Look Skeptically at China’s CPTPP Application
November 18, 2021
China formally applied to the Comprehensive and Progressive Agreement on Trans-Pacific Partnership (CPTPP) on September 16, the day after the groundbreaking Australia-United Kingdom-United States defense alliance (AUKUS) was announced.
Under AUKUS, the United States will share sensitive nuclear submarine technology and, together with the United Kingdom, help Australia build up its maritime defense capabilities. AUKUS is a clear move to counter China’s increasingly assertive military stance in the South China Sea and against Taiwan.
Chinese president Xi Jinping had openly mused about joining the CPTPP after former president Donald Trump withdrew the United States from its progenitor, the Trans-Pacific Partnership (TPP). Xi’s bold move to submit a formal application one day after the AUKUS announcement is a clear effort to divide the United States from its allies and partners, many of whom share the United States’ concern about China’s military buildup and its increasingly tough economic actions against other countries. Australia, for example, suffered a near-total cutoff of many exports to China after calling for an independent investigation into the origins of Covid-19.
Since submitting its formal application, Beijing has lobbied CPTPP countries to gain support for negotiations on China’s accession. Speaking on November 4 to the China International Import Expo, a trade fair in Shanghai, Xi sweetened the pot by offering to discuss China’s state-owed enterprises (SOEs), industrial subsidies, and other measures as a price of entry.
CPTPP countries should be very skeptical of Xi’s offer. The reason is simple: China has pledged to discipline SOEs, industrial subsidies, and other trade-distorting practices before, and its record of compliance on these and other commitments, as detailed below, is poor. There is no reason to expect Xi’s recent pledges will bring a different outcome. On the contrary, Xi has reversed previous reforms and is doubling down on state support to SOEs and private firms alike.
When China joined the World Trade Organization (WTO) in December 2001, its economy looked far different than it had under Mao Zedong’s command and control system that had decimated the economy and society alike, most notably through the Great Leap Forward and Cultural Revolution.
Premier Deng Xiaoping, who took the helm soon after Mao’s death, launched a “reform and opening up” program that reduced state support for SOEs and pushed them to increase efficiency and profitability, allowed a thriving private sector to grow and flourish, and opened China up to foreign trade and investment.
These reforms, coupled with WTO membership, helped create the modern, competitive economy that we know today—China has the world’s largest economy on a purchasing power parity basis and is the largest trading nation. China also boasts manufacturing giants in steel, aluminum, and other sectors and tech titans in telecommunications, surveillance, e-commerce, and other emerging fields.
In 2001, WTO members had every reason to believe that China’s leaders would continue to move the country along the path toward greater market influence and reduced state control. Indeed, that’s what China pledged to do in its accession agreement.
As a general matter, China pledged to make systemic reforms that would bring the country closer to WTO norms on transparency, openness, non-discrimination, and market-oriented policies.
On SOEs and state-invested companies, China promised to adhere to WTO rules requiring firms to make purchases and sales based solely on commercial considerations, such as price and quality. China also pledged that the state would not influence these commercial considerations. In subsequent bilateral discussions with the United States, China made additional commitments to ensure fair competition among all firms (both foreign and domestic, and state-owned and private) in terms of taxation, access to financing, and other factors affecting the competitive environment.
On industrial subsidies, China pledged in its WTO accession agreement to notify and discipline or phase out a wide range of subsidies for Chinese producers from the central and provincial governments. These subsidies included favorable tax treatment; free or low-cost land, energy, and water; and other non-market benefits. In addition, China committed to eliminating all export subsidies benefiting industrial goods upon accession.
The Office of the U.S. Trade Representative has rightly judged China’s compliance on these and other WTO commitments to be poor. Instead of moving in the promised direction, China in recent years has increased the role of the government and the Chinese Communist Party (CCP) in nearly all aspects of the economy. China is also taking steps to build up globally competitive Chinese firms in a host of industry sectors and wean China off of its dependence on the United States and other foreign suppliers of critical parts and components in strategic industries, such as semiconductors and other sectors included in the Made in China 2025 program.
Made in China 2025 aims to guide the development of Chinese champions in 10 strategic sectors including artificial intelligence, robotics, aeronautics, and other leading-edge industries. Government-directed cyber theft, targeted acquisitions of foreign firms and technologies, and state support for the aforementioned sectors appear to be an integral part of the program. These and other measures have given the government and the CCP a degree of control over the economy that has not been seen since the days of Mao.
Xi, who is laying the groundwork for an unprecedented third term as CCP general secretary, has accelerated the pace of CCP control and government support of industry. He is increasing the role of SOEs in China’s economy even as he clamps down on certain private firms and billionaire entrepreneurs, such as Jack Ma of Alibaba, whose success threatens party control. Furthermore, the government’s recent merger of three SOEs into one giant firm with a roughly 70 percent market share in rare earth and other critical minerals is an example of China’s effort to tighten control over strategic sectors.
To believe Xi will change direction and seriously consider meeting tough CPTPP disciplines over SOEs, industrial subsidies, and other trade-distorting policies is fanciful. Xi’s stated goal is “the great rejuvenation of the Chinese nation” by 2049. That goal certainly does not include moving away from the “socialism with Chinese characteristics” that has brought China this far.
Surely, the 11 members of the CPTPP will see China’s move as a transparent effort to extend its economic dominance at the expense of the United States and the open, rules-based system that has governed world trade in the postwar era.
Joanna Shelton is a senior associate (non-resident) with the Economics Program at the Center for Strategic and International Studies in Washington, D.C.
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