An APEC Trade Agenda?: The Political Economy of a Free Trade Area of the Asia-Pacific

4. The Political Economy of a Free Trade Area of the Asia-Pacific: A Chinese Perspective

A Chinese Perspective 73 4 The Political Economy of a Free Trade Area of the Asia-Pacific: A Chinese Perspective Sheng Bin I. INTRODUCTION APEC has long been relevant for China’s economic diplomacy although its significance has been relatively weakened since China’s accession to the World Trade Organization (WTO) in 2001. However, China still attaches great importance to the Asia-Pacific Economic Cooperation (APEC) activities because the “APEC approach” that stresses concerted unilateralism, voluntarism and flexibility provides a unique means of regional co-operation on an experimental basis. As such, APEC can serve strategically for China to implement its Asia-Pacific foreign policy in the long run. Meanwhile, with the rapid proliferation of regional trade agreement and free trade agreements (RTAs/FTAs) in the region, China has also started to set up its own RTAs/FTAs network in the manner of a hub-and-spoke system. Among many proposals, the East Asian Free Trade Area (EAFTA) was particularly favoured by Chinese leaders, in 04 FTAAP Ch 4 6/7/07, 10:13 AM 73 74 Sheng Bin contrast to the ambiguous idea of a Free Trade Area of the Asia-Pacific (FTAAP), which was brought forward and widely advocated by the APEC Business Advisory Council (ABAC). On the one hand, there is little doubt that further trade and investment liberalization and facilitation with institutional reforms and a binding treaty would benefit China in terms of enhancing welfare and structural changes. But, on the other hand, it is uncertain whether the proposed FTAAP would challenge China’s prevailing strategy forAPEC, given the expected institutionalization of the process. Additionally, economic issues, such as the protection of sensitive sectors, and political issues like the U.S.-China relationship and the status of Taiwan, make it more complicated for China to hold a positive attitude towards the FTAAP proposal. Against such a background, it is important to have an insight of China’s policy towards the FTAAP from a political economy perspective. This paper aims to review the current Chinese overall strategy and policies towardsAPEC and regional agreements, and extrapolate the likely position that China would have for the proposed FTAAP based on a political economy analysis of the benefits and costs of the agreement. Section II will briefly depict China’s trade and economic relations with other APEC member economies in terms of trade, foreign direct investment (FDI), balance of payment and trade barriers. Section III reviews recent Chinese trade policy focusing on its development of an RTAs/FTAs network. Sections IV and V conduct a cost-benefit study of FTAAP by probing the gains, impediments, and concerns China would have in joining the agreement. Finally, section VI concludes with an analysis of some possible scenarios. II. CHINA’S ECONOMIC RELATIONS WITH OTHER APEC MEMBERS The Asia-Pacific region is the most important region for China in terms of economic and trading activities. In 2004, 72 per cent of China’s exports and 68 per cent of imports were with other APEC economies.1 The APEC region is also vital in terms of foreign investment with 70 per cent of China’s FDI inflows coming from the region.2 Over the past decade “triangular trade” between China, other East Asian economies and North America (the United States in particular) has emerged that makes up much of China’s intra-regional trade in the Asia-Pacific.3 It means that 04 FTAAP Ch 4 6/7/07, 10:13 AM 74 A Chinese Perspective 75 China is exporting consumer goods and semi-finished manufactures to the U.S. market, while importing raw materials, intermediary goods and capital goods from the region and then processing them with relatively low value-added. In line with such a large volume of trade flows, there are also huge FDI inflows into China, which makes China the third-largest trader and largest developing country recipient of FDI in the world. One of the great concerns for China’s trade relations withAPEC partners is a trade imbalance, particularly with its largest export market — the United States.4 China has been charged as the main culprit for global imbalances, and immediate actions are called upon in order to make necessary adjustments (Bergsten 2005c). However, China explains that the U.S. trade deficit with China is not only overstated due to some technical reasons, such as rules of origin and transshipment via Hong Kong, but also a “natural...