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Asia-Pacific Trade Deal RCEP Is Signed; Xi Signals Potential Interest in CPTPP

By Abby Lemert, Eleanor Runde
Wednesday, November 25, 2020, 12:57 PM

Asia-Pacific Trade Deal RCEP Is Signed; Xi Signals Potential Interest in CPTPP

On Nov. 15, the 10 countries of the Association of Southeast Asian Nations (ASEAN) plus China, Japan, South Korea, Australia and New Zealand signed the world’s largest free trade agreement by population. The pact, known as the Regional Comprehensive Economic Partnership (RCEP), covers more than 2 billion people, and its signatories have a collective gross domestic product of $26 trillion. The deal is China’s first multilateral free trade agreement. President Xi Jinping has since announced that China would also “give positive consideration to the idea” of joining the Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP). Together, the announcements signal China’s newly open approach to global commerce.

RCEP aims to reduce tariffs, increase market access and facilitate the development of cross-border supply chains within the bloc. The pact, which took eight years to negotiate, avoids politically charged issues including dispute resolution mechanisms and regulations on environmental impact, labor rights and government subsidies.

Chinese Premier Li Keqiang has touted RCEP as “a victory of multilateralism and free trade.” Some observers have noted that the deal reflects positively on China’s image as a cooperative economic actor. China will likely reap economic benefits from RCEP participation: According to simulations run by the Peterson Institute, China will gain approximately $100 billion in income due to added trade and production in East Asia. The Atlantic Council surmises that the deal is “securing a lower tariff trading environment in Asia without any change to China’s model of state capitalism.” RCEP also fits China’s “dual circulation” strategy, which pairs self-sufficiency driven by domestic consumption with supplemental international connections. Regional supply chains may also augment China’s strength in manufacturing as its domestic economy moves up the global value chain. And, as purchasing power in Asia grows, RCEP is likely to encourage “Asian trade for Asia”—perhaps, as Beijing sees it, regional self-sufficiency to complement China’s national independence.

RCEP’s membership attests to broader international political trends; it is the first trade agreement to join China, Japan and South Korea. The conclusion of the RCEP deal is predicted to jump-start negotiations on a long-stalled trilateral free trade agreement—a tentative sign that the two U.S. allies may be coming together under a Chinese umbrella. And Xi’s announcement regarding the CPTPP comes on the heels of a Japanese statement recommending expansion of the agreement. India was involved in the negotiations until it bowed out last year, citing unresolved “issues of core interest.” Taiwan was also excluded from the deal, and the island’s exports are projected to suffer as a result.

Like RCEP, the CPTPP eases digital trade and the cross-border flow of goods. Wang Huiyao, president of the Center for China and Globalization, has said that Chinese membership in the CPTPP could “mean an end to the suppression of Chinese companies such as Huawei and TikTok when they conduct business abroad.” The CPTPP’s rules are more comprehensive than RCEP’s, particularly on labor and environmental protection. Membership could require China to make some domestic reforms, though the CPTPP’s data localization requirements provide an exception for government services and public policy decisions, and the original Trans-Pacific Partnership’s (TPP’s) controversial intellectual property section was removed in the transition to the CPTPP. China’s interest in eventually joining the CPTPP, which includes Canada, Mexico, Peru and Chile, may signal a broadening approach to commercial leadership abroad. The new outlook comes as China reforms its domestic rules for foreign investment.

Neither RCEP nor the CPTPP includes the United States. President-elect Joe Biden has indicated that trade agreements will not be his top priority, though some analysts have recommended the creation of bilateral deals with RCEP member states to “keep some of the doors open.”

China Introduces Draft Antitrust Rules

China has issued draft rules to combat monopolistic practices among its largest internet companies. The regulations from the State Administration for Market Regulation (SAMR) are focused on anti-competitive behavior, including algorithmic collusion and predatory pricing. The new rules mark a major step to regulate China’s online “platform economy.” Kendra Schaefer of Trivium China told Bloomberg: “The Party is faced with the conflicting desires to empower domestic tech companies to be internationally competitive, while keeping their market activities firmly under control at home.”

This is the second blow in one month to Jack Ma, the founder and owner of Ant Group and Alibaba. First, regulators stopped Ant Groups’s highly anticipated record-breaking IPO at the last minute and now Alibaba appears to be in the regulatory crosshairs. The e-commerce behemoth has been cited as an anti-competitive actor for allegedly forcing merchants operating on its platform to sell exclusively to Alibaba, an approach known as “choose one of two” (erxuanyi). Like its competitors, Alibaba has used its power to facilitate price discrimination. For example, when looking for a hotel room, the phone and browser used to perform the search can influence the price quoted.

