china's move to preferential trading: a new direction in china's diplomacy

This article was downloaded by: [University of Miami]On: 22 September 2013, At: 14:07Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House,37-41 Mortimer Street, London W1T 3JH, UK

Journal of Contemporary ChinaPublication details, including instructions for authors and subscription information:http://www.tandfonline.com/loi/cjcc20

China's Move to Preferential Trading: a new direction inChina's diplomacyJohn Ravenhill & Yang JiangPublished online: 05 Dec 2008.

To cite this article: John Ravenhill & Yang Jiang (2009) China's Move to Preferential Trading: a new direction in China'sdiplomacy, Journal of Contemporary China, 18:58, 27-46, DOI: 10.1080/10670560802431420

To link to this article: http://dx.doi.org/10.1080/10670560802431420

PLEASE SCROLL DOWN FOR ARTICLE

Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) containedin the publications on our platform. However, Taylor & Francis, our agents, and our licensors make norepresentations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of theContent. Any opinions and views expressed in this publication are the opinions and views of the authors, andare not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon andshould be independently verified with primary sources of information. Taylor and Francis shall not be liable forany losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoeveror howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the use ofthe Content.

This article may be used for research, teaching, and private study purposes. Any substantial or systematicreproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in anyform to anyone is expressly forbidden. Terms & Conditions of access and use can be found at http://www.tandfonline.com/page/terms-and-conditions

http://www.tandfonline.com/loi/cjcc20

http://www.tandfonline.com/action/showCitFormats?doi=10.1080/10670560802431420

http://dx.doi.org/10.1080/10670560802431420

http://www.tandfonline.com/page/terms-and-conditions

http://www.tandfonline.com/page/terms-and-conditions

China’s Move to Preferential Trading:a new direction in China’s diplomacyJOHN RAVENHILL and YANG JIANG*

China was a latecomer to the preferential trading bandwagon that has swept East Asia in the

years since the financial crises. The Chinese government was unwilling to go down the path of

negotiating bilateral and minilateral agreements until the terms of its accession to the World

Trade Organization were finalized. Since then, it has become one of the most active

participants in the negotiation of preferential trading arrangements, currently being engaged

in negotiations with more than 20 countries. The paper will address the following questions

about China’s move to preferential trade: (a) What forces are driving China’s approach to

the negotiation of preferential trade agreements? (b) To what extent is it possible to untangle

economic and political motivations in China’s choice of partners for PTA negotiations? And,

which economic interests are being pursued most aggressively? (c) How are conflicting

domestic interests reconciled in the policy-making process? (d) To what extent will the new

PTAs facilitate Chinese-dominated production networks in the regions? (e) What overall

impact will the PTAs have on the Chinese economy?

Participation in the global trading regime has been a major factor in the rise ofChinese economic power. China’s accession to the World Trade Organization(WTO) provided it with the relative security of market access that it had long soughtand helped reinforce China’s place in East Asian production networks.1 Moreover,preparation for WTO entry as well as implementation of the terms of China’saccession agreement, reflected principally in a slashing of tariffs and the removal of

*John Ravenhill is Professor in the Department of International Relations, Research School of Pacific and AsianStudies at the Australian National University. Yang Jiang is Assistant Professor at the Asia Research Centre,Copenhagen Business School. We are grateful to Gordon Cheung, David Kerr and participants in the ‘GlobalIdentities of Chinese Business’ conference at Durham University in March 2007 for their comments on earlier draftsof this paper. John Ravenhill acknowledges financial support from the Australian Research Council throughDiscovery Project DP0453077.

1. Although the ‘Chinese’ link figured prominently in some of these production networks, particularly thoseinvolving Hong Kong and Taiwan, the Chinese dimension can easily be overstated given the importance of US-basedbuyer-driven production networks. On China’s role in production networks, see, for instance, Guillaume Gaulier,Francoise Lemoine and Deniz Unal-Kesenci, ‘China’s integration in Asian production networks and its implications’,paper presented at Resolving New Global and Regional Imbalances in an Era of Asian Integration, Tokyo, RIETIDiscussion Paper Series 04-E-033, (17–18 June 2004); Guillaume Gaulier, Francoise Lemoine and Deniz Unal-Kesenci, China’s Emergence and the Reorganisation of Trade Flows in Asia (Paris: Centre d’Etudes Prospectives etd’Informations Internationales, 2006), available at: http://www.cepii.fr/anglaisgraph/workpap/pdf/2006/wp06-05.pdf.

Journal of Contemporary China (2009), 18(58), January, 27–46

ISSN 1067-0564 print/ 1469-9400 online/09/580027–20 q 2009 Taylor & FrancisDOI: 10.1080/10670560802431420

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

many non-tariff barriers, provided a significant stimulus to the competitiveness of thelocal economy.2 China, however, was a latecomer to preferential trading agreements(PTAs).3 Unlike other Northeast Asian economies, particularly Japan and Korea,China’s reluctance to jump on board the preferential trade bandwagon owed little toconcerns that these arrangements might undermine the multilateral trade framework.Rather, it was a pragmatic response to the sensitivities of negotiations over its WTOaccession—Beijing was unwilling to embark on preferential negotiations until itsentry to the WTO had been successfully concluded.

Pragmatism has remained the hallmark of China’s economic diplomacy in the yearssince WTO entry. Countries use economic instruments to pursue a variety of foreignpolicy objectives—some of which may be far removed from securing domesticeconomic benefit, narrowly conceived. China’s negotiation of preferential tradeagreements is no exception to this generalization. In East Asia over the last decade,countries have negotiated PTAs with relatively insignificant economic partners—sometimes because they wanted to gain experience in negotiating these agreements (forinstance, Singapore with New Zealand, or Korea with Chile), or primarily for politicalreasons (most obviously in Taiwan’s negotiation of PTAs with Guatemala andNicaragua, two of the relatively small number of countries that accord Taiwandiplomatic recognition). But even where the other party is a relatively significanteconomic partner, the motivations for negotiating the agreement may be as muchpolitical-strategic as economic—seen, for instance, in Singapore’s efforts to ‘anchor’ itsrelationships with all of its major strategic partners—the United States, India, Japan, andChina—by negotiating (often ‘unequal’) trade agreements with them. Preferential tradeagreements thus are instruments that may facilitate the pursuit of multiple objectives—not necessarily as alternatives but sometimes simultaneously within a single agreement.

In this article, we examine China’s pursuit of PTAs in the period since 2001. Chinahas become a very active player in negotiating and implementing PTAs in the briefperiod since its accession to the WTO (Table 1 lists China’s current PTA activities). Asthe world’s second largest and fastest growing economy, China is an attractive PTApartner for many governments, despite the threat that its exports may pose to theirdomestic manufacturing. The potential demand for PTAs with China from othercountries therefore is likely to exceed China’s capacity to negotiate these agreements—even before taking into consideration the burden of negotiating PTAs that China itselfmight want to initiate. The division of International Cooperation of the Ministry ofCommerce (MOFCOM), the Chinese government agency with principal responsibilityfor negotiating bilateral and regional trade agreements, has a professional staff ofaround 20, of whom only a dozen in 2006 were experienced negotiators.4 The division’s

2. Nicholas R. Lardy, Integrating China into the Global Economy (Washington, DC: Brookings InstitutionPress, 2002); Gregory W. Noble, John Ravenhill and Rick Doner, ‘Executioner or disciplinarian: WTO accession andthe Chinese auto industry’, Business and Politics 7(2), (2005), pp. 1–33.

3. We prefer the term ‘Preferential Trade Agreements’ to either regional agreements or free trade agreements.Even though such agreements (when they involve industrialized economies) are referred to the WTO’s Committee onRegional Trade Agreements for consideration (those involving developing economies exclusively go to theCommittee on Trade and Development), their membership is often not ‘regional’ in any conventional geographicsense of the word. And relatively few of the large number of preferential arrangements negotiated in the last decadecome close to conventional criteria for ‘free’ trade.

