China and the FTAs

China switches from Soft Power to Slow Power

I lived in China for 10 years without hearing the phrase “FTA – Free Trade Agreement”  , but in the last month “FTA” has been creeping into some very prominent and high level conversations.

At the May Asia Society meeting in New York about the future of US-China relations headlined by an A List including none other than Henry Kissinger, Ronnie Chan (Hang Lung Props) framed a US-China FTA as the cornerstone for a successful economic relationship between the great powers. A few weeks later, economist Andy Xie proposed in Caixin that a Euro-China FTA was the best way to solve what ails the troubled relationship between Beijing and Brussels.

High Profile Whisper Campaigns are China’s “Slow Power” Method

Welcome to Chinese “Slow Power”.  Soft Power was the hallmark of the Hu-Wen administration – and like so many of their initiatives it was

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incomplete and unsuccessful. The Xi-Li era will be about Slow Power. China will focus on slowly but surely setting agendas and influencing the basic rules of the game- and spend less time on superficial issues like popularity polls and public opinion (which were the basic tenets of Soft Power).

Look for FTA to subtly enter the general vocabulary of Chinese international relations and economics, gently washing away the smudges of multilateral rules and WTO court challenges. China was never comfortable with messy multi-party negotiation which tend to be public, unpredictable and subject to formalized institutional rules. China prefers quieter one-on-one relationships where face-saving conversations and horse-trading take place in private. WTO has served China well — read MacGregor’s “No Ancient Wisdom, No Followers “  chapter titled “Coming to Terms with China’s Trade Juggernaut” “The bad news is that WTO rules are proving to be ineffective in dealing with the wide range of discriminatory and distorting Chinese industrial policies…”. But now China is looking to leave the cumbersome rules of a world body behind and upgrade with a series of strategic guanxi-based bilateral relationships.

The PRC Ministry of finance even has a website dedicated to the subject. MOFCOM’s FTA site is introduced , The Chinese Government deems Free Trade Agreements (FTAs) as a new platform to further opening up to the outside and speeding up domestic reforms, an effective approach to integrate into global economy and strengthen economic cooperation with other economies, as well as particularly an important supplement to the multilateral trading system. Currently, China has 14 FTA partners comprising of 31 economies, among which 8 Agreements have been signed already.

What FTA means to the International Business Community:

The Slow Power approach to replacing WTO and multilateral agreements with a network of FTAs is a textbook example of Chinese negotiation. It involves agenda-setting, misdirection, and undermining the authority of conditions that once served a useful purpose but is now inconvenient. By framing all trade disputes as being rooted in a lack of FTAs, China accomplishes three useful goals.

  • It is undermining the validity of WTO and anti-dumping regulations. The problems with Europe aren’t that China or the EU violated rules banning trade subsidies and unfair competition – they are because the machinery of the WTO is antiquated and unfair. If we can just fix the WTO, everyone will get along.
  • It moves the goalposts. The point of the WTO is to follow rules that are THEORETICALLY in the best interests of everyone. The point of FTAs is to get along with China. Look for future FTAs to replace existing multilateral trade agreements, and have a negotiated settlement facility (that will be weakly enforced).
  • It resets the clock. China entered the WTO in 2001 – which provided many benefits, but also obligations, requirements and jurisdictional conditions. Now that China has reaped the benefits of the agreement, it is time to dispense with it and replace it with a set of institutionalized guanxi-style relationships that it can control as it sees fit.

I don’t want to be one of those pontificating blow-hards who goes around quoting Sun Tzu to explain modern Chinese motives, but it’s worth taking a quick look at Chapter 3 of Art of War:

Therefore, the best warfare strategy is to attack the enemy’s plans, next is to attack alliances,next is to attack the army, and the worst is to attack a walled city.

When China sets up FTAs to replace multilateral bodies, it is simply following an age-old strategy of attacking alliances to undermine the plans of its adversaries. Unfortunately, the plans and alliances being targeted are the ones that offer the international business community the most concrete protections it has.

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