China s Role in Asia s Free Trade Agreements

Transcription

1 bs_bs_banner Asia & the Pacific Policy Studies, vol. 2, no. 2, pp doi: /app5.66 Original Article China s Role in Asia s Free Trade Agreements Fan He and Panpan Yang* Abstract A new wave of regional trade negotiations have sprung up in the Asia-Pacific region. China faces challenges and opportunities simultaneously. On the one hand, if China is excluded from major regional trade agreements, such as Trans-Pacific Partnership, it may hurt China s future growth. On the other hand, China can utilise the opportunities of regional trade negotiations to shape the new rules of international trade from the very early stage. Regional trade negotiations are also important for China because it needs further opening up to facilitate the domestic economic reform. Key words: regional trade negotiations, TPP, RCEP, China * Institute of World Economics and Politics, Chinese Academy of Social Sciences, Beijing , China; hefancass@gmail.com. 1. Introduction Regional trade negotiations in the Asia-Pacific area are flourishing in recent years. This phenomenon can be explained by two major factors. First, countries in Asia are getting disappointed on the slow reform of global trade governance, so they decided to move one step ahead (Baldwin 2011). Global trade negotiations went into a stalemate since the failure of the Doha Round, and the legitimacy of the World Trade Organization (WTO) has been tarnished. Although member countries attempted several times to restore the Doha negotiation and agreed on an early package in late 2013, global trade negotiations are far from complete and successful. Regional agreements can complement as well as substitute for the global trade system. The Asia-Pacific region is becoming an increasingly important and prosperous trade area; export has been one of the major driving forces for their economic growth. After the global financial crisis, with the sluggish external demand, it becomes more urgent for member countries to strengthen trade relations and develop regional production networks; thus, regional trade negotiation becomes one of their priorities in the agenda. Second, the strategic pivot to Asia adopted by the United States stirred up a new wave of trade negotiations in this area. One priority of the pivot policy is the Trans-Pacific Partnership (TPP) negotiation. It is the leverage that the United States can use not only to enhance its leading role in the Asia-Pacific region but also to formulate new international trade rules to safeguard its own interests. The TPP. This is an open access article under the terms of the Creative Commons Attribution-NonCommercial License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited and is not used for commercial purposes. Electronic copy available at:

2 He and Yang: China s Role in Asia s FTA 417 negotiations have triggered a domino effect, 1 stimulating widespread regional trade negotiations. The Regional Comprehensive Economic Partnership (RCEP) may be seen as a rival to TPP, in the sense that China is not included in the TPP but it plays a vital role in RCEP. Beyond these two mega agreements, the upgrading of China ASEAN Free Trade Area, China Japan Korea Free Trade Area (CJK FTA), and China Australia Free Trade Area, among others, are all under negotiation. These newly emerged regional trade negotiations, to some extent, can be seen as a reaction to the ambitious goal of the US TPP strategy. Those who are not parties in the TPP negotiation are eager to find their own platforms, and those who are already on the TPP negotiation table think it may increase their bargaining power if they have alternatives. The result is a messy noodle bowl of free trade agreements (FTAs) in the Asia-Pacific region. Not only did the number of FTAs increase, but also their scope broadened, issues like service trade, government procurement, labour law, environmental protection and intellectual property rights (IPRs) are all on the list. Higher standards are discussed, and more domestic policies are to be under scrutiny. A new set of international trade rules may emerge from this round of regional trade negotiations. To make the situation even more complicated, geopolitics is mingled with economic considerations in Asia s regional trade arrangements, making it very sensitive. This article tries to explain China s corresponding policy on regional trade negotiations. China has been actively promoting regional economic cooperation and is preparing carefully for the new international trade rules. If FTAs in Asia can be successfully negotiated and implemented with the involvement of China, then it is not only a boon for the regional trade, but also an impetus for China s domestic structural reform. 1. Baldwin (1993) has proposed this domino theory in 1993 and an updated version is in Baldwin and Jaimovich (2010). 