4. Interviews, Beijing, June 2006.

JOHN RAVENHILL AND YANG JIANG

28

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

resources were already so severely stretched by 2005 that the Ministry’s WTO divisiontook responsibility for handling the PTA negotiations with Australia and New Zealand,the first two industrialized economies with which China began negotiations.

Table 1. China’s preferential trade agreements

PartnerDid ChinaInitiate? Current Status

ASEAN Y Framework Agreement November 2002. Agreementon Goods began to be implemented July 2005;Agreement on Services Signed January 2007 andimplemented July 2007. Agreement on Investmentsaimed to be signed by the end of 2008. PTA to becompleted by 2010 (2015 for “new” ASEAN members).

Australia N Framework October 2003. Currently Negotiating(12th round of talks September 2008).

Bolivia Currently negotiating.Brazil Y Shelved.Chile Y Agreement on Goods Implemented October 2006;

Agreement on Services signed April 2008.Negotiating Agreement on Investments.

Costa Rica Under feasibility study.GCC Y Framework agreement on economic, trade, investment

and technological cooperation signed July 2004.Negotiations on PTA continue. 4th round July 2006.

Hong Kong N Agreement (CEPA I) Concluded June 2003implemented Jan. 2004. CEPA II to VI signed.

Iceland N Feasibility study completed. Negotiating. 1st roundApril 2007.

India Y? Second Study Group Appointed January 2007(Indian government rejected 1st group’s recommendationfor PTA). Feasibility Study completed October 2007;currently shelved.

Macau N Agreement (CEPA I) concluded October 2003.CEPA II to VI signed.

New Zealand N Agreement signed April 2008.Norway N Negotiations launched September 2008.Pakistan Early Harvest Program 2005. PTA on Goods and

Investments signed November 2006 and implementedJuly 2007. Negotiating services.

Peru N Negotiations launched September 2007.Shanghai CooperationOrganization

Y Proposed September 2003. Negotiation expected to belaunched in 2015 and FTA to be established in 2020.

Singapore N Currently negotiating (previously suspended afterLee’s visit to Taiwan). 1st round of talks October 2006.

South AfricanCustoms Union

Y Negotiations launched July 2004.

South AmericanCommon Market (Mercosur)

Proposed.

South Korea Y Under feasibility study (accelerated January 2007).Switzerland N Under feasibility study.Japan & Korea Y Proposed.

CHINA’S MOVE TO PREFERENTIAL TRADING

29

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

Given these constraints on negotiating capacity, China’s choice of partners clearlyindicates the government’s priorities in using PTAs as a foreign policy instrument.Those negotiations that Beijing itself chose to initiate provide the clearest evidence.But so too, given the range of keen partners, do the invitations that Beijing has chosento accept from other countries. As Table 1 indicates, China itself has initiated lessthan half of the PTA negotiations on which it has embarked. From this listing, we candeduce four categories of partnerships that China has chosen to pursue, and theirprincipal motivations (while acknowledging that multiple motivations are likely tounderlie any specific agreement):

. those intended to facilitate Chinese production networks—the economicpartnership agreements signed with Hong Kong and Macau;

. proposals for agreements with neighbouring states [Association of South EastAsian Nations (ASEAN), India, Japan and Korea] that China has made, initially atleast primarily out of diplomatic considerations (although the potential forrealizing significant economic benefits from these agreements certainly shouldnot be entirely discounted);

. relationships, primarily initiated by China, with resource-rich countries/regionalgroupings, intended to enhance China’s security of supply of raw materials(Brazil, Gulf Cooperation Council, Southern African Customs Union);

. invitations for negotiations that China has accepted, which were initiatedby relatively small, resource-rich industrialized economies (Australia andNew Zealand).

In the second half of this article we examine three of these relationships in moredetail—those with Hong Kong, ASEAN and Australia. First we look at the moregeneral influences on China’s PTAs.

China’s PTAs in comparative context

We begin by highlighting a number of dimensions on which China’s PTAs differ intheir content and their motivations from those of other countries.

First, China, in marked contrast in particular to the United States and the EU, but alsoJapan, has no single template for its PTAs. Again, this is an indicator of the pragmaticapproach that China has taken: its agreements negotiated to date vary substantially intheir content. Some cover only trade in goods (and may have only partial coverage ofthis trade); some also include trade in services and articles on investment promotion.

Second, China has been happy to sign vague framework agreements for PTAswhose details have subsequently to be negotiated—behaviour that accords well withthe practices of other states in East Asia, and brings to mind the caustic commentabout the ASEAN Free Trade Area, namely that its acronym (AFTA) stood for‘Agree First, Talk After’.

Third, China has shown no great concern for the compatibility of its agreementswith WTO rules that permit regional trade agreement as an exception to therequirement that members should provide most-favoured-nation status to oneanother. Officials and academics have been content merely to state that the rules of


30

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

the WTO clearly acknowledge the legitimacy of regional trade agreements, andChina should take advantage of the flexibility this entails.5 This stance is in markedcontrast to that of Japan and the EU, which frequently have resorted to tortuousreasoning in attempting to demonstrate that the incomplete agreements they havenegotiated are compatible with the requirement under Article XXIV that regionalagreements must cover ‘substantially all the trade’ between partners. In part, thisrelaxed attitude to WTO rules may be because agreements that China signs with othercountries that classify themselves as ‘developing’ in the WTO (which includes, forinstance, its agreement with ASEAN) are not subject to Article XXIV but to the evenlaxer requirements of the ‘Enabling Clause’.6

Fourth, unlike Japan where the Ministry of Economy, Trade and Industry hasargued repeatedly that PTAs can be an important instrument for enhancingcompetitiveness in the domestic economy and, in particular, for exposing traditionallyprotected sectors, most notably agriculture, to international competition, the Chinesegovernment in its official statements on PTA negotiations has made little reference tothe potentially beneficial competitive effects of PTAs on the domestic economy.7

Fifth, again in marked contrast to the EU and the United States, whose PTAsfrequently have a mercantilist character—being designed with the intention ofopening foreign markets to their exports—the unequal character of the PTAs thatBeijing has signed to date has been primarily to the advantage of China’s partners.Again, this can be attributed both to China’s pragmatic approach and to its desire touse economic instruments for diplomatic advantage. As an analyst from MOFCOMasserted, opening China’s market to some developing countries is ‘an effectiveresponse to the China threat theory’.8 The unequal obligations are particularlynoticeable in the ‘Early Harvest’ provisions of the agreements with ASEAN and withPakistan. In these instances, Beijing has chosen not to make use of the asymmetries ineconomic power between the parties to its own economic advantage, opting instead touse the PTAs as assurance mechanisms against fears by the weaker parties of Chineseeconomic domination. In the ASEAN agreement in particular, Beijing was willing toaccept ASEAN exports of agricultural products fully cognizant that these woulddamage domestic producers in provinces bordering ASEAN. This reluctance tocapitalize on its relative power has not carried over, however, to its negotiations withAustralia and New Zealand, where Beijing has been insistent on minimizing damage

5. See, for instance, the remarks of Ministry of Commerce spokesman, Chong Quan, in response to criticisms ofChina’s activism in negotiating PTAs made by WTO Director-General, Pascal Lamy: Chong asserted that free tradeagreements were ‘important supplements’ to the WTO, and that the two mechanisms of freeing trade should becombined. See ‘China to advance bilateral and regional free trade negotiation’, People’s Daily, (16 September 2006).

6. Officially the agreement on ‘Differential and more favourable treatment, reciprocity and fuller participation ofdeveloping countries’ adopted by the GATT on 28 November 1979. Like Article XXIV, the ‘Enabling Clause’ wasincorporated into GATT 1994 and subsumed under the WTO when it was established in that year.

