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November 10, 2006
Jacques deLisle is Director of FPRI’s Asia Program and Professor of Law at the University of Pennsylvania, specializing in U.S.-China relations, Chinese politics and legal reform, cross-strait relations, and the international legal status of Taiwan. He made this presentation at the Roundtable Discussion on Free Trade And East Asia held in Philadelphia on October 4, 2006, sponsored by FPRI and co-sponsored by the World Trade Center of Greater Philadelphia.
The international law of free trade areas reflects a simple and venerable liberal logic of international economic relations. The pursuit of-and controversies over-free trade areas, however, often reflect more complex and particularistic calculations of political interest. This is true for proposed FTAs in East Asia, specifically those involving the region’s two key political actors, the People’s Republic of China and the United States. FTAs that (for the U.S.) might include or (for the PRC) pointedly would exclude Taiwan provide particularly striking-and distinctive-variations on this theme.
The basic economic ideas underlying the law governing FTAs are rooted in the concept of comparative advantage. The economic pie is larger if each national economy specializes in the mix of goods and services that it enjoys an international comparative advantage (though not necessarily an absolute advantage) in producing, and trades with other states with different patterns of comparative advantage (due to different factor endowments and such) to acquire what it needs but does not produce in sufficient quantities. The efficiency gains offered by such specialization, of course, can only be reaped fully in a world without "artificial" barriers to international trade-i.e., those typically created by national laws and regulations with protectionist effects.
In an idealized liberal international economic order, such barriers would be eliminated. In the real world, they have been pervasive but not ubiquitous, and they would not be uniform toward a state’s trading partners absent treaty-based obligations to the contrary. That is, almost all states (and other entities with autonomous control over trade) have imposed significant restrictions on trade (usually in the form of inhibiting imports or promoting exports), but many states are willing to remove almost all barriers with some, but by no means all, of their trading partners. And most states would be willing to remove or reduce some barriers toward some trading partners but not others.
Herein lies a core quandary for a liberal international trade regime. Given that the best (a global free trade regime) is unattainable, what among the array of imperfect but achievable options should the regime’s rules require or tolerate? The World Trade Organization (WTO)-centered regime-here broadly following its more weakly institutionalized General Agreement on Tariffs and Trade (GATT) predecessor-opts primarily for a "most favored nation" or "normal trading relations" rule that requires a state generally not to discriminate among its trading partners (or, more, precisely, those of its trading partners that are fellow members of the now-nearly-universal membership WTO), thereby according each trading partner treatment that is no less liberal than the most generous terms it provides to any other partner.
This is consistent with the quite plausible conclusion that such a regime is superior to one in which each state negotiates a bilateral arrangement with each trading partner. On this view, the series of discrete agreements would result in an overall regime that, in comparison with the nondiscriminatory MFN/NTR alternative, would less nearly approach the idealized liberal order of trade conducive to globally efficient specialization. True, some bilateral relationships would be more liberal than the universalized ones under an MFN/NTR structure because states would be able to offer favored partners better terms than they would be willing to offer if all such terms had to be universalized. But others would be more illiberal because states would be free to deny to disfavored partners benefits and privileges that they would be willing to extend to all if that were the price of making equivalent arrangements with favored trading partners. And the efficiency-impeding or trade-diverting effects of the latter would, in the end, outweigh the efficiency-enhancing or trade-creating effects of the former. (A weak form of the argument relies on the transaction costs savings of the multilateralized regime compared to the series of bilateral deals; but the more robust form of the claim that does not rely upon such reductions for its net efficiency gains is commonplace and credible.)
The WTO/GATT regime allows a major "carve out" from its MFN/NTR principle (along with several less structural exceptions from the basic nondiscrimination requirement): free trade areas. In somewhat oversimplified terms, the FTA provision allows two or more member states to remove substantially all trade barriers among themselves while maintaining their background (and less liberal) structure of MFN/NTR-conforming national laws regulating trade with all other WTO/GATT members. This reflects the plausible assertion that true FTAs are likely to produce significant net gains in trade liberalization. On this view, the radical lowering of restrictions on trade among FTA members will result in stimulation of trade and specialization along the lines of comparative advantage among the FTA members that outweigh what are likely to be relatively modest costs of an incrementally less liberal regime than would have been the case-absent the FTA-between the states that join the FTA and other WTO members.
The basic nature of the trade-off is, of course, the same as that which underlies the WTO/GATT embrace of the MFN/NTR norm (and rejection of tailored, non-universal trade agreements among pairs or small groups of states). But the claim is that the balance is likely to come out the other way in the extreme, special circumstances of an FTA. (A weaker form of the argument invokes administrative and enforcement considerations-that a combined regime of MFN/NTR with an FTA carve-out permits relatively simple monitoring and detection of cheating-and in part on second-order effects-that a regime of a more-than-binary choice of FTA-or-MFN/NTR risks unraveling MFN/NTR norms more generally and, thus, the efficiency gains they provide).
Increasingly, the economic argument for FTAs and for a liberal trading order more generally has become bound up with issues of investment. Capital-exporting countries (and the foreign-investing firms that are based there) often seek to go abroad in part to establish facilities to produce goods and services that are consumed in their home markets or in third-country markets. Such a strategy, of course, benefits from-and may depend on-low trade barriers to exports from the host country. In addition, a fully liberal international economy would permit the free movement of capital (and labor as well) in addition to goods (and services). While GATT and FTAs focus on the latter, the institutional framework that the WTO-centered trade regime provides has provided a means-albeit a frustratingly limited one-for liberalization of investment rules too. This has come partly through a modest but potentially expandable WTO jurisdiction over so-called trade-related investment measures (TRIMs)-restricting the use of investment regulations that discriminate against foreign investors and have sufficient impact on trade. It has also come partly through the inclusion of commitments about the regulation of inbound foreign investment in some (including, notably, China’s) protocols of accession to the WTO.
These classically liberal considerations of global economic efficiency and welfare, not surprisingly, fail to capture what arrangements labeled as "FTAs" in practice look like. These less-than-fully liberal arrangements of real-world FTAs are ones in which trade diversion may well exceed trade creation even if the economic assumption behind the WTO’s MFN/NTR with FTA carve-out structure is correct. The series of diverse bilateral not-truly-FTA arrangements means the loss of the transactions costs and monitoring costs gains that are important to the weak forms of the liberal economic arguments for allowing FTAs despite their risks. Liberal economic ideals also fall well short as explanations of when states (or other state-like entities with autonomous control over their trading relations and, typically, with independent WTO memberships) enter into FTAs or contemplate doing so or seek to convince other states to do so, and how the resulting FTAs depart from free trade principles. More political issues of national interest, ideology and parochial interest group agendas figure prominently in explanations of existing and propose FTAs, which all depart to varying degrees from legal and economic theory ideals.
The U.S. has been among the more zealous proponents of trade liberalization generally and FTAs specifically and a frequent participant in FTAs. Washington was the largest moving force behind the WTO, which made the global trading regime institutionally stronger, economically more liberal, and substantively wider-ranging. (In some respects, this reprised the U.S.’s early postwar role in the creation of the WTO’s predecessor, the original GATT, which, though it fell short of liberalization ideals of