Saturday, May 27, 2017, 12:15 PM CST – China

Editorial

China needs to speed up its own free trade initiative to counter the TPP

Two years after the scheme’s establishment, progress made in the free trade zones has been limited.

On October 5, it was announced that 12 countries, led by the US, had completed negotiations on the Trans-Pacific Partnership (TPP), with all parties agreeing to the conditions of the pact, which include the free flow of personnel and capital, protection of intellectual property rights, and improvement in the business environment. The agreement also impacts previously untouched areas, including labor and environmental protection, and restrictions on preferential policies for state-owned enterprises. The progress made on the TPP, which some have dubbed an “economic NATO” that will serve to undermine Chinese influence in international trade, has caused alarm within China.

To counter the potential influence of the TPP, China has been pushing for the development of bilateral free-trade pacts with several countries, including South Korea, Australia, Singapore and New Zealand, all of which are now signatories to the TPP. Besides these countermeasures, China has also launched its “free trade zone” (FTZ) initiative, a scheme which began in 2013. Establishing its first FTZ in Shanghai (the SFTZ), the central government approved the establishment of another 12 free trade zones last year.

Different from earlier projects such as the Special Economic Zones, where the government provides favorable trade policies, the SFTZ is designed to follow the model of free ports such as Hong Kong and Singapore by adopting an entirely different governance structure, including the enforcement of financial, taxation and administrative policies. The purpose of the initiative is to help Chinese leaders better understand the possible economic and social ramifications of adopting the rules enacted by the TPP, so that China can either adopt these rules – even going so far as to join the TPP if experimentation proves such a move to be in China’s interests – or take measures to minimize the new pact’s impact on Chinese trade.

However, two years after the scheme’s establishment, progress made in the free trade zones has been limited. Fiscal reform is a case in point – the SFTZ was originally designed to adopt a liberal financial policy to minimize government regulation. In fact, concerns over financial instability have delayed the enaction of these reforms. Similarly, tax reform in the SFTZ has also stagnated, largely resulting from objections raised by local governments loath to lose revenue. Finally, the goal of establishment of a modern governance system in the FTZs still seems a long way off, as there appear to be significant conflicts of interest among various government departments and agencies with a stake in such reform.

As major progress has been made in the TPP, the Chinese government must step up its efforts in pushing forward its FTZ initiative. As the initiative serves as a kind of “stress test” for the impact of the TPP on China, prolonged delay in implementing reforms will cause China to miss its window of opportunity to gain firsthand experience in this field.

As international competition over the establishment of trade regimes has become strategic, China must become more audacious in launching its policy experiments. This is not only a matter of whether China can remain competitive in international trade negotiations. It will also be key in determining whether China can deliver its reform agenda and create new momentum in its long-term economic growth. 

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