7. On the potential for PTAs to accelerate trade liberalization in Japan see Trade and Industry Ministry ofEconomy, Government of Japan, The Economic Foundations of Japanese Trade Policy—Promoting a Multi-LayeredTrade Policy (Tokyo: Ministry of Economy, Trade and Industry, 2000), available at: http://www.meti.go.jp/english/report/data/g00Wconte.html; Naoko Munakata, ‘How trade agreements can reform Japan’, The Globalist 2003(3),(February 2002), available at: http://www.brook.edu. When Chinese officials have made reference to the potentiallybeneficial effects of international competition, this has typically occurred in response to complaints from domesticsectors fearful that their interests will be damaged by relatively inexpensive imports.

8. Ai Hua, ‘Jingji quanqiuhua diertiao daolu: Zhongguo FTA zhanlue’ [‘The Second Way of EconomicGlobalization: China’s FTA Strategy’], Guangdong Shenji [Guangdong Auditing], no. 2 (2006), p. 8.


31

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

to its vulnerable domestic sectors, particularly agriculture. And, of course, skepticalobservers will see Beijing’s willingness to agree to ‘unequal’ treaties as merely anexpedient approach in which some economic interests are sacrificed in the short-termin order to secure long-term (economic and political) gains.

China’s willingness to accept agreements that discriminate against its interests isthe classical behaviour of a benevolent hegemonic power, reminiscent of the UStolerance of discrimination against its exports by its European and Northeast Asianallies in the period after 1945. One consideration in China’s policies has been rivalryover leadership of the East Asian region, the area to which China gives top priority inits diplomacy. China has attempted to position itself advantageously vis-a-vis Japanin its dealings with smaller economies in the region. In its negotiations with ASEANeconomies, Japan’s behaviour has resembled that of the EU and the US in their recenttrade negotiations with weaker parties—Tokyo has been very reluctant to make anyconcessions that would adversely affect domestic interests. Japan’s agreement withSingapore was markedly unequal, with Tokyo failing to offer access to its marketequivalent to that enjoyed by Japanese exporters to Singapore. Beijing’s concessionson imports of agricultural products through the Early Harvest provisions of theASEAN agreement placed it in a particularly favourable light compared withTokyo’s (and Seoul’s) unwillingness to make concessions on agricultural imports inthe PTAs they have negotiated with ASEAN states.

Beijing is acutely aware of the alternative designs for East Asian regionalism thathave been put forward, and believes that it alone—through the China–ASEAN FreeTrade Agreement (CAFTA)—has implemented a practical mechanism for movingregional cooperation forward.9 Beyond reassuring regional states about its intentions,China’s pragmatic stance on PTAs is intended to reinforce its claims to be the naturalleader of a developing country coalition within the global economic system,affording the potential benefit of enhancing its bargaining position within the WTO.

The economic dimension

Even in those instances where China’s proposals for PTAs were initially drivenprimarily by diplomatic/strategic considerations, as in the CAFTA relationship,economic considerations inevitably were not entirely absent—and came into greaterprominence once negotiations on the agreements began.

A primary economic objective in China’s negotiation of PTAs is to ensure bettertreatment than Beijing enjoys within the WTO, where it believes it has beendisadvantaged by the concessions that it was forced to make in its accessionnegotiations. Foremost amongst these aims is the desire to be treated as a marketeconomy by its trading partners, a status that would render Chinese exports lessvulnerable to arbitrary anti-dumping actions. Partners’ recognition of China as amarket economy has been a non-negotiable precondition for the opening of PTAnegotiations. The desire to gain recognition as a market economy appears to haveinfluenced the choice of invitations for PTAs that Beijing has accepted. It is probablyno coincidence that China’s first negotiation of a PTA with an industrialized

9. See, for instance, ‘Commonwealth offers bright future for E. Asia’, People’s Daily Online, (15 January 2007),available at: http://English.peopledaily.com.cn/200701/15/eng20070115_341324.html.


32

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

economy was with New Zealand, the third smallest of the OECD economies (afterIceland and Luxembourg)—and therefore a relationship in which the asymmetry ineconomic power was most marked. Once New Zealand conceded recognition ofmarket economy status, Australia, the next industrialized economy to enternegotiations, had no alternative but to follow suit. China’s next choice ofindustrialized economies as a PTA partner was the smallest of the OECD members,Iceland. One reason for the delay in the opening of negotiations of the proposed PTAbetween China and India has been the reluctance of the latter to accord China marketeconomy status.

A second factor dominant in many of the negotiations that Beijing has initiated,and in its choice of invitations for PTAs it has accepted, has been the desire toenhance China’s access to raw materials. China’s sustained rapid economic growthhas rested on enormous increases in imports of raw materials and particularly ofenergy.10 China’s increasing dependence on imports has led to a dramatic expansionof the country’s economic diplomacy with all parts of the global economy. Beijing’sforays in Africa have attracted a great deal of critical attention but it has been equallyactive in resource diplomacy in Latin America, the Middle East and in Central Asia.From 2004 to 2006, the National Development and Reform Commission (NDRC)released a series of policy notices on the measures to support ‘important projectsencouraged by the government’. The measures include giving preference in grantinglicenses by the NDRC, as well as providing loans and financial insurance, financingsupport, and establishing a risk security mechanism through the China Import &Export Bank, the China Export & Credit Insurance Corporation (SinoSure), and theChina Development Bank.

PTAs have been part of the arsenal of diplomatic weapons that China has broughtto bear in its quest to enhance its resource security. At the very least, signature of aPTA, assuming a reasonably non-confrontational process of negotiation, can beexpected to provide an improved context for the operations of China’s major resourcecorporations. Here it is not a matter so much of facilitating production networks butthe operations of giant vertically-integrated corporations. More specifically, Chinahas sought to ensure that PTAs will end any discrimination against its resourceinvestments and deliver at least most-favoured-nation treatment in its partnereconomies—the Australian case, discussed below, provides a good example. AndChina has sought to include provisions in its PTAs that enable its resource companiesto bring in Chinese labour to staff its resource projects. Beyond these specificmeasures, it is not clear what PTAs can deliver to China, and whether Beijing’sexpectations are realistic—it has referred, for instance, in the PTA negotiations withAustralia to its desire to secure access to resources at ‘reasonable’ prices. TheAustralian government responded that prices in the resource sector were set by thedecisions of private companies, rather than being controlled by the state becauseAustralia was a market economy. Nonetheless, Chinese officials believed the

10. Aaron L. Friedberg, ‘“Going out”: China’s pursuit of natural resources and implications for the PRC’s grandstrategy’, NBR Analysis 17(3), (2006), pp. 21–22 provides a concise summary of recent increases in China’s importdependence.


33

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

Australian government should still have been able to restrain undesirable companybehaviour.11 In a world in which natural resource extraction is often controlled byglobal transnational corporations, usually headquartered outside of the country inwhich the resource extraction is taking place, the capacity of inter-governmentalagreements to affect the allocation and pricing of minerals is limited.

Even though China has not been as aggressive as the EU and the US in attemptingto use PTAs to open the markets of its negotiating partners, the potential that suchagreements may have to enhance exports at a time when China faces growingprotectionist pressures in North America and Europe is clearly an attraction todomestic economic interests. But with the partial exception of the agreement withHong Kong (which accounts for over 15% of China’s total exports), China’s PTAnegotiations are taking place with relatively minor trading partners. Although Beijinghas frequently emphasized the potential significance of the combined CAFTA market(the ‘world’s largest FTA’), ASEAN countries together account for only 7% ofChina’s total exports. And, given the zero tariffs of Singapore, ASEAN’s single mostimportant market for China, which accounts for 2% of China’s global exports, it isnot immediately obvious how much its market access will be improved when CAFTAis fully implemented.12

Liberalization of trade in services has not been high on China’s initial negotiatingpriorities in its PTAs—indeed, in several of the agreements, negotiations on serviceshave not begun until several years after the treaty on goods trade was concluded.China’s reluctance to negotiate on services has been a contentious issue in thenegotiations with New Zealand and particularly Australia, where domestic serviceindustries have lobbied to ensure that talks on services occur simultaneously with thoseon goods. Beijing is clearly reluctant to expose weak domestic service industries,especially the financial sector, to international competition beyond that to which it hasalready committed in the WTO. China prefers a safety-first approach to service sectorliberalization, in particular in finance, not least because of its memories of thedetrimental impact of crises on its neighbours. Beijing also argues that the liberalizationof telecommunications and cultural services sector may endanger its national security ifliberalization is not done carefully. One of China’s objectives in service negotiationswith industrialized economies has been to improve the opportunities for Chineseprofessionals to work in partner economies—in the Australian case the focus has beenparticularly on nurses. Beijing apparently sees PTAs as providing a partial solution to alack of domestic employment opportunities for some professional groups.

