Obstacles and Opportunities in China’s Further Economic Opening

Author: Xu Mingqi, CCIEE

China is undoubtedly facing dramatic changes on the world stage. The United States is increasingly mobilizing resources and alliances in the Indo-Pacific region and increasing strategic competition to combat what it sees as a “growing threat from China.” The Biden administration has deviated from or abandoned nearly all of its predecessor’s policies except its China policy.

Trump-era export tariffs and controls on Chinese imports continue and Trump’s legacy of Indo-Pacific strategy lives on through the rise of the Quad and the formation of the AUKUS security arrangement to combat the influence of China. Chinese policymakers recognize that these measures pose challenges to China’s external environment, the stability of which is of utmost importance for the development of the Chinese economy.

However, China remains optimistic and believes in the strength of common interests with its trade and investment partners. China argues that the US-led decoupling will not only damage the interests of the United States and its allies, but will also violate basic economic rules that govern international trade and investment. While political and security considerations will certainly affect global production and trade patterns, they will not change the driving forces of economic globalization – the search for comparative advantage. Based on these beliefs, China continues to uphold the principles of free trade.

China’s economy is deeply integrated into the global economy through its participation in global production chains. Although its trade-to-GDP ratio has declined from a peak of 64.2% in 2006 to 31.4% in 2020, it remains one of the highest among major economies in the world. China clings to the idea that maintaining stable economic growth and development with reforms and opening-up measures will benefit both itself and its trade and investment partners. . Therefore, China has actively promoted the regional comprehensive economic partnership agreement and wants to start more free trade negotiations.

Many developed countries have criticized China for its unfair trade practices and relatively closed domestic market. This criticism is not unfounded. China’s market economy is still immature in terms of legal and regulatory infrastructure, and economic development also remains low compared to advanced Western market economies, which have evolved for more than a century.

But as China’s economy enters a more developed phase after a period of very strong growth, it is now more confident about upgrading its domestic laws and regulations to better meet the demands of trade and commerce. investing in the 21st century. By further opening up the Chinese market, China could also offset US pressure and help maintain a stable external environment for economic development over the next decade.

The Chinese government is certainly making efforts in this direction. The annual China International Import Expo, launched in 2018, showcases policy intentions to further open up the domestic market and reject mercantilist trade policies. The Foreign Investment Act 2019 also grants foreign investors full national treatment. Since 2013, China has established new free trade zones, including Shanghai, Shenzhen and Hainan, to test a more open economic system. In many of these areas, domestic trade-related regulations have been simplified or eliminated and average tariff levels have been lowered to facilitate trade liberalization.

China’s application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership is an important step in this direction. Many outside observers understand the move as part of Chinese policy aimed at offsetting U.S. geopolitical pressures. But from an economic point of view, it is in fact a logical decision to modernize the Chinese market system, with a logic close to China’s entry into the WTO at the end of the 1990s.

Despite the geopolitical competition, China still aspires to utilize its economic progress by seeking opportunities to expand and improve trade and investment relations. Take for example the US Indo-Pacific Economic Framework, which seeks to articulate a set of standards for key industries including supply chain resilience, digital economies, export controls and environmental protection. While most countries in the region welcome US leadership in economic development, what they seek most is better market access and trade facilitation. Without this important element, it will not be easy to decouple China from the global supply chain.

While Western media coverage is dominated by the hot topic of geopolitical competition, China’s moves in recent years to further open up its services sector and financial market have largely gone unnoticed. Where economic reform was once not feasible – for fear of speculative shocks triggering financial crisis and social instability – China now has a mature economy that is increasingly suited to opening up historically closed industries and will be reinforced by market-oriented regulations.

Contrary to some speculation, the next decade will not see China’s trade policy revert to closed market principles, as increasing openness is imperative for the Chinese and global economy.

Xu Mingqi is vice president of the China Center for International Economic Exchanges and a senior researcher at the Shanghai Institute of International Finance and Economics.

This article appeared in the latest edition of East Asia Quarterly Forum“East Asian Economic Agreement”, vol 14, n° 1.