2. How Will RTAs Affect China One hard choice for China is how to decide which regional trade agreements it should join. There are benefits as well as costs regarding each regional trade agreement. Should China join TPP and can it join TPP? Should China be satisfied with the RCEP and other bilateral trade agreements which are already on the track? Or should China take the lead by forming its own trade bloc? TPP is so far the most important transregional trade negotiation that reaches across the Pacific. TPP s predecessor is the Trans- Pacific Strategic and Economic Partnership established in Originally, the agreement was signed among four countries (Brunei, Chile, New Zealand and Singapore). But after the United States joined and took the lead to upgrade the negotiation, the number of member countries increased gradually. Currently, there are 12 member countries in the TPP negotiation, and the total economic scale of this group accounts for 40 per cent of the global gross domestic product (GDP). China is not in TPP. The attitude of member countries towards China s role in TPP tends to be ambiguous. Although several member countries in TPP welcome China joining in the TPP negotiation, their acceptance is not without certain conditions. The general thinking is that it is premature for China to participate in TPP. At this stage, it is almost impossible for China to take part in TPP before the negotiation is closed. If China is kept outside of the TPP, there is concern that it will exert negative impacts on China. The negative impacts include trade diversion, when an FTA diverts trade from a more efficient exporter towards a less efficient one within a trading arrangement. Since more than one third of China s total exports are to TPP member countries (based on 2012 data) and China has signed FTAs with many TPP member countries (with ASEAN countries, Chile, Mexico and New Zealand), China may find some proportion of their trade with TPP member countries diverted to other TPP member countries. They will import more from other TPP member countries at China s Electronic copy available at:

3 418 Asia & the Pacific Policy Studies May 2015 expense. Under such circumstances, TPP will pose a severe threat to China s exports. Complicating matters further, due to the rules of origin, this will not only hurt the exports of final products, but also that of raw materials and intermediate goods. Researchers provide some empirical evidence of such trade diversion and its economic consequences. Researchers from Peterson Institute of International Economics and the East-West Center (Petri et al. 2012) demonstrate a relatively pessimistic result. Their estimation shows that if China is excluded from TPP, it would lead to an economic slowdown of 0.2 per cent of GDP and export slowdown for 0.5 per cent per year, compared with the baseline scenario in Li and Whalley (2012) are more optimistic. Their simulation showed that China s absence from TPP would lead to a decline of its output of per cent of GDP, but China s exports may increase. Such an influence is trivial to China. Another two Chinese scholars (Peng & Zhang 2013) mainly focus on the potential growth rate. Their estimated negative effects on China s GDP growth and export growth from exclusion to the TPP are 0.14 per cent and 0.32 per cent, respectively. If China becomes a member of the TPP, then this will stimulate economic growth by a rate of 1.21 per cent of GDP. Researcher from People s Bank of China analyses the industrial-level effect of trade diversion (Ma 2014). His research shows that textile, clothes and electrical equipment will benefit a lot from TPP, and thus trade diversion effect happens most in these industries. Ma also emphasis that if China has a chance to be a party of the TPP, then the likely impact on China s growth performance is not from the elimination of trade diversion; rather, it comes from the adjustment of trade balance and increase of domestic demand. In other word, TPP can facilitate the much needed structural reform in China. RCEP has a different origin. RCEP is a regional trade agreement proposed by ASEAN countries. Its member countries include ASEAN 10 countries, plus China, Japan, Korea, India, Australia and New Zealand, and those are the countries that ASEAN has already signed FTAs with. The ASEAN initiative is to gather all these FTAs into an integrated regional economic agreement. Both RCEP and TPP call for deeper economic cooperation than the existing FTA agreements. But the RCEP approach and TPP approach are quite different. While TPP emphasises a higher, if not harmonised standard, RCEP will be a WTO-plus arrangement, which focuses on trade in goods, several types of services and investment. It generally considers the reality of the difference of development stages of member countries. Because RCEP is mainly composed of developing countries, it is more focused on development and encompasses an economic cooperation agenda. 2 Although China is not in TPP, it is an important member of RCEP. Member countries of RCEP have a close economic relationship with China. The bilateral trade between China and other RCEP countries accounts for about 31 per cent of China s total trade. Based on some research, if RCEP negotiation succeeded finally, it would boost China s economic growth rate by 1.4 per cent, and it would expand the size of China s exports by 11.2 per cent (Petri et al. 2012). Considering the estimated 0.2 per cent growth effect and 0.5 per cent trade diversion effect of TPP, the benefit for China from RCEP exceeds the loss from not being a member state of TPP. Many more FTAs have mushroomed in this region. One FTA leads to another one, as a chain reaction. Once a country observed that other countries were trying to establish a new FTA, it would worry about the discrimination and trade diversion effect. The easiest way to correct some of the discrimination is to sign FTAs with other countries. Thus came the domino effect. Besides the two mega-regional agreements, China is also involved in the FTA with Japan and Korea (CJK FTA). Yang and Lu (2013) showed that CJK FTA would boost Chinese economic growth by an additional 0.33 per cent. The China-Australia FTA 2. See RCEP Guiding Principles.