Beyond these general principles in its PTAs, individual agreements have servedparticular economic purposes. For instance, CAFTA has provided a foundation for

11. Before Australian Prime Minister John Howard’s visit to Beijing in April 2005 to sign the MOU to startnegotiations, He Yafei, Director of the Department for North America and Oceania at the Chinese Foreign Ministrytold Australian media that Canberra ‘can certainly encourage companies to take a long-term point of view in settingprices’ [China Daily, (19 April 2005)]. During Hu’s visit to Canberra in October 2003, on the sideline of theFramework agreement, the two countries signed a US$30 billion deal to supply 3.3 million tonnes of Australianliquefied natural gas (LNG) over 25 years, after a similar AUD$25 billion, 25-year contract of Australian LNG forGuangdong province.

12. Not least because of the vagueness of the trade liberalization provisions—their being defined in customaryASEAN fashion as tariffs between zero and 5%—and because of the historic reluctance of ASEAN economies toreduce protection of politically sensitive industries despite PTA obligations.


34

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

infrastructure strengthening and for micro-regional development in the GreaterMekong River sub-region in Western China. The closer economic partnerships withHong Kong and Macau, on the other hand, are clearly intended to give Chineseproduction networks in these economies an advantage over those involvingTaiwanese capital that operate across the Straits.

Case I: China–Hong Kong Closer Economic Partnership Agreement (CEPA)

On the sidelines of the 14th General Meeting of PECC on 28 November 2001(immediately after China and ASEAN had agreed to set up a PTA), Chinese ViceMinister of Foreign Trade and Cooperation (MOFTEC), the former body ofMOFCOM Long Yongtu disclosed that Tung Chee Hwa, Hong Kong ChiefExecutive, had proposed to form a special trade area comprising the mainland,Hong Kong and Macau. Then Chinese President Jiang Zemin and Premier ZhuRongji reportedly gave an immediate positive response to Tung’s proposal.13 ViceMinister Long argued that the establishment of such an area was fully in accordwith WTO regulations on regional agreements; this view was supported by MikeMoore, then Director General of the WTO, who cited the examples of the EU andNAFTA.14 In December 2001, during his annual job report in Beijing, Tungformally submitted proposals to the central government to establish a ‘Sino–HKFree Trade Area’. Beijing welcomed the proposal but re-named the proposedarrangement a Closer Economic Partnership Agreement (CEPA), on thegrounds that FTAs were usually arrangements concluded between sovereigncountries.15

Beijing’s motivations

The CEPA was widely considered a ‘big present’ from the mainland to Hong Kong,bestowed during Premier Wen Jiabao’s first visit in June 2003.16 Because Hong Konghad historically positioned itself as a free port, the CEPA was largely a one-wayopening of trade by the mainland. The China Customs Administration predicted thatHK’s services exports to the mainland would increase but the mainland would notgain many economic benefits from the agreement. Trade in goods would not increaseby much because the labour-intensive products of the mainland already dominatedthe HK market and most of HK’s manufacturing had already moved to the mainlandto utilize cheap labour and land.17

13. Huifeng Dong, CEPA De Lailong Qumai [CEPA’s Origins and Developments ], available at: http://www.chinanews.com.cn/n/2003-06-29/26/318902.html (accessed 29 June 2003); CASS, ‘CEPA: Yuanqi, Yiyi JiYingxiang’ [‘CEPA: origin, nature and implications’], The Pursuit of Economic Trends 48(388), (2003).

14. ‘China considering to set up special trade area: Long Yongtu’, People’s Daily (English), (29 November 2001).15. CASS, ‘CEPA: origin, nature and implications’. Hanying Peng (from the Customs Administration),

‘“Caozuo” Neidi Yu Xianggang Geng Jinmi Jingmao Guanxi’ [‘“Operationalize” CEPA’], China Customs no. 12,(2003).

16. Kui Hu, ‘Xianggang De Xin Qidian’ [‘Hong Kong’s new starting point’], China Newsweek, (7 July 2003);Peter Y. W. Chiu, ‘CEPA: a milestone in the economic integration between Hong Kong and mainland China’, Journalof Contemporary China 15(47), (May 2006). CASS, ‘CEPA: origin, nature and implications’.

17. Xiuli Guan (from the NDRC), ‘Economic and trade relations among mainland, Hong Kong, Macau andTaiwan after CEPA’, Straits Technology and Industries no. 4 and 5, (2005).


35

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

The immediate objective of the CEPA was to lift Hong Kong’s economy out ofdepression. In 2001, Hong Kong was in one of the worst economic depressions in itshistory after being hit by the Asian Financial Crisis and the subsequent global economicslowdown. During the SARS (Severe Acute Respiratory Syndrome) outbreak in HongKong in 2003, the leadership in Beijing decided to accelerate the negotiation of theCEPA in order to alleviate the economic impact of the epidemic on Hong Kong.

Secondly, the CEPA was intended to give Hong Kong18 an advantage that wouldallow its products and companies duty-free access to the mainland market earlier thanother countries would achieve under China’s WTO commitments.19 When it becamecertain in 2001 that China would become a member of the WTO, Hong Kongbusinessmen were worried that they would lose their traditional role of being aneconomic bridge between the mainland and other countries. Some Hong Kongcompanies (in particular small- and medium-sized enterprises), academics andprofessionals in Hong Kong put pressure on the HK government to request themainland central government to grant them preferential treatment. According toofficials at the China Customs Administration and the NDRC, Beijing supported theproposal because it considered it an obligation to help maintain the prosperity andstability of HK after 1997.20

Third, Beijing hoped that the CEPA would promote the integration of the mainland,HK, Macau and Taiwan. In July 2003, then Chinese Vice Minister of Commerce AnMin stated that the CEPA was ‘an operationalization of the “one country, two systems”strategy’. The advantage of being ‘one country’ is shown in opening ‘earlier than underthe WTO, more preferential than for the ASEAN’, and ‘exemplifies the mainland’ssupport and help to HK’s economy’.21 The CEPA was regarded as an important step inChina’s domestic economic integration strategy and the starting point for constructinga ‘Greater China Economic Circle’, which would have a greater influence onneighbouring countries than the mainland alone does. Beijing hoped the CEPA wouldpush Taiwan to join the three others both by providing an example and by the increasedcompetition Taiwanese exports would face.22

Finally, the CEPA might help mainland businesses to enhance their productivity.In the speech mentioned above, An Min expected that the agreement would have somenegative impact on the mainland economy but hoped that mainland sectors would growthrough competition and dynamic integration with HK businesses, a similar kind of‘platform’ as the grand ‘reform and opening’ strategy of Deng Xiaoping after 1978.23

18. On interdependence with Hong Kong see Gordon C. K. Cheung, ‘Governing Greater China: DynamicPerspectives and Transforming Interactions’, Journal of Contemporary China, 18(58), (January 2009), pp. 93–111.