The draft rules will also augment scrutiny of mergers and acquisitions, as well as oversight of variable interest entities (VIEs)—investment vehicles used by companies such as Alibaba and Baidu to attract foreign capital outside the sweep of Chinese regulation. VIEs have long been an anomaly in China’s tightly controlled market. Already a brave bargain, VIEs now entail a heightened risk of crackdown. If investors are shared off, firms that use VIEs may face a shortage of foreign capital.

The announcement of the draft antitrust rules comes just weeks after the introduction of additional financial reporting requirements for big tech companies. Together, these moves represent an unprecedented assertion of state power in the industry. Given President Xi’s reported personal involvement in the suspension of the Ant IPO, the effort to keep China’s “national champions” on a tight leash appears to be backed at the highest levels of the Chinese Communist Party.

Chinese tech stocks are suffering as a result, and Ant Group’s valuation has been slashed. SAMR has invited public comment on the regulations until Nov. 30.

The U.S. and China Make Separate Progress Toward Coronavirus Vaccines

The United States and China have made significant progress toward deploying coronavirus vaccines in recent weeks. Pfizer requested emergency approval from U.S. regulators for its vaccine on Nov. 20, becoming the first vaccine maker to reach that stage after a successful large-scale trial. Another U.S. company, Moderna, is expected to reach the same milestone by Dec. 4, relying on innovative mRNA technology similar to Pfizer’s.

The good news comes amid the largest spike in coronavirus cases since the onset of the pandemic, with U.S. cases now surpassing 12 million. According to U.S. Health and Human Services Secretary Alex Azar, the United States will likely have 40 million doses of the two vaccines available by the end of 2020. The first doses are expected to go to front-line health care workers in all 50 states.

On Nov. 19, China announced the results of its large-scale trial of a leading vaccine, developed by state-owned pharmaceutical giant Sinopharm. According to a Sinopharm press release, nearly 1 million people, including construction workers, students and diplomats, received the vaccine without any serious side effects. Because case numbers in China have remained low since April, trial subjects had to be sent abroad to test the vaccine’s effectiveness.

With the U.S. vaccines completing final trials, some commentators believe China is falling a step behind in the vaccine race. After announcements that U.S. vaccine effectiveness was better than expected, Gao Fu, head of the Chinese Center for Disease Control and Prevention promoted China’s vaccine candidates, saying, “[T]he Chinese vaccines are very effective too.” Brazil and Turkey have already placed orders for Chinese vaccines. Some commentators speculate that politics prevented China from launching a vaccine trial in Canada, though officials on both sides declined to blame the partnership’s end on the deteriorating China-Canada relationship.

At the launch of the virtual G-20 Riyadh summit on Nov. 21, President Xi declared China’s willingness to “strengthen cooperation with other countries” in developing and distributing vaccines, pledging to make them “a public good that citizens of all countries can use and can afford.” Xi also called for the development of a global mechanism using QR codes to enable mutual recognition of health certificates and coronavirus testing results, enabling “orderly” cross-border travel.

The United States seems poised to reserve its initial vaccine doses for Americans and has refrained from joining COVAX, the World Health Organization initiative aiming to distribute 2 billion doses to developing countries. Some commentators view the Pfizer and Moderna breakthroughs as proof that the United States still dominates China in science and technology. Other commentators wonder whether an “America First” vaccination strategy will allow China to cement its dominance in the Global South as the chief vaccine provider for many countries already participating in its Belt and Road Initiative.

China Congratulates Joe Biden as the U.S. President-Elect

China issued a statement congratulating U.S. President-elect Joe Biden on his victory on Nov. 13, six days after U.S. media outlets declared that Biden had secured the necessary Electoral College majority. China’s delayed recognition of Biden’s victory came several days later than official congratulations from U.S. allies such as France, the United Kingdom, Israel and Saudi Arabia. Russia has not yet congratulated Biden.

Policy advisers on both sides of the Pacific are already considering the implications of a Biden presidency on U.S.-China relations. In the months leading up to the U.S. election, Biden increasingly echoed President Trump’s tough rhetoric toward China, responding to early critiques that Biden’s dovish language was “naive.”

A Chinese think tank has encouraged Biden to “adopt a more careful and considered approach” than Trump toward China. Others recall Biden’s central role in the Obama administration’s less belligerent tack toward China.

