China's Policymaking for Regional Economic Cooperation

Yang Jiang, Kenneth A. Loparo

• Publisher: Palgrave Macmillan
• Year: 2013
• ISBN:
  9781137347602
• Topic: Politics & International Relations
• Subtopic: Trade & Tariffs
• Index: Politics & International Relations

Using first-hand interview data, Yang Jiang reveals the key trends of China's trade and financial politics after its WTO accession. In particular, she highlights the influence of competing domestic interests, government agencies and different ideas on China's foreign economic policy.

1

Introduction

Peter Katzenstein proclaimed in 2005 that we were living in ‘a world of regions, embedded deeply in an American imperium’, with core states in Asia and Europe—Japan and Germany—acting as supporters of American power and purposes. The world in the 2010s may still be one of regions, but it is a different one because of China’s rise and extensive activities in regionalism. East Asia has changed tremendously, from a team of ‘flying geese’ led by Japan to an arena where major powers compete for influence.¹ When the Doha round of negotiations at the World Trade Organization (WTO) is announced effectively ‘dead’,² and the International Monetary Fund (IMF) inadequate to prevent or lead the world out of the global financial crisis, the rise of regionalism³ and nationalism seems both natural and worrying. While the EU struggles to keep its very existence and the US tries to make its way back to the Asia Pacific, China is building partnerships through a variety of economic instruments. With the second largest economy in the world and a very different political and economic system from major powers, China’s economic diplomacy invites both hope and awe. To the partners, is it coming with Noah’s Ark, or a Trojan horse? To major powers, is it a revisionist force or a ‘responsible great power’ as Beijing claims? And, importantly, to what extent is China able to realise its ambitions?

Just as their ancestors in the Han Dynasty 2000 years ago believed that the world would be peaceful if it were upheld by three poles, many Chinese today advocate a multipolar world for peace and development. Whether or not the pursuit of multipolarity is a true motivation behind China’s increasing activity in regionalism since the late 1990s, Beijing’s move has caused much scholarly and policy attention. There have been numerous attempts to interpret the nature, or predict the trajectory, of China’s foreign economic policy behaviour, without, however, much knowledge of how such policies came into being. Chinese foreign economic policymaking has largely remained an enigma to outsiders because of its opaqueness and complexity. Based on interviews with Chinese officials, involved academics, business associations and their foreign counterparts, this book opens the black box by exploring how China makes policies for economic regionalism.

This chapter will first discuss the two major issues mentioned above as the context for this study: first, the tension between multilateralism and regionalism, in particular when the new bilateralism rises in the Asia Pacific; second, China’s move from unilateralism and multilateralism to growing regionalism. To answer the leading question of what factors determine China’s policies on economic regionalism, this chapter will provide an overview of China’s changing diplomatic strategy, its activities in regionalism and its perceptions of different models of Asian regionalism. Following a discussion of possible domestic constraints on China’s execution of its regionalism strategy, the leading research question will be raised and the analytical framework will be introduced for case studies in the next chapters.

Global and/or regional?

When the world economy was overall growing steadily, regionalism was feared to be cancerous to the multilateral regimes for global cooperation or liberalisation. Now that the global economy is in crisis and the dream of multilateral institutions developing into a world government has been shattered by rising nationalism, regionalism is the lifeline for some countries and a burden for others, but all are trying to keep it. The tension between globalism, or multilateralism, and regionalism persists.

In trade, on the one hand, the WTO is facing seemingly insurmountable obstacles to making any further progress on trade liberalisation, as its membership expands and more issues are placed on the negotiating table. This once privileged club of free trade believers is now losing credibility both in guaranteeing membership privileges and in enforcing obligations. Each WTO Ministerial Meeting, in Seattle, Doha, Cancún, Hong Kong and Geneva, was a heavy step fraught with arguments. The suspension of the Doha round in 2006 and an uneventful resumption in Geneva epitomised the extent of difficulty in coordinating national interests. Whether or not the WTO Doha round is water under the bridge, a critical question remains as to whether major economic powers—including the US, the European Union (EU) and China—should contribute to global trade liberalisation or abandon it for alternatives.

On the other hand, regional economic arrangements are mushrooming in almost every corner of the earth. Following the first wave of post-war regional integration in Europe and Latin America in the 1950s, a new wave of regionalism at the turn of the century has been taken up by most countries in the world, usually in the form of free trade agreements (FTA), but also as financial and monetary regionalism.⁴ These agreements are not necessarily between countries in geographic proximity, and they involve not only economies in transition but also traditional advocates of free trade and open economic systems. The EU has intensified its pursuit of bilateral FTAs with non-member countries since the onset of the global financial crisis, the US is trying to build a Trans-Pacific Partnership (TPP) as an alleged detour towards greater liberalisation, and African countries are planning to build a continental free zone by 2017.

