Chinese Membership in the CPTPP: Greater Benefits Than Downside Risks

On 16 September 2021, China formally applied to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The CPTPP took effect on 30 December 2018, and provides rigorous, up-to-date trade rules for its 11 members, including four ASEAN members (Brunei, Malaysia, Singapore, and Vietnam) and seven other countries, namely Australia, Canada, Chile, Japan, Mexico, New Zealand, and Peru. China’s application to join the CPTPP, if successful, has important economic implications for the CPTPP partners and the rest of the world. The perceived economic benefits of Chinese membership in the CPTPP are slightly greater than the downside risks, according to the 2022 State of Southeast Asia (SSEA) Survey.

China is one of several countries — including the United Kingdom, South Korea, Taiwan, Indonesia, Thailand, and the Philippines — that have expressed interest in joining the CPTPP. The CPTPP offers a smaller market size than the Regional Comprehensive Economic Partnership Agreement (RCEP), but it provides a deeper commitment to liberalise trade than the RCEP.  In 2020, CPTPP partners collectively recorded US$10.7 trillion of gross domestic product (GDP) and 511 million in population, which amounted to 41.3 per cent of RCEP’s combined GDP and 22.4 per cent of RCEP’s population. The CPTPP would eliminate 98 per cent of tariffs on imports of goods among its partners, while the RCEP would eliminate 90 per cent of tariffs over the next 20 years. Provisions on digital trade and non-tariff measures (NTMs) in the CPTPP are also more comprehensive than those in the RCEP, suggesting that the CPTPP has a greater capacity to promote trade.

Chinese membership in the CPTPP is expected to deliver substantial benefits for China and other CPTPP partners. An empirical study estimates that the current 11-member CPTPP will increase global income by about US$147 billion annually. If China joins the CPTPP, income gains from the CPTPP will quadruple to US$632 billion. Enlarging the CPTPP to China and other countries such as South Korea, Indonesia, the Philippines, and Thailand will generate global income gains of about US$1,225 billion annually — a sevenfold increase compared to the current CPTPP.

The SSEA survey finds that, on balance, a majority of Southeast Asians view Chinese CPTPP membership positively, for the world economy and for China. About 53.2 per cent of ASEAN respondents perceive that having China in the CPTPP will provide economic benefits to China, the United States (US), and other CPTPP partners. These benefits include reducing economic tensions in the region — for instance, bilateral trade tensions between China and Australia — and resolving the US-China trade war (31.0 per cent of respondents), and spurring China to pursue domestic reforms and to modernise its economy (22.2 per cent) (Figure 1).

Figure 1: ASEAN’s perceptions on potential benefits and downside risks of Chinese membership in the CPTPP

Although the US is not a member of the CPTPP, it could benefit from Chinese membership through two channels. The first channel is the harmonisation of NTMs to reduce trade costs for US exporters to China. An analysis of data from UNCTAD’s Global NTM Database reveals that China maintains 7,256 measures, which are greater than the US (6,757 measures). The CPTPP provisions on sanitary and phytosanitary measures (SPS) and technical barriers to trade (TBT) consist of regulations that promote transparency and adoption of international standards, which can harmonise NTMs in China and other CPTPP partners. The improved trade regulations and procedures in China should be applied to all trading partners, including the US, in a non-discriminatory manner.

Perceptions of downside risks may reflect concerns over China’s ability (or lack thereof) to comply with the CPTPP rules.

The second channel is the possibility of reducing trade tensions between China and the US. By acceding to the CPTPP, China would need to accept trade rules such as increasing transparency of state-owned enterprises (SOEs) and eliminating performance requirements as conditions for making investment approvals. The CPTPP provisions on SOEs aim to create a level playing field for SOEs and their private competitors. SOEs are required to increase transparency and eliminate discriminatory practices against foreign goods and services. The CPTPP provisions on investment prohibit the use of performance-related preconditions for investment approval, including domestic content and technology transfer requirements. These are two key elements of trade disputes between the US and China. China’s compliance with CPTPP trade rules should address these issues, and hence reduce trade tensions with the US.                     

The remaining 46.8 per cent of SSEA survey respondents perceive that Chinese membership in the CPTPP will increase economic downside risks for China, the US and CPTPP members. These risks include raising economic tensions and the US-China trade war (29.9 per cent), and weakening  the role of CPTPP in the multilateral trading system (16.9 per cent) (Figure 1). The risk of escalating economic tensions is less of a concern in Cambodia (16 per cent of respondents) and Laos (18 per cent), but widely held in Brunei (38 per cent) and Myanmar (47 per cent). Such risk is perceived to be moderate in other ASEAN-CPTPP countries such as Malaysia (27 per cent), Singapore (34 per cent) and Vietnam (32 per cent).

Perceptions of downside risks may reflect concerns over China’s ability (or lack thereof) to comply with the CPTPP rules. These rules require China to undertake substantial reduction in tariffs and unprecedented domestic reforms such as promoting transparency in SOEs, reducing state subsidies to SOEs, increasing intellectual property protection, liberalising foreign direct investment and facilitating electronic commerce and cross-border data transfers. These apprehensions should be mitigated by strengthening the enforcement, monitoring and accountability mechanisms of the CPTPP across all partners, including China. For its prospective CPTPP accession to generate net benefit, China must resolutely commit to trade and investment liberalisation and the CPTPP must be rigorously enforced. The CPTPP plus China stands to deliver mutual benefits for its members; expansion to non-CPTPP ASEAN countries further augments the potential economic returns. China has resisted undertaking domestic reforms of SOEs and strengthening intellectual property protection in the past, but it may now be motivated by the substantial economic gains from the CPTPP and pressures from other countries such as the US. If successful, these domestic reforms should enhance the role of China in promoting the rules-based trading system at the regional and global levels.

2022/57