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Obstacles and opportunities in China’s pursuit of economic openness
China is undoubtedly facing dramatic changes in the global arena. The United States is increasingly mobilising resources and alliances in the Indo-Pacific region and strengthening strategic competition to combat what it sees as a ‘rising China threat’. The Biden administration has deviated from or abandoned almost all of its predecessor’s policies, except for its China policy.
Author: Xu Mingqi, CCIEE
Trump-era tariffs and export controls on Chinese imports continue and the legacy of Trump’s Indo-Pacific strategy endures through the elevation of the Quad and the formation of the AUKUS security arrangement to combat China’s influence. Chinese policymakers recognise these measures as challenges in China’s external environment, stability in which is of utmost importance to the development of the Chinese economy.
However, China remains optimistic and believes in the prevailing strength of common interests with its trade and investment partners. China maintains that US-led decoupling will not only damage the interests of the United States and its allies, but also violates basic economic rules that govern international trade and investment. While political and security considerations certainly affect patterns of global production and trade, they will not change the forces driving economic globalisation — the pursuit of comparative advantage. Based on these beliefs China is continuing to uphold free trade principles.
The Chinese economy is deeply integrated into the world economy through participation in global production chains. Although its trade-to-GDP ratio has declined from a peak of 64.2 per cent in 2006 to 31.4 per cent in 2020, it remains one of the highest among major economies in the world. China clings to the view that maintaining stable economic growth and development with reforms and opening measures will benefit both itself and its trade and investment partners. That is why China has actively promoted the Regional Comprehensive Economic Partnership arrangement and is keen on entering more free trade negotiations.
Many developed countries have criticised China for its unfair trade practices and for its relatively closed domestic market. This criticism is not all groundless. The Chinese market economy is still immature in terms of legal and regulatory infrastructure and economic development also remains low compared to advanced Western market economies, which have evolved for more than a century.
But as the Chinese economy enters a more developed phase after a period of very high growth, it is now more confident about upgrading its domestic law and regulations to better suit the requirements of trade and investment in the 21st century. By further opening the Chinese market, China may also offset US pressure and help to maintain a stable external environment for economic development in the coming decade.
The Chinese government is certainly making efforts to do so. The annual China International Import Expo, launched in 2018, showcases policy intentions of further opening the domestic market and a repudiation of mercantilist trade policies. The 2019 Foreign Investment Law also grants foreign investors comprehensive national treatment. Since 2013, China has established new free trade zones — notably in Shanghai, Shenzhen and Hainan — to test a more open economic system. In many of these zones, trade-related domestic regulations have been simplified or abolished and average tariff levels have been lowered to facilitate trade liberalisation.
China’s application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership is an important move in this direction. Many external observers understand this decision as one component of China’s policy to offset US geopolitical pressures. But from an economic standpoint, it is actually a logical decision to upgrade the Chinese market system, with a rationale akin to China’s entry into the WTO in the late 1990s.
Despite geopolitical competition, China still aspires to use its economic advancements by seeking opportunities to expand and enhance trade and investment relations. Take for example, the US Indo-Pacific Economic Framework, which aims to formulate a set of standards for key industries, including supply chain resilience, digital economies, export control and environmental protection. While most countries in the region welcome US leadership in economic development, what they seek most is greater market access and the facilitation of trade. With this important element lacking, it will not be easy to decouple China from the global supply chain.
With Western media coverage dominated by the hot topic of geopolitical competition, China’s measures in recent years to further open its service sector and financial market have generally gone unnoticed. Where economic reform was once not feasible — for fear of speculative shocks triggering a financial crisis and social instability — China now has a maturing economy that is increasingly suited to opening historically closed industries and will be made stronger by market-oriented regulations.
Contrary to some speculation, the next decade will not see China’s trade policy revert back to closed-market principles, as increasing openness is imperative for both the Chinese and global economy.
Xu Mingqi is Vice President of the China Centre for International Economic Exchange and Senior Research Fellow at the Shanghai Institute of International Finance and Economics.
This article appears in the most recent edition of East Asia Forum Quarterly, ‘East Asia’s Economic Agreement’, Vol 14, No 1.
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