19. Qingjiang Kong, ‘Closer Economic Partnership Agreement between China and Hong Kong’, China: AnInternational Journal 1(1), (March 2003); Jin Zhang and Jiang Wei, ‘Mainland–HK trade fruitful’, China Daily(North American ed.), (28 December 2004); Nan Jia, ‘CEPA De Shenhua Xuyao Shijian Erfei Tiaowen’ [‘Thedeepening of CEPA needs time not articles’], Guoji jinrong [International Finance ], (28 January 2005).

20. Peng, ‘“Operationalize” CEPA’; Guan, ‘Economic and trade relations among mainland, Hong Kong, Macauand Taiwan after CEPA’. Also see Kong, ‘Closer Economic Partnership Agreement between China and Hong Kong’.

21. CASS, ‘CEPA: origin, nature and implications’.22. Guan, ‘Economic and trade relations among mainland, Hong Kong, Macau and Taiwan after CEPA’; CASS,

‘CEPA: origin, nature and implications’.23. CASS, ‘CEPA: origin, nature and implications’.


36

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

Negotiations and impact

Negotiations started in early 2002 but were reportedly not easy because of the widesectoral coverage. Beijing wanted to promote Hong Kong’s interests, while keepingthe agreement WTO-compliant and keeping in mind the possible impacts onthe mainland economy as well as other countries’ reactions.24 On 29 June 2003, theCEPA was signed in Hong Kong by the new Chinese Premier Wen Jiabao, andimplemented at the start of 2004. The CEPA is a ‘living’ document to which newcontent can be added if both parties agree. In subsequent iterations, CEPA II to VI,the mainland granted duty-free entry to more HK products and preferential treatmentto additional services.

CEPA has helped HK keep its ‘niche’ manufacturing sectors. The exports oftraditional Chinese medicine, jewellery and watches, chemicals and informationtechnology products from HK to the mainland have increased since the signingof the CEPA.25 Moreover, according to the Hong Kong Trade DevelopmentCouncil, the agreement has encouraged the further development of productionnetworks in which Hong Kong companies produce intermediate goods withcompetitive technologies and export them to the mainland for further labour-intensive processing.26

In services, the agreement opened many service sectors earlier or more widely toHK companies and individuals than were available to other countries under China’sWTO commitments. This concession was intended to reaffirm HK’s position asa gateway for foreign businesses to enter the mainland market.27 It led to amushrooming of Hong Kong businesses on the mainland in 2004. A researcher of theNDRC has observed that the increasing entrance of HK firms expanded the servicesavailable on the mainland, and brought in business experience to mainlandcompanies.28

In particular, policymakers and academics in China and HK hold the view that themajor and long-term benefits of the CEPA would be the integration of mainlandmanufacturing and HK’s manufacturing services—including consultancy, logisticsand banking. The CEPA helps integrate HK’s service sectors closer with itsmanufacturing bases in Guangdong. It also allows HK services companies toparticipate in projects being undertaken by China’s state-owned companies as well asthe mainland’s small and medium enterprises, rather than only for those by foreigncompanies and joint ventures as before the agreement. HK’s services formanufacturing have catered to the needs of manufacturers in the mainland (whetherowned by HK or the mainland), reduced the cost in services and helped them enhancespecialization and scale of production. The agreement has facilitated the formation of

24. Ibid.25. Zhang and Wei, ‘Mainland–HK trade fruitful’.26. Ibid.27. Eden Y. Woon (from the HK General Chamber of Commerce), ‘Wider implications of CEPA’, HKGCC

Chamber CEPA Papers, (July 2003).28. Guan, ‘Economic and trade relations among mainland, Hong Kong, Macau and Taiwan after CEPA’.


37

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

production chain networks between HK and the mainland, so far mainly in the PearlRiver Delta.29

Case II: China–ASEAN Free Trade Agreement (CAFTA)

Initiation and progress

In the late 1990s, fear of the ‘China threat’ was rampant among ASEAN countries.In particular, ASEAN governments worried that when China joined the WTO itwould out-compete ASEAN’s industries in domestic and export markets, and divertforeign direct investment. At the 2000 ASEAN–China Summit in Singapore,ASEAN leaders raised their concerns with the then Chinese Premier Zhu Rongji andasked China to pay special attention to their economic interests. Zhu responded thatChina and ASEAN could explore the possibility of a free trade relationship, to thesurprise of other countries as well as, apparently, to his Chinese delegation.30

Although Chinese officials were surprised by Premier Zhu’s proposal, they took swiftaction to realize this initiative given the significance of the leadership’s commitment. Ayear later, a report on Economic Cooperation by the China–ASEAN Experts Group wassubmitted to the leaders, and the Group’s recommendation to establish a free trade areawas endorsed. At the next ASEAN–China Summit in November 2002, the leaderssigned the Framework Agreement on the Comprehensive Economic Cooperation.Because some ASEAN countries doubted the CAFTA would bring real benefits to themas China claimed, China proposed an ‘Early Harvest Program’ (EHP)—a fast-tracktrade liberalization of agricultural products—to ‘let ASEAN pick the peaches and tastethe sweetness first’.31 A Sino–Thai PTA on trade in vegetables and fruits, as part of theEHP, was signed in 2003 and came into effect on 1 October 2003, earlier than for otherASEAN countries. The intention was to accelerate bilateral trade liberalization andshow other ASEAN countries the potential benefits of the partnership. In November2004, the Agreement on Trade in Goods, which came into force on 20 July 2005, and theAgreement on Dispute Settlement Mechanisms were concluded. In January 2007, theAgreement on Services of CAFTA was signed at the 10th ASEAN Summit; negotiationon investments was scheduled to be completed by the end of 2008.

Motivations

It is widely acknowledged among Chinese officials and scholars that the motivationof Beijing in proposing a PTA to ASEAN was more political than economic. First,

29. Ibid.; Xiuli Guan (from the NDRC of China), ‘Xianggang Fuwuye Yu Fan Zhujiang Sanjiao Zhizaoye DeYoushi Hubu, Hezuo Hudong’ [‘The complementary and cooperation between Hong Kong services and Pan-RiverDelta manufacturing’], Review of Economic Research no. 9, (2006); Xiaoji Zhang (Development Studies Centre ofthe State Council), ‘CEPA Yu Liangdi Shengchanxing Fuwuye Hezuo Tanlun’ [‘CEPA and manufacturing servicescooperation between the mainland and Hong Kong’], Forward Position in Economics, (September 2006); Zhang andWei, ‘Mainland–HK trade fruitful’; Jianping Zhang (from the NDRC), ‘Zhengque Renshi He Kandai CEPA ShishiYilai De Zuoyong He Yingxiang’ [‘Adequately view the impacts of CEPA since implementation’], MacroeconomicStudies no. 7, (2006); Tao Qu and Shanmin Li, ‘CEPA Dui Liangdi Zhizaoye Fazhan De Yingxiang’ [‘CEPA’simpacts on manufacturing in the mainland and Hong Kong’], International Economics and Trade Research 20(4),(July 2004).