The vagueness of General Agreement on Tariffs and Trade (GATT) Article XXIV is often blamed for the proliferation of FTAs, or preferential trade agreements. It allows the formation of regional free trade areas on the condition that they eliminate restrictive regulations on commerce in ‘substantially all trade’, a term that remains vague despite the WTO’s efforts to clarify it. However, the development of FTAs from the inception of GATT in 1947 until the late 1990s was slow, which probably reflected a lack of domestic demand for such agreements, the constraint by Article XXIV over regionalism, and the US’s commitment to multilateralism. Following the ‘defection’ of the US from multilateralism through its FTAs with Israel and Canada and through the North American Free Trade Agreement (NAFTA) in the 1990s, a major change at the start of the 21st century is arguably the joining of East Asia in general, and China in particular, into the ‘encircling game’, which has made demands by some states for regionalism much stronger, and the constraints of Article XXIV on them even weaker.

Optimists hope regional blocs can be a mechanism that states use to push forward domestic reforms so as to gradually fulfil global liberalisation. In a way, regional trade agreements can help the state to overcome status quo bias when domestic groups are uncertain about the size of the adjustment costs associated with liberalising trade multilaterally.⁵ Regionalism can also spread through effects of ‘demonstration’, ‘emulation’ and ‘contagion’:⁶ if carried out thoroughly, regionalism is no longer a traditional barter trade of concessions but a ‘systematising of knowledge and principles’.⁷

However, more people seem to see the current relationship between global and regional economic cooperation as a life-and-death struggle—irreconcilable between multilateralism and bilateralism, between open and closed trading systems, and between equal treatment for all and discrimination. They have the effect of trade diversion rather than trade creation; they are seldom linked with one another, and, instead, add transaction costs and confusion to world trade with specific and restrictive rules of origin (ROO); or they fragment the world trading system into a ‘spaghetti bowl’.⁸ In particular, the new wave of regionalism at the turn of the century is observed by some as exclusive and discriminatory, a sign of the revival of realism in state ideology.⁹ It can be a tactic that a state uses to permanently defy global obligations, as it offers states the possibility of liberalising parts of the economy while protecting other parts from global challenges.¹⁰ Trading blocs may also retain barriers against outside competition and ensure that firms in the region fully internalise the scale effects of larger markets, creating opportunities to leapfrog foreign competitors through ‘import protection as export promotion’.¹¹ FTAs between large and small economic powers can be especially problematic because the power imbalance can be abused by a predatory country to obtain disproportionately greater benefits than its smaller partner. Further development of regionalism can even lead to several hub-and-spoke-type economic empires that battle for spheres of influence, resulting in potentially damaging conflicts.

In finance, there seems to be less tension between globalism and regionalism, but the relationship is nevertheless sensitive. The successful adoption of the euro by the EU was hailed as the fruit of 50 years’ foundational work, entailing significant liberalisation of national economies and the formation of a security area, achievements that deserved a Nobel Peace Prize. Despite its recent sovereign debt and euro crisis, the EU is considered in accordance with the spirit of liberalisation in global financial institutions represented by the IMF (which is traditionally headed by a European). However, East Asian financial regionalism has not always been regarded as supportive of the global financial system. Rather, it sprouted from resentment in the region over the inadequate help that the IMF extended during the Asian financial crisis.¹² East Asian countries questioned the imposition of the conditionality of IMF loans on developing countries and explored the possibility of a less stringent regional mechanism for crisis management, as well as a currency area that is independent of the US dollar. Although the attitude of the IMF towards East Asian financial regionalism has changed from outright objection towards qualified approval, the IMF still fears that regional financial initiatives will cause moral hazard or dilute its mandate in domestic reforms. Moreover, the potential of East Asia or Brazil, Russia, India, China and South Africa (BRICS) gaining a louder voice in international financial institutions could still be a challenge to the existing rules of the game.