4 He and Yang: China s Role in Asia s FTA 419 negotiation, which has dragged on for several years due to concerns from Australia s agricultural industry and disagreements around investment access, may be concluded in As far as the size of FTAs is concerned, the bigger, the better. China is in favour of a more integrated FTA in the whole region. If there is an Asia-Pacific Free Trade Area, which includes all the Asia-Pacific Economic Cooperation (APEC) members, then the benefit China can get will outweigh both that from TPP and RCEP. According to Peng and Zhang (2013), an FTA in the Asia Pacific Area (FTAAP) would increase Chinese economic growth by 1.86 per cent. The second choice that China has to face up with is the emerging new issues that are included in regional trade negotiations. The new round of FTAs is not constrained by traditional issues like the reduction of tariff barriers or quotas the TPP negotiations are stuck on this though they are primarily concerned with the setting of new international trade rules. First, when trade of tangible goods is concerned, these new FTAs are more focused on the whole processing procedure of production, or the value chain (Freund & Ornelas 2010). The pattern of trade has changed substantially, to a great extent thanks to the revolution of transportation, telecommunication and IT technology. Traditional inter-industrial trade is transformed into intra-industry or even intra-product trade. If production is a chain, then the division of labour and international trade creates a production network. The new trade rules are trying to capture these significant changes of global trade, which are already having profound impacts on policies. How to measure trade volumes, how to gauge global imbalances, what is one country s position on this value chain, and how to promote trade, and to what kind of trade to promote? The new trade rules will not only focus on how to move across borders, but will also consider what is done behind borders. The establishment and settlement of future trade rules would be more focused on domestic issues, including domestic market access and the competition environment within one jurisdiction. Second, the new trade agreements focus not only on trade of tangible goods, but also on a combination of trade, investment and services (Baldwin 2011). The content of the new trade agreement would be much more comprehensive. It is not only the upgrading of the current trade agreement, but also includes more issues on investment and services trade. The world trade system is actually moving towards a three-pillar system focusing on trade, investment and services. But these new issues are far more complicated than trade in finished goods only, and the benefits of both developed and developing countries need to be balanced. There is often no best practice or one-size-fitall solution, and a rush to harmonise the standards and rules may cause more harm than gain. Third, the very nature of behind-the-border reforms raises sensitive domestic issues. When talking about competitive neutrality, the topic has been tilted towards the issue of state-owned enterprises (SOEs). The reason why SOEs are singled out, according to many Western observers, is that SOEs can get subsidies and other supports from the government, so that the playground is not level. There are also worries that SOEs may be utilised by the government as a tool for its political and strategic goals, for example, to grasp raw materials, lands and high technology from other countries. To be fair, there are some elements of truth in this argument, but it does not get the whole picture. The interests of SOEs and Chinese government do not always coincide; SOEs are pursuing their commercial interests, the same way as private enterprises. In fact, there is no significant difference in saving and dividend payment behaviour between listed SOEs and private enterprises (Bayoumi et al. 2013). It is true that monstrous SOEs can bully their competitors, but in most cases it is because they are monopolies, not state-owned. In other words, market structure rather than ownership is the issue that should be concerned. Also, the concept of SOEs and the way of managing SOEs in China keep changing, and in the future probably we will see the rising of more Temasek-type SOEs (sovereign wealth fund) and the dramatic reform on traditional SOEs