30. Interviews, Beijing, March 2006.31. Interview with trade officials and academics in Beijing, March–May 2006.


38

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

China wanted to allay ASEAN’s worries about the repercussions of China’saccession to the WTO.32 As part of the ‘mulin youhao’ [peaceful and friendlyneighbourhood] policy, Chinese policymakers hoped the CAFTA would stabilizeSino–ASEAN political and economic relations, which Beijing saw as crucial increating a peaceful strategic environment.33 Second, the CAFTA initiative wasregarded as a diplomatic landmark for China in taking the leading position inpropelling the progress of East Asian cooperation by forging institutionalarrangements and making economic concessions first. It gave China a diplomaticadvantage over Japan. Third, China and ASEAN hoped the CAFTA would strengthentheir voice as a group in global trade and economic issues.34

As for economic interests, Beijing wished first to guarantee the supply of energyand raw materials from ASEAN and, second, to help diversify export markets.Chinese trade officials thought that CAFTA would be helpful in offsetting tradeprotectionism in America and Europe, and in reducing the dependence of bothparties on those markets.35 China obtained acknowledgment of its market economystatus (MES) from ASEAN in September 2004, before the agreement on goods wassigned. Moreover, Chinese policymakers view PTAs as an important policy optionto create more space for economic development. They hoped the enlargement ofmarket size and the establishment of market coordination mechanisms in China andASEAN would improve the investment environment and attract more investmentfrom outside the region.36

Domestic coordination

The government’s announcement that it would negotiate a PTA with ASEAN causedlittle concern to domestic sectors other than agriculture. The Ministry of Agriculture(MOA) organized its own study on the potential impact of the CAFTA on China’sagriculture. The report was not optimistic regarding the prospects for producers oftropical produce and raw materials in South China. MOFCOM responded that thoseinterests likely to be adversely affected should ‘look at the big picture’ and considerthe national interest; as Premier Zhu directed, ‘we should calculate the politicalbalance sheet’.37 As a result of the EHP, imports of agricultural products into the

32. Interviews with many academics and officials in Beijing, February–June 2006. Also see Yunling Zhang andZhou Xiaobing, eds, Dongya Hezuo De Jincheng Yu Qianjing [The Progress and Prospect of East AsianCooperation ] (Beijing: Shijie Zhishi, 2003), p. 14.

33. Interview with a trade official in Beijing on 23 March 2006. Changwen Xu, Guanghui Li and Wei Li,Zhongguo Lingpao Dongya Jingji Hezuo [China Leading the Race of East Asian Economic Cooperation ] (Beijing:China Customs Press, 2003), p. 144; Zhang and Xiaobing, eds, The Progress and Prospect of East Asian Cooperation,p. 130. Yunling Zhang and Zhao Jianglin, eds, Yatai Quyu Hezuo De Fazhan [Developments of Asia PacificCooperation ] (Beijing: Shijie Zhishi Press, 2003), pp. 13–16.

34. Xu et al., China Leading the Race of East Asian Economic Cooperation, pp. 157–158.35. Ibid., p. 144. Yunling Zhang, ed., Shijie Quyuhua De Fazhan Yu Moshi [The Development and Models of

Regionalization in the World ] (Beijing: World Affairs Press, 2004), p. 14; Zhang and Jianglin, eds, Developments ofAsia Pacific Cooperation.

36. Beijing also expected that the Chinese diaspora in Southeast Asia would facilitate Chinese investment there.Michael Jacobson, ‘Navigating between Disaggregating Nation States and Entrenching Processes of Globalisation.Reconceptualising the Chinese Diaspora in Southeast Asia’, Journal of Contemporary China 18(58), (January 2009),pp. 69–91.

37. Interview with an expert on ASEAN.


39

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

markets bordering ASEAN, in particular in Guangxi and Yunnan provinces,increased suddenly and caused adverse impacts on local Chinese agriculturalproducers. The MOA and the local government of Guangxi Province submittedinternal reports to MOFCOM regarding the negative effects.38 MOFCOM argued thatliberalizing the agricultural industry would be beneficial for improving itsproductivity and competitiveness, and cited the positive impacts of liberalizationunder the WTO on some sectors as a precedent. The central government tried todivert attention from costs to opportunities by letting Guangxi hold an annual China–ASEAN Expo, and by funding Yunnan’s infrastructure development as part of theGreater Mekong River Sub-regional cooperation.

During the negotiations, conflict among domestic interests sometimes occurredbetween different parts of a production chain. For instance, the reduction of industrialinput prices would be detrimental to raw material producers but beneficial toprocessors further down the production chain. The trade negotiators would oftenattend more to the interests of the former than to the latter because they thought thenegative effects would be more severe and more concentrated than the reduction ofpotential profits for processors.39 Moreover, some raw material producers are bigstate-owned enterprises, generally acknowledged to be the companies with the mostinfluence on the central government in China.

As noted by the China–ASEAN Business Association and economists, intra-industry trade has increased significantly between China and ASEAN, changing theeconomic structure of the region.40 China and ASEAN had previously largely beencompetitors in third country markets, but with the implementation of the CAFTA,ASEAN increasingly exports raw materials and components to China, where they areprocessed and assembled before being exported to third countries (mainly the US andEurope). There is a risk to both ASEAN and China that the products are tooconcentrated in electronics, and the final market is over-dependent on the US.41

However, MOFCOM is glad to see that ASEAN’s economic dependence on the US,Europe and Japan is gradually being shifted to China, so that ASEAN economies areincreasingly ‘bound’ with that of China.42

During the process of negotiating and implementing CAFTA, Beijing has learnedthat PTAs are a useful implement for achieving foreign policy goals, and that PTAsare most effective as an instrument when they provide substantial benefits so that theother party will increase its economic dependency on China.43 Moreover, becauseCAFTA caused other countries to be eager to enter PTAs with China, Chinesepolicymakers feel that championing this agreement has helped increase China’sleverage in PTA negotiations with others.

38. Interviews with officials at the MOA and the Bureau of Commerce of Guangxi.39. Interview with a trade official.40. Interview with the Director of the Business Association. Also see John Ravenhill, ‘Is China an economic

threat to Southeast Asia?’, Asian Survey 46(5), (September/October 2006).41. Interview with the Director of the China–ASEAN Business Association.42. Interview with trade officials. As Pan points out, the intra-industry trade between China and ASEAN has

embedded China tightly in global economic networks, instead of enhancing, the Chineseness of Chinese businesses.Chengxin Pan, ‘What is Chinese about Chinese Businesses? Locating the “Rise of China” in Global ProductionNetworks’, Journal of Contemporary China 18(58), (January 2009), pp. 7–25.

43. Interview with a MOFCOM official in Beijing on 23 March 2006.


40

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

Case III: Australia–China FTA (AUCFTA)

Beijing’s motivations for accepting Australia’s proposal

When China started to embark on preferential trade agreements in internationaleconomic cooperation, the Australian government became worried that it would loseout to ASEAN and other countries in the Chinese market. The AUCFTA is reportedto have been proposed by Australia during one of the high-level visits by Australianleaders to China.44 Political analyses of the proposed agreement were conducted as apreliminary assessment by the Ministry of Foreign Affairs (MFA) and the ChinaInstitute of Contemporary International Relations (CICIR), a quasi-governmentalthink tank mainly concerned with state security.

Both institutions gave positive reports on the state of bilateral political relationsand on the potential economic and political benefits for China from strengtheningcooperation with Australia.45 First, the political conditions were considered‘mature’ enough for a PTA. In other words, sufficient political trust existedbetween the two countries and they did not have ‘fundamental differences’.46

Beijing appreciated Australia as offering First World goods and services without‘the political baggage that comes with the Americans and the Europeans’.47

Second, Australia was an important country in the Southern Pacific as well as in theSouthern hemisphere more generally. In Beijing’s strategic map, Australiabelonged to the ‘big neighbourhood’ so the ‘friendly neighbourhood’ policy shouldapply.48 And finally, Beijing felt Sino–Australia political relations were not closeenough, and hoped the FTA could promote political trust, like the China–ASEANFTA had done.

There were two major economic motivations for China in negotiating a PTA withAustralia. First, Beijing hoped the PTA would secure a ‘stable’ supply of resourcesfrom Australia, since energy security had become a priority in China’s foreigneconomic policy objectives. Beijing believed the Canberra government couldconstrain company behaviours on issues like raising prices or even switchingbetween contracting partners. Besides, the prospective enhanced investmentconditions for Chinese companies were expected to put them on a par with thosethat American investors in resource exploration enjoyed in Australia (because of theAustralia–US Free Trade Agreement). During the negotiations, Beijing demandedthat Canberra allow Chinese workers to staff China’s resource production chain inAustralia, but Canberra has considered this proposal to be too intrusive.49 Second,since Australia was the demandeur in proposing the PTA, Beijing could ask Canberrato grant China market economic status, thereby setting a precedent that it could

44. Interviews, Beijing, 2006.45. Interview with a researcher at the Department of Policy Research of MFA and a researcher at CICIR. Also see

Jiechi Yang, Deepen All-Round Cooperation and Promote Common Prosperity, Speech by Vice Minister Yang Jiechiof the Ministry of Foreign Affairs of the People’s Republic of China at the Asia Society of Australasia Center inMelbourne, 13 December 2005.

