Why China needs to cham­pion free trade

China Daily (Canada) - - LIFE -

In the decade to come, China has a huge op­por­tu­nity to seize the ini­tia­tive and be­come an ar­chi­tect of free trade. An­chor­ing newfree trade ar­eas would help it make the tran­si­tion to a more sus­tain­able growth model, based on con­sump­tion rather than low-cost ex­ports, a goal set out in its 13th Five-Year Plan (2016-20). It would also help with the coun­try’s other eco­nomic goals – namely in­ter­na­tion­al­iza­tion of its cur­rency and lib­er­al­iza­tion of cap­i­tal ac­count reg­u­la­tions.

China has an op­por­tu­nity to make the Belt and Road Ini­tia­tive the foun­da­tion of a huge East-West FTA, with it­self as a ma­jor con­sumer and lower-cost lo­ca­tions as man­u­fac­tur­ing cen­ters. Span­ning 65 coun­tries across Asia, theMid­dle East andWest Africa and Europe, the Silk Road Eco­nomic Belt and 21st Cen­tu­ryMar­itime Silk Road aim to cre­ate two huge trade cor­ri­dors that would en­com­pass a to­tal pop­u­la­tion of 4.4 bil­lion and 40 per­cent of the global GDP. To­gether they would ri­val the US-led Trans-Pa­cific Part­ner­ship Agree­ment in size. Agreed in Oc­to­ber 2015, the TPP cov­ers 12 Pa­cific Rim coun­tries, in­clud­ing the US and Ja­pan, which ac­count for 40 per­cent of world trade. It is the big­gest trade agree­ment launched since the mid-1990s.

China has been one of the big­gest ben­e­fi­cia­ries of free trade. Its role as a man­u­fac­turer for the world has at­tracted a huge amount of in­vest­ment and pro­pelled it to the sta­tus of num­ber one or num­ber two trad­ing part­ner for most large na­tions. This growth has trans­formed the wealth of the coun­try and its cit­i­zens. Since 1995, av­er­age an­nual GDP growth of more than 7 per­cent has trans­formed both the econ­omy and the liv­ing stan­dards of many of its peo­ple.

China’s eco­nomic goals have changed, but free trade re­mains im­por­tant. How­ever, rather than driv­ing ex­port-led growth, China aims to­move­upthe value chain, im­port­ing con­sumer goods and ex­port­ing higher-value prod­ucts and ser­vices. The dan­ger of theTPP­toChina is that it could im­pact the coun­try’s trade op­por­tu­ni­ties over a pe­riod of time. When­trade bar­ri­ers are re­duced, coun­tries tend to spe­cial­ize in the sec­tors where they are most ef­fi­cient, com­pa­nies in­vest in economies of scale, the costs of pro­duc­tion fall, con­sumers be­come bet­ter off and eco­nomic growth rises.

Form­ing an FTA based on the Belt and Road Ini­tia­tive would help China ful­fil many of its goals, as China would be­come the eco­nomic an­chor for the FTA, so the ren­minbi could be­come its cur­rency an­chor, mak­ing it a ma­jor trad­ing cur­rency.

The Belt and Road Ini­tia­tive is likely to de­liver more sus­tain­able growth to all economies along the routes. Asia’s economies have huge in­fra­struc­ture re­quire­ments over the next decade, as they seek to move up the value chain while ab­sorb­ing fast-grow­ing pop­u­la­tions. China can pave the way for greater growth by help­ing to fi­nance high-qual­ity roads, rail­ways, ports and other in­fra­struc­ture. But if a Belt and Road FTA is es­tab­lished, the ben­e­fits would be even greater.

Re­gard­less of the frame­work, China needs to ac­cel­er­ate re­forms and in­te­grate its econ­omy fur­ther with the rest of the re­gion and world. This means ex­pos­ing its in­dus­tries to more com­pe­ti­tion and giv­ing for­eign in­vestors greater on­shore ac­cess. The TPP pro­motes a high stan­dard for such in­te­gra­tion among its mem­bers, and China will also need to step up.

Trade agree­ments are gen­er­ally an­chored to one eco­nomic pow­er­house, which tends to set the rules. While the Belt and Road Ini­tia­tive pro­vides the per­fect op­por­tu­nity for such an FTA, the TPP shows the po­ten­tial dan­ger to China of not tak­ing such an ini­tia­tive.

As China en­ters a newe­co­nomic era, its am­bi­tions for sus­tain­able eco­nomic growth de­pend partly on tak­ing a lead­er­ship in free trade. To suc­cess­fully move up the value chain and be­come a con­sumer of goods made else­where, the time has come for it to take a lead.

The au­thor is man­ag­ing di­rec­tor and re­gional head of trans­ac­tion bank­ing, Stan­dard Char­tered Bank in Greater China and North Asia.

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