5 420 Asia & the Pacific Policy Studies May 2015 like Sinopec. 3 The protection of IPRs is another sensitive issue. There is a question of how to balance the need to protect incumbents and to encourage new innovators. These issues need to be addressed, but getting the correct modality is important where economic cooperation and capacity building can help achieve agreed goals, instead of imposition of external rules. When the scope of the FTAs is concerned, China agrees that new rules are needed, but they should be carefully evaluated and discussed. China understands the rapid changes of international trade and strongly supports the reform of trade rules regarding value chains. With its overseas investment increased dramatically, China also feels the need to reform the international investment rules. For some sensitive issues like SOEs and IPRs, China is more cautious and defensive. 3. China s FTA Strategy When the TPP was first being negotiated in 2005, China did not pay much attention. When Washington decided to take the lead, however, Beijing s interest grew. It has the potential to create a set of higher standard international trade rules which may replace the WTO rules without China s input. Given China is the world s largest trader and second largest economy, it is in China s interest to be part of the rule setting. Over the years, however, China s attitude towards TPP has changed from strong criticism to cautious support. Before 2013, the official reaction of China to TPP was we are 3. The name of Temasek, the Singapore holding company of its SOEs, has been mentioned in a joint research by the World Bank and Development Research Center, a think tank affiliated to the State Council in 2013 (Development Research Center of the State Council and the World Bank 2013). The advantage of the Temasek model, compared with the current Chinese SOEs, is that it focuses purely on maximising shareholder value, and at the same time keeps an arm s length with the daily operation of the SOEs. In the future, it is likely to see more state equity to be transferred to emerging state-owned capital investment companies, both at the central and local level. Sinopec is one of the major state-owned petroleum and chemical companies in China. In 2011, it ranked as the fifth largest company in sales in Forbes Global In 2007, it ranked first in the Top 500 Enterprises of China ranking. not invited. But in 2013, people from the Ministry of Commerce (MOFCOM) announced that China was working on the feasibility of joining in TPP. This is a turning point for China s attitude towards TPP. On the fifth Strategic and Economic Dialogue between China and the United States, many topics including the bilateral investment treaty (BIT) negotiation, commitment for the reform of China SOEs, among others, are closely related with TPP. The Shanghai Pivot Free Trade Zone is established to test the water for a more ambitious opening up policy. All these signals show that China is more willing to embrace new trade rules, including TPP, but up until now China has not decided to join TPP. One reason is that China has become more confident with its economic strength. It is true that being left out at the TPP negotiation will cause some trade diverted away from China, but it will not be hugely damaging to the Chinese economy. And China can offset the negative impacts through active participation in other bilateral and regional trade negotiations. The other reason is that TPP still has a long way to go, and its pressure on China may be reduced in the short run. The TPP negotiations have missed multiple deadlines, and there are many unresolved issues between negotiating partners. The large number of negotiating countries, their diversity and the single undertaking modality means it is difficult to reach conclusion. Japan s joining at a late stage in the negotiation process added significant complexity. The United States and Japan have been engaged in an intense bilateral negotiation around market access with very little progress as of mid-2014, a year after it joined negotiations. US domestic politics also constrains the smooth progress of TPP negotiation. Whether US Congress will support Trade Promotion Authority (TPA) is a big question mark, but TPA is a prerequisite for the conclusion of TPP. It is unclear whether the TPP will conclude in 2014, 2015 or after. The influence of TPP cannot be underestimated, but it should not be exaggerated either. Given the large economic relationship between China and the United States, it is important to foster further linkages between

6 He and Yang: China s Role in Asia s FTA 421 these two economies and foster closer cooperation. Although the TPP s door is not currently open to China, the China US BIT opens a window. Currently, 13 rounds of negotiations have finished with in-depth discussion on negotiation text. Many of the controversial issues in TPP, such as competition policy, SOEs, negative list, investor-state dispute settlement mechanism and IPRs, are included in the China-US BIT. China has accepted the requirement of a negative list and pre-establishment national treatment for US investment. It may pave the way for further cooperation between China and the United States, as well as other developed countries. China has started a China EU BIT negotiation as well. It may also encourage China to be involved in other trade issues. For example, China has signalled its intent to join the Trade in Services Agreement (TiSA) negotiations recently. TiSA aims to reduce service trade barriers and promote cross-border service trade. RCEP and TPP have similar sizes but different