46. Interview with a researcher at CICIR, who participated in the preliminary evaluation, 18 April 2006, Beijing.47. Rowan Callick, ‘A mutual attraction’, Australian Financial Review, (23 August 2004).48. The small neighbourhood refers to countries adjacent to China including Southeast and Northeast Asia and

countries bordering China.49. Interview, Canberra, 2006.


41

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

request the EU and the US to follow.50 Although some Australian industriesexpressed concerns regarding remnants of the planned economy in China, Australiarecognized China as a market economy in April 2004 so as not to fall far behind othercountries in getting preferential access into the Chinese market.51

Upon Chinese President Hu Jintao’s visit to Australia in October 2003, the twogovernments signed the Australia–China Trade and Economic Framework, in whichthey agreed to look into the feasibility of a bilateral free trade agreement. The JointFeasibility Study was finished in March 2005, and formal negotiations commenced inApril that year. Although the Feasibility Study was accomplished earlier than theOctober target and the leaders of both countries have repeatedly expressed theirsupport for the initiative, the progress of Sino–Australian free trade talks has been farslower than those between China and ASEAN, Pakistan or Chile. As discussedbelow, domestic resistance, not least in China, and different approaches betweenBeijing and Canberra to the design of PTAs have been the two main obstacles.The bureaucratic capacity of China for PTA negotiations is another constraint.MOFCOM negotiators have lamented that domestic industrial sectors could notprovide enough support to the negotiation.52

Domestic resistance

Major resistance in China to the AUCFTA has come from the agricultural and servicessectors. Inagriculture, theMinistryofAgriculturehasbeenthemoststubbornopponent.53

First, officials argued that China’s trade negotiators had already made too manyconcessions under the WTO, which had caused major damage to Chinese agriculture.Besides, they argued, contrary to the assertions of MOFTEC, the competitiveness ofChinese agriculture had not increased significantly because of liberalization under theWTO. MOA noted that intra-industry trade in wool textiles had already been happening;further tariff reduction through a PTA with Australia would not bring much more profit totextile producers but would damage raw material producers in China. Moreover,compared with China’s PTA with ASEAN, the volume of agricultural trade betweenChina and Australia was much bigger, and the geographical area to be affected by thepotential PTA was much wider—including Heilongjiang, Liaoning, Shandong, Hebei,Shaanxi, Gansu and Inner Mongolia, instead of only Guangxi, Yunnan and Hainandao inthe ASEAN case. Shaanxi, Inner Mongolia and Gansu are also provinces where ethnicminorities reside, most of whom rely on cattle farming for a living.

Minority issues have become increasingly sensitive in domestic politics, and thecentral government regards them as potential risks for social stability. Similarsensitivities are shown towards agricultural issues, prompted by rising peasantprotests, and therefore the government placed solving ‘three agricultural’ problems—peasant, rural areas, and agricultural production—at the top of the list of governmentpolicy priorities at the 16th National People’s Congress in 2004. They have remained

50. A total of 66 countries have accepted China’s status as a market economy since New Zealand stood out as thefirst acceptor in April 2004; this group includes Australia, Brazil, South Africa and Russia.

51. See Riding the Chinese Dragon: Opportunities and Challenges for Australia and theWorld, Australian Chamberof Commerce and Industry, available at: http://www.acci.asn.au/IssuesPapersMain.htm, (accessed August 2005).

52. Interview with a MOFCOM official, April 2006, Beijing.53. The information on MOA’s views is based on interviews with MOA officials, Beijing, May 2006.


42

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

a priority in national policies since then.54 Chinese Vice Minister of Commerce,Ms Ma Xiuhong, flagged in March 2005 that any negotiations with Australia overagriculture would be tough because if the government did not handle the issue of 740million peasants properly, it would cause trouble or social unrest.55

In services, Chinese domestic providers and relevant government institutions havestaunchly resisted liberalization beyond WTO commitments. Chinese officials atMOFCOM and ministries responsible for service industries (including the Banking,Insurance, Securities Regulation Commissions, the Ministry of Information andTransportation, the Ministry of Transportation, etc.) asserted that China wouldhonour its WTO commitments first, judge the impact, and then decide what to donext. This meant no special treatment would be granted to other countries before anassessment was obtained on the completion of the implementation of WTOcommitments in December 2006. For instance, although the central governmentrecognized the necessity of reforming the banking sector, it prefers to maintaincontrol of the reform process and to ensure China’s financial security because itbelieves domestic banks are still vulnerable to foreign competition. Beijing is alsoworried that if it gives preferential treatment to Australia, other trade partners,particularly the US or the EU, will demand the same treatment on the basis of WTO’smost-favoured-nation (MFN) principles. Moreover, the Ministry of InformationIndustry (MII) claims that China is worried about information security if foreigncompanies tap into the intelligence system, although Australia argues that foreigntelecommunications companies like SingTel have been operating in Australiawithout security problems. An important reason for the MII to resist the AUCFTA,however, was that the telecommunications sector in China, major state-ownedcompanies have been making huge profits from monopolies, and have pressured theMII not to rush to open markets to foreign competition.

Domestic resistance to the FTA has also come from the NDRC, which retainspower and appears to have inherited a conservative position on industrial policiesfrom its former incarnation, the State Planning Agency. MOFCOM is wary ofmoving beyond traditional agendas and ideas without the approval of the NDRC.Australian negotiators suggested that they believed that the negotiations would haveproceeded more rapidly if the NDRC had been more centrally involved in the talks.56

Different approaches to PTA negotiation

China prefers a phased approach to trade liberalization under the PTA while Australiaseeks one comprehensive deal. One source of disagreement is which set ofinternational rules should apply to a treaty between the two countries—Article XXIVof the General Agreement on Tariffs and Trade, which permits ‘regional’ agreementsas an exception to the most-favoured-nation principle, or the Enabling Clause (whichallows special trade arrangements among less developed countries). Australia seeks a‘single undertaking’ on the grounds that the PTA should cover ‘substantially all trade’

54. See ‘Zhongyang guanyu zengjia nongmin shouru ruogan zhengce de yijian’ [‘The central government’s viewon policies to increase peasants’ income’], People’s Daily, (9 February 2004).

55. ‘China fears FTA’s impact on farming’, ABC Australia, (22 March 2005).56. Interview, Canberra, May 2007.


43

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

as required by the GATT’s Article XXIV. However, Chinese negotiators insist thatbecause China, as a developing country, is not subject to Article XXIV but to theEnabling Clause, it does not need to include all sectors in an agreement even ifAustralia offers to do so.57 Therefore China prefers to negotiate trade in goods first, andservices and investment later, as it has done with ASEAN, Chile and Pakistan. Chinesenegotiators also argue that PTAs have proliferated in the world, but few of them arereally ‘free’. According to the Chinese government, the most important criterion for itsPTAs is that they should be ‘mutually beneficial’, and certainly tolerable in terms of theimpact on the domestic economy.58 As a result, China has been strongly defending itsagriculture and services sectors against Australia’s efforts to open them. For the samereason, China prefers a positive-list approach to a negative-list approach (Australia’spreference) to tariff reduction and liberalization in services and investment.59

Besides, when China agrees to a proposal for international cooperation, the centralgovernment usually argues it will bring both opportunities and challenges but on thewhole will be beneficial, without making specific assessments. In this way, the centraldecision makers try to dismiss the potential costs on both sides. However, the attemptto hide challenges does not always succeed. When Australian negotiators presentedquantitative results of the potential losses to the Australian economy of a PTA, theirChinese counterparts were doubtful but could not provide an alternative calculation.Chinese negotiators are often in an embarrassing situation at the negotiating tablewhen Chinese domestic industrial sectors provide inaccurate or inconsistent statisticsand offers.

