treatment that distorts global markets and China’s domestic market in ways to create unfair market conditions for foreign and domestic private investors.
Under Xi, China has embarked on a clear path of reform, but not of the kind the West once hoped for. On the contrary, its trajectory seeks to consolidate “socialism with Chinese characteristics”, with far-reaching consequences for the rule of law, business regulation and political risk when investing or exporting to China. . A crucial reform towards this goal has been the systemic integration of Party political cells in large and small companies. In 2016, as many as 68% of Chinese private companies had Party cells, while for foreign companies the figure was 70%. These Party cells can be used to influence business decisions when necessary. The integration of parties into private enterprises will also support the operationalization of China’s “”dual circulationâStrategy. The latter implies a policy of technological self-sufficiency and involves permanent protectionism in key sectors, as well as subsidies and preferential treatment for public enterprises and strategic private enterprises which are already a sore point for the country’s trading partners.
The Party believes that its system is superior to the Western economic model, which is at the heart of the US-designed CPTPP.
China “common prosperityâHas so far resulted in politicized targeting of wealthy tech moguls with pressure toâ donate âto charitable causes, primarily Party-run development programs. Foreign companies could be next. This is an arbitrary method of reducing inequalities, but indicates the Party’s preference for an authoritarian decree rather than transparent regulation.
It is clear that China’s reform path holds a permanent role in the economy for a privileged state sector, and emphasizes Party control in a state system by law rather than d Rule of law. The Party believes that its system is superior to the Western economic model, which is at the heart of the US-designed CPTPP. This is why Xi said in his speech at the 19th National Congress that China “opens a new path for other developing countries to modernize.”
The idea that Beijing wants membership in the CPTPP to be a tool for pushing liberalization reforms that go against its own model is wishful thinking. Beijing has set its reform direction in plain sight, a direction that deviates from CPTPP rules and norms, not more. Australia’s conditionality to end coercion should be the minimum basis for membership talks with Beijing.
Other members should carefully consider whether socialism with Chinese characteristics is truly compatible with the rules-based trade agreement they signed. If not, membership ultimately risks causing more trade problems than it solves, while leaving on the table the real problem of fundamentally divergent economic systems.