objectives. TPP aims at higher level FTA while RCEP is more realistic, providing larger space for its members. TPP covers wider issues than RCEP. Some of TPP issues can be easily connected with political concern, but RCEP tries to limit its scope on economic issues (see Sanchita 2013; Chen & Zhao 2014). As a large emerging economy, China feels more comfortable at the RCEP negotiation table. But China does not dominate, or attempt to lead the RCEP negotiations as the United States does so in the TPP. RCEP is an ASEAN proposal, and ASEAN plays the central role. Currently, RCEP has four rounds of negotiation, and it is intended to close at the end of 2015.One concern is that the rivalry between TPP and RCEP may split ASEAN members. While Brunei, Malaysia, Singapore and Vietnam are involved in the TPP, other ASEAN countries are not. Since those ASEAN countries in TPP might be more interested in TPP, and those ASEAN countries that are not in TPP but in RCEP might focus on RCEP, this will weaken the centrality of ASEAN. Some commentators argue that the recent tensions in the South China Sea between China and some neighbouring countries will cast a shadow on the RCEP negotiation (Hsu 2013). Yet part of the appeal of RCEP for Chinese policy-makers is that it is likely to foster better relations with China s Southeast Asian neighbours. The real danger lies elsewhere. If TPP drives a wedge between the United States, China and other Asian countries, then it may cause more mistrust and conflicts in the Asia-Pacific region. Splitting the Asia-Pacific region by two RTAs will not do Asia good. With the fast development of value chains, intermediated goods will move across borders more frequently. Closed FTAs in the Asia-Pacific region with limited members will ruin the efficiency of value-added chain within this region. Thus, it is important to guarantee that both TPP and RCEP be open to new entrants, and neither should restrict participants from joining other trade groups, and both should be negotiated in a transparent and open way. A more ambitious proposal comes from China s initiative of revitalising the FTAAP. FTAAP was proposed 10 years ago when Singapore hosted APEC and was in the leader s declaration 8 years ago. China is hosting APEC this year, and accelerating FTAAP has become the priority of this year s summit. It provides an opportunity to promote the connectivity between Asia-Pacific countries, and regional trade agreements are better to be negotiated under the auspices of APEC, so that APEC can become a platform for coordination and cooperation on a broad range of issues. Advocating establishing this mega free trade area in the Asia-Pacific area is consistent with China s own interest. FTAAP has made certain progress during this year s APEC. In the APEC Trade Ministers Meeting this May, a general agreement has reached to take 2014 as the starting year to enhance the regional integration and take action in promoting FTAAP. A roadmap will be established to provide guidance for the future negotiation of FTAAP. Furthermore, Since China benefits greatly from globalisation, multilateral free trade system is always China s first-best choice. In late 2013, the Ninth Ministerial Conference of WTO in Bali successfully closed. The Bali Trade Agreement (Bali Package) reached at the meeting made progress on the trade facilitation

7 422 Asia & the Pacific Policy Studies May 2015 agenda of the Doha Round the first such progress for Doha. To build on the positive momentum for the WTO from Bali, it will require active and ambitious commitment from major global trading countries like China. 4. Promoting Reform through Opening Up China s entry into the WTO in 2001 is a milestone for the global trading system. It further integrated China into the global economy and encouraged China to embrace the international community. A new consensus emerged among policy-makers in China. They started to view the opening up policy as the most effective way to dismantle vested interested groups and facilitate domestic reforms. Before China s entry into the WTO, there were loud critics arguing that opening up too fast would hurt the domestic economy. A famous Chinese entrepreneur, Zhang Ruimin, CEO of Haier, a major manufacturing company in China, warned his peers that foreign competitors were intruding, and Chinese companies had to learn how to dance with the wolves. But it soon turned out that it was the foreign competitors who should be worried. China s manufacturing companies grew rapidly and China s exports increased dramatically. China entered into a golden era of economic growth averaging 10 per cent growth a year. The export-led growth model was very successful, but it is an unbalanced one. Domestic consumption is repressed with too much investment in the manufacturing sector as well as infrastructure, which lead to rampant overcapacity. The external demand, on the other hand, may remain sluggish for a long time after the global financial crisis. In order to adapt changes