Most U.S. commentators think Biden will take a middle path between Trump’s aggressively anti-China rhetoric and Obama’s perceived dovishness toward Beijing. On certain issues, including climate change and multilateral diplomacy, commentators are urging Biden to adopt more predictable, less aggressive stances than Trump. In other contentious areas, particularly supply chain decoupling, economic protectionism, intellectual property theft and technological competition, China experts on both sides of the political aisle are encouraging the Biden administration to treat the China threat seriously.

Chinese foreign policymakers are also anticipating new possibilities with Biden at the helm of the United States. Many expected Trump’s “America First” isolationism to open a path for China’s rise as an alternative global leader, but at the end of Trump’s presidency, President Xi’s global popularity stands at an all-time low. Chinese foreign relations scholars are attempting to lower expectations that Biden’s election will bring about any major or rapid improvements to the U.S.-China relationship.

President-elect Biden has indicated a desire to restore American leadership in multilateral institutions, pledging to reenter the World Health Organization, the Paris Agreement on climate, and the Iran nuclear deal. On Nov. 22, Biden announced Antony Blinken, his longtime foreign policy adviser, as his incoming secretary of state. Blinken was a deputy secretary of state under Obama and has been an outspoken proponent of multilateralism in foreign affairs. At a conference in July, Blinken advocated competing with China through multilateral efforts “instead of forcing individual nations to choose between the two superpowers’ economies.”

Other News

Hong Kong Lawmakers Resign

Following the expulsion of four lawmakers from Hong Kong’s legislature, pro-democracy colleagues have announced their collective resignation. Of the 43 remaining lawmakers in the legislative council, 41 hold pro-Beijing views.

Wu Chi-wai, chairman of the Hong Kong Democratic Party, called the resolution that effectuated the four lawmakers’ expulsion the “official death” of the “one country, two systems” principle that has governed China’s relations with Hong Kong and Taiwan since 1972. U.S. National Security Adviser Robert O’Brien has echoed Wu’s sentiment.

Elections to the legislative council this year were originally scheduled for September but were postponed. The government cited the pandemic for the delay, while critics saw an attempt to block expected pro-democracy wins.

The news has done little to slow the Hong Kong stock market. Rather, as predicted in July following the introduction of the national security law, investors seem to believe the mainland’s tightening control will benefit business predictability and promote Hong Kong markets for more Chinese listings.

Still, Hong Kong is now arguably within China’s Great Firewall, and the battle over data collected in Hong Kong by U.S. tech companies has not yet been publicly resolved. The companies—Google, Facebook, Microsoft, Twitter and others—will be blocked from operating in Hong Kong if they do not comply with the mainland’s data-sharing requirements.

Commentary

The Paul Tsai China Center at Yale Law School and John L. Thornton China Center at the Brookings Institution publish a 17-part report on the future of U.S. policy toward China.

Max Zenglein, MERICS’s chief economist, explains Europe’s mutual economic dependency with China.

Kristen Hopewell writes for the Washington Post on RCEP and President-elect Biden’s future trade policy in Asia. The Peterson Institute podcast, “Trade Talks,” discusses the ramifications of RCEP.

An Airbnb executive quit in 2019 over the company’s willingness to share data on its users in China with Chinese authorities, the Wall Street Journal reports. Airbnb has hundreds of thousands of rentals on the mainland and has made growth in China a priority.

Susan Shirk and Helen Toner lead a group report for ChinaFile on the United States’s ability to maintain its advantages in science and technology.

Analysts at the Washington Post demonstrate that, similar to some Southeast Asian countries like Singapore, many African nations desire engagement with both the United States and China.

Lawfare’s ChinaTalk podcast interviews former National Security Adviser H.R. McMaster on his time in that role and his thoughts on China.

Sangeet Paul Choudary writes for the Brookings Institution on China’s “Country-as-a-Platform” approach to promote its global influence.

CSIS published a major survey of the U.S. public and thought leaders in the U.S., Europe and Asia on a host of issues related to U.S.-China policy, including trade, security and human rights. The report also outlined policy recommendations.

Maya Villasenor covers the international implications of the Section 230 repeal in the United States for the Council on Foreign Relations.

Michael C. Horowitz, Joshua A. Schwartz and Matthew Fuhrmann track China’s rise as a global exporter of weaponized drones for Foreign Affairs.

Paul Scharre and Ainikki Riikonen of the Center for a New American Security call for a national U.S. defense technology strategy for the Department of Defense.

Niall Ferguson explains how Xi and Biden can keep U.S.-China tensions from turning into a hot war.

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