Given the prevalence and controversies of regionalism, however, there is little knowledge about its domestic politics. Why do some regional arrangements carry little economic sense but only symbolic value, while others force national governments to make significant domestic sacrifices? Why do some countries prefer a gradual and flexible approach to regional cooperation while others prefer a legalist and comprehensive approach, and what happens when the two meet each other at a negotiating table? There is a rich literature on the motivations that drive states to FTAs. They include: to strengthen political relations or a regional identity, to expand export markets outside the multilateral framework, to defend against discriminatory trade policies in other countries, to attract foreign investment, to drive domestic liberalisation, and, increasingly, to facilitate intra-industry trade and to obtain natural resources.¹³ Since Mansfield and Milner (1999) pointed out the lack of empirical study of the domestic politics of FTAs, there have been some efforts to fill this gap.¹⁴ These studies focus on the power distribution between domestic liberal and protectionist interest groups, and the negotiation between national economic and political interests. They are inspired by the theories that suggest a country’s trade policy is often determined by domestic policy coalitions, which form along either class lines or industry lines (exporting versus import-competing industries), depending on the stage of industrialisation and the amount of domestic regulation.¹⁵ However, most such studies are based on practices in Western democratic countries. At the same time, because such theories are based on comparative advantage, they predict that regional economic cooperation is likely to happen between countries with different or ‘complementary’ endowments, and not likely between countries with similar or ‘competitive’ endowments. In fact, many regional agreements have been achieved between countries of similar economic structures, including those in the Asia Pacific.¹⁶ They are examples of vertical specialisation or intra-industry trade.¹⁷ That is, they coordinate to take different positions along a value chain, which is not always the case when a trade agreement is being negotiated. The cases in this book of China’s domestic policymaking for regionalism and its negotiating behaviours, therefore, supply information for those enduring questions and puzzles.

The new bilateralism in the Asia Pacific

Countries in the Asia Pacific have taken the lead in the latest wave of regionalism, featuring bilateral economic agreements. Before the turn of the 21st century, Asian regional cooperation was characterised by informality and a low level of institutionalisation, in contrast to the binding agreements of the EU and NAFTA.¹⁸ The major grouping for economic cooperation in the Asia Pacific was the Asia-Pacific Economic Cooperation (APEC), a forum advocating non-discriminatory ‘open regionalism’ and unilateral voluntary liberalisation. Another regional group, the Association of Southeast Asian Nations (ASEAN), was heralded for its unique organisational culture—the ‘ASEAN way’—characterised by consensus-seeking, informality, flexibility and sovereignty instead of conflict, restriction and interference in each other’s autonomy.¹⁹ Although ASEAN was implementing a free trade agreement, this preferential agreement did not prevent ASEAN economies undertaking significant unilateral trade liberalisation, consistent with APEC’s approach, from the mid-1980s onwards.

When the Asian financial crisis hit the region in 1997, East Asian countries were disappointed with major developed countries and the IMF, as well as with APEC, for doing too little to help. The Bogor Declaration in 1994 set firm targets of trade liberalisation for APEC’s developed and developing members to reach by 2010 and 2020, respectively, but the APEC Leaders’ Meeting at Kuala Lumpur in 1998 failed to push the agenda through an Early Voluntary Sectoral Liberalization initiative because members could not reach consensus over which sectors to open first. Disappointment and pessimism thus led this Asia Pacific forum to stumble to the backstage of regional economic cooperation. Despite efforts in recent years to rekindle APEC by raising non-traditional security issues on the agenda, the forum earns its legitimacy by enabling the leaders of major powers to meet, although they no longer insist on the tradition of wearing a national costume for family photos.

Thanks to the Asian financial crisis, East Asian regionalism gained momentum, mostly in the form of bilateral arrangements. In a bold attempt by East Asian countries, the East Asian Vision Group was established to design the architecture of East Asian integration as a whole, at the suggestion of the South Korean President Kim Dae-jung at the 1998 ASEAN+3 Summit. The East Asian Study Group’s report proposed an East Asian Community as the objective of regional cooperation to the political leaders at the 2001 ASEAN+3 Summit. At the summit, Kim Dae-jung also raised the idea of establishing an East Asian FTA. According to Chinese Academy of International Trade and Economic Cooperation (CAITEC), ‘The leaders of ASEAN countries were not as enthusiastic to this idea as to the China-ASEAN FTA (CAFTA), and shelved it to the next Summit.’²⁰ Likewise, the proposal of an Asian Monetary Fund was shelved for being ‘premature’.²¹ Instead, bilateral proposals for South Korea–Chile, Japan–South Korea and South Korea–Thailand FTAs in 1998, the deliberation of a Japan–ASEAN economic partnership, and particularly China’s proposal of an FTA to ASEAN in 1999, kicked off a domino effect of bilateral trade agreements in the Asia Pacific. Many other countries have sought to form similar arrangements, with ASEAN–Japan being the first, followed by the US (although initially, for both these countries, their agreements were with individual ASEAN partners), India, South Korea, Australia and New Zealand, and most recently the EU. Most ASEAN states seem to have welcomed such a trend by engaging in regionalism either collectively or individually so as to balance among major powers while maximising their economic opportunities. The structure of Asian regionalism thus changed from loose to binding connectio...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• List of Tables
• Acknowledgements
• List of Abbreviations
• 1. Introduction
• 2. China’s Policymaking for the China–ASEAN Free Trade Agreement
• 3. Australia–China FTA Negotiations
• 4. China’s Policymaking for Financial Regionalism
• 5. Conclusion: Domestic Reform and Global Engagement
• Notes
• Bibliography
• Index