of foreign environment, China has to launch a new long march of structural reform. Further opening up policy may be used to dismantle the vested interest groups and provide new impetus for market-oriented reform. China s new leadership often emphasises the importance of promoting reform through opening up. According to the Third Plenum Report, a blueprint for the future reform released late last year, developing a new opening mechanism, is one of the most important reforms and it connects closely with domestic reforms. Three opening up policies have been mentioned: one is accelerating FTAs negotiation, and the other two policies are providing wider market access to foreign investors, and opening up the inner areas. These opening policies are accompanied by a series of domestic reforms, including the administrative examination and approval system reform, the further opening of domestic manufacturing sector, and the orderly opening and reform in different service sectors. International trade needs new rules and China needs new reform. It is fair to say that a new set of international trade rules are far from complete, and interests of both developed and developing countries have to be better considered with compromises being made. China is not ready to accept all the higher standards of international trade rules immediately given its stage of development, and it will take time for domestic legal and regulatory systems to adjust. Less competitive sectors like agriculture and some services may need some breathing room. But on the whole, for many areas, the targets of the new trade negations and the blueprints of China s next step reform coincide. Many proposals in TPP, TTIP and TiSA are consistent with China s reform plan. The challenge is to get buy-in from Chinese policymakers and adjust the timetables expected by other economic partners. Take the services trade agenda as an example. Both TTP and RCEP advocate reducing service sector barriers and encourage service trade. TiSA is the trade agreement focusing on service trade. While China s manufacturing sector has become very competitive, even by international standard, its service sector is lagging behind. The success of catching up in the manufacturing sector is, to a great extent, the result of opening up and the introduction of more competition. Competition stirs innovation, and many Chinese factories flourished. The main cause of the underdevelopment of China s services is the excess regulation and heavy protection. Doors are closed for both domestic private investors as well as foreign investors. To unleash the huge potential of China s services, a new

8 He and Yang: China s Role in Asia s FTA 423 round of opening up policy should pay more attention to the service sector. A more opened and fully competitive market would promote the development of service sector in China. The related rules can also be absorbed as a model of developing service trade in China. The Third Plenum Reform plan is a sign that such a reform and liberalisation agenda is a policy priority. Foreign investment is another case. China used to be a major recipient of foreign investment; now, it has a huge interest in investing abroad. China s overseas investment has played a positive role in stimulating global economy after the financial crisis, but its sudden expansion has also aroused anxieties in some countries, and more and more major Chinese investments have run into obstacles. Also, China has invested heavily in countries that were not stable, such as Libya, Venezuela, North Korea and Sudan. With its go abroad strategy, China s overseas investment will continue to increase rapidly. China begins to show a strong interest in establishing a highly liberalised international investment environment together with other countries. Another example is the negative list. During the negotiation between China and the United States on the BIT, to many people s surprise, China agreed to accept the prerequisite of negative list and pre-establishment national treatment for future negotiation. That was a big step forward. It means clearly that China needs to make huge compromise, but it also shows that the Chinese government is determined to carry on major reforms to its current regulatory framework. The current system puts too much emphasis on ex ante approvals. When you start up a new business, invest in a new project, try to put a new product on the market, you always need to go through a tedious bureaucratic process. Investment and innovation are repressed, as is the potential for growth. At the same time, less attention is paid to ex post monitoring and regulation. Even when some dairy companies produced contaminated formula, or some grand investment project turned out to be failures, there was no legal recourse. The Chinese government has committed to simplify and streamline the approval system, and the negative list approach will herald more domestic reforms to allow the market to play the decisive role in resource allocation, as Chinese leaders promised in The Third Plenum Reform plan in 2013 a major reform agenda for future reform. While an opening up policy is the best catalyst for domestic reform, it cannot guarantee success. Painstaking efforts need to be paid to achieve the goals, and in doing so it is necessary to incorporate the relevant issues in the regional trade negotiations into the designing of future reforms. Current flourishing negotiations in Asia-Pacific region provide both opportunities and challenges to China. First, China should adopt the tradition of a gradual approach by allowing several free trade zones to test the water first. The Shanghai Free Trade Zone has already been working on the issue of negative list and now has its second edition of negative list. Some services have already been opened up for foreign investors. In the second edition of negative list, areas like infrastructure investment, research and development in manufacturing, and shipping business are all further opened up. This development is consistent with current reform agenda in China. Qianhai Modern Service Area in Shenzhen, which is very close to Hong Kong, has done some pilot projects on the internationalisation of RMB. Other free trade zones in Tianjin, Zhejiang and Guangdong are all eager to be the vanguard for further opening up policy. Through these trial and error experiments, the central government can find successful experiences and endorse them as national policy, and contain potential risks. Second, China has to make more domestic adjustments. The low hanging fruits of reform have long ago been harvested. The domestic adjustment needed in the future will be painful and politically difficult. But failing to accelerate reform has the risk of losing economic growth momentum. The Chinese government has already achieved a high degree of its market liberalisation policy. Since service trade has become more and more tradable, and the increasing cross-border flows of services have become a major trend in international trade, China needs to further open up its

9 424 Asia & the Pacific Policy Studies May 2015 service sectors. Further reform on exchange rate policy, gradual liberalisation of interest rates, and more efficient monitoring and supervision of cross-border capital flows are all vital for the next-step opening up policy. Finally, China needs to reform its FTA negotiation mechanism. The MOFCOM is the main government agency in charge of FTA negotiations, but the new international trade rules will move well beyond the scope of the traditional FTAs. MOFCOM often finds itself in conflict with other government departments, local governments and large SOEs. Different government departments represent the interests of different sectors, and they have growing, if not larger, influence on policy-making than MOFCOM. This inter-ministry coordination is inherently ineffective. Very often, the Chinese government finds that it lacks a unified position at the FTA negotiation table. The decisionmaking process has to be streamlined and coordination among different government agencies to be enhanced. November References Baldwin RE (1993) A Domino Theory of Regionalism. NBER Working Paper Baldwin RE (2011) 21st Century Regionalism: Filling the Gap between 21st Century Trade and 20th Century Trade Rules WTO Economic Research and Statistics Division. Staff Working Paper ERSD May Baldwin RE, Jaimovich D (2010) Are Free Trade Agreements Contagious? NBER Working Paper No Bayoumi T, Tong H, Wei SJ (2013) The Chinese Corporate Savings Puzzle: A Firm- Level Cross-Country Perspective. In: Fan J, Morck R (eds) Chapter in Capitalizing China, pp University of Chicago Press, Chicago, IL. Chen SM, Zhao L (2014) Why RCEP Not TPP in East Asian Corporation? New Insights from General Integration. Northeast Asia Forum 2, Development Research Center of the State Council and the World Bank (2013) China 2030: Building a Modern, Harmonious and Creative Society. World Bank Publication, Washington, DC. Freund C, Ornelas E (2010) Regional Trade Agreements. Annual Review of Economics 2, Hsu K (2013) Balancing Trade Growth and Trade Security. Paper presented at the 2013 Taiwan-US-Japan Trilateral Security Dialogue. Li C, Whalley J (2012) China and the TPP: A Numerical Simulation Assessment of the Effects Involved. NBER Working Paper No Ma J (2014) The Quantitive Effect of TPP on China and World Economy. CF40 Monthly Report No. 72 (in Chinese). Peng Z, Zhang BW (2013) The Economic Effects of TPP and FTAAP and the Implications for China. International Trade Issue, No. 4 (in Chinese). Petri PA, Plummer MG, Zhai F (2012) The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment. Peterson Institute for International Economics and East-West Center Policy Analyses in International Economics No. 98. Sanchita BD (2013) RCEP and TPP: Comparisons and Concerns. ISEAS Perspective No. 2/2013. Yang L, Lu S (2013) GTAP Simulation Analysis of the Economic Effects of TPP and China-Japan-ROK FTA. Northeast Asia Forum, No. 4.