Moreover, Chinese regulators hold that many behind-the-border, or WTO-plusissues, such as intellectual property rights (IPR), transparency, technical barriers to trade(TBT) and sanitary and phytosanitary measures (SPS), cannot be changed overnight.Australian industries, in contrast, believed progress on these issues to be crucial for theirbusiness with China. The IPR issue has especially been a point of contention. Australiannegotiators have insisted that its manufacturers cannot benefit from the Chinese marketbecause of inadequate IPR protection in China. Beijing has rejected this accusation,reasoning that IPR breaches happen in China despite the central government’s bestefforts, because of problems in local implementation. China has been surprised byAustralia’s draft chapters on behind-the-border issues because it feels that Australia isattempting to alter the Chinese domestic regulation system, and that this wholesalerestructuring is not the task of a PTA, which in Chinese views is supposed only to givepreferential treatment within an existing regime to the foreign partner.

China’s failure to table a specific offer on tariff reductions in September 2006disappointed Australian negotiators, who then put their offer on hold. After the seventhround of talks in December 2006, Australia refused to continue talks on tariffs unlessthe Chinese submitted a substantially better offer. China has also remained sensitive on

57. Technically, the Australian government is correct in that an agreement involving an industrialized economy issubject to Article XXIV. Nonetheless, the practice in many bilateral agreements between industrialized anddeveloping economies is that the latter exempt more sectors from coverage and are afforded longer periods toimplement the agreement.

58. Interview with Chinese officials, April–May 2006.59. Under a positive list approach, liberalization only occurs in sectors that are specifically listed in the treaty

(under the alternative negative list approach, liberalization occurs across all sectors except for those exempted by thetreaty).


44

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

services and investment, although Australia regards services and investment asconstituting their major interests in this PTA, and have sent strong messages to China todemand an improved offer. China’s continued reluctance to give preferential treatmentto Australian services and investment beyond its commitments under the GeneralAgreement on Trade in Services (GATS) triggered the chief Australian negotiator, RicWells, to make the extraordinary comment at an Australian Parliamentary Committeehearing that ‘the Chinese government doesn’t want an FTA’.60 Although Chinesenegotiators were under pressure to realize the target set by Chinese Premier Wen Jiabaoin April 2006 that a major breakthrough in China–Australia PTA negotiation should bemade within two years, they believed that such a development would be unlikely unlessthe leadership intervened in the negotiation process and imposed a settlement ondomestic industries.61

Conclusion

China, like other countries, uses PTAs to pursue a variety of foreign policy interests.Unlike the PTAs of most other large economies, however, those involving China arediverse in their structure and coverage, reflecting the variety of diplomatic andeconomic objectives that Beijing is pursuing through its various partnerships. Theyvary substantially between the vague framework agreements signed with ASEANand Pakistan to the comprehensive agreements being negotiated with Australia andNew Zealand—their comprehensiveness not just a matter of Beijing’s own choicebut also reflecting the preferences of their trading partners. Many less developedcountries (LDCs) prefer the lack of specificity and obligation of a vague frameworkrather than the legalistic approach that industrialized economies (including Japan)require of PTAs—not least because agreements involving the latter are subject to themore stringent requirements of the WTO’s Article XXIV. Not surprisingly, China’sfirst negotiation with one of the larger industrialized economies, Australia, hasproved more difficult than its other PTA negotiations to date not least because ofthe Australian government’s insistence on a comprehensive PTA that includesagricultural trade and liberalization of the services sector.

China’s stance at the negotiation table of PTAs is shaped by domestic policymaking.The political leadership plays an important role, as demonstrated in the initiation andthe Early Harvest Program of the China–ASEAN FTA. China usually tries toannounce major decisions on an PTA during high-level visits by its leaders to thepartner country as a ‘gift’ to the host as well as an example of diplomatic achievement.However, as in the policy-making process in other countries, resistance by domesticsectors can frustrate China’s trade negotiators. Whether the conflict of domesticinterests can be coordinated not only depends on the relative power among ministriesbut also on the political sensitivity of the sectors facing liberalization, as well as howmuch the central government prioritizes ‘economic security’ over ‘liberalization’. In adifficult case like the China–Australia PTA, the record of negotiations to date suggeststhat breakthroughs only occur when top leaders intervene.

60. Budget Estimates, Australian Senate Standing Committee on Foreign Affairs, Defence and Trade, 29 May2007, available at: http://www.aph.gov.au/hansard/senate/commttee/S10267.pdf, p. 114.

61. Interviews, Beijing, April 2007.


45

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

Of the PTAs that China has concluded or is negotiating, that with Hong Kong is theone that was most consciously aimed at the promotion of production networks.Moreover, it was designed to give Hong Kong-centred networks an advantage overthose based in Taiwan. But its impact on the promotion of specifically ‘Chinese’networks is more questionable. The reason is that the CEPA with Hong Kong hasa relatively liberal definition of what constitutes a Hong Kong company.62

The agreement benefits Hong Kong subsidiaries of multinational corporations just asmuch as it aids local Chinese capital.

More broadly, the impact of the CEPA with Hong Kong on manufacturingnetworks is likely to be limited—primarily because components from Hong Kong forassembly in the mainland have already entered the market duty-free. In fact,components imported from Hong Kong for processing in the mainland and forultimate export are not even covered by the CEPA but by the mainland’s ‘Regulationon Goods for Processing Trade’. This regulation provides for exemption from importduties, provided the assembled product is exported. The division of labour inmanufacturing between Hong Kong and the mainland had already been firmlycemented before the CEPA was put into place; most labour-intensive manufacturinghad migrated North. The main impact of the CEPA on production networks is likelyto be in facilitating the entry to the mainland market of Hong Kong providersof services, perhaps the most important of which are financial services to themanufacturing sector. Apart from the intention to boost the Hong Kong economy bygiving preferential treatment to its services providers, policymakers in Beijing hopedto gain knowledge and experience in the service sector without worrying about theimpact of foreign competition on national economy. At the same time, enhancedaccess of services provided by Hong Kong companies to the mainland may helpmanufacturers reduce costs and increase specialization; it is doubtful, however,whether the provisions of the CEPA itself will facilitate the forming or restructuringof production networks.

How much economic difference PTAs will make in general is a matter of ongoingdebate. They are certainly unlikely to meet all of China’s expectations for a securesupply of raw materials at favourable prices. Moreover, low MFN tariff levels,reinforced by provisions such as duty-drawback schemes and the establishment offree trade zones that facilitate trade in components, restrictive rules of origin and theexclusion of politically-sensitive products from liberalization measures, all have theeffect of reducing the likely aggregate economic gains from preferential tradingagreements. PTAs may have little overall impact on an economy of the size anddynamism of that of China (but nonetheless may still cause domestic politicaldifficulties given the vulnerabilities of sensitive sectors). But it would be mistaken tojudge PTAs solely on their economic contributions: China, like other countries,clearly believes that they are potentially important diplomatic instruments.

62. To qualify as a Hong Kong company for the purposes of the agreement, the company must be registered inHong Kong, pay taxes on its profits there, and have 50% of its total employees from Hong Kong. A foreign companyis regarded as a Hong Kong company one year after merger with or acquisition of a controlling share of a Hong Kongcompany.


46

Dow

nloa

ded

by [

Uni

vers

ity o

f M

iam

i] a

t 14:

07 2

2 Se

ptem

ber

2013

china's move to preferential trading: a new direction in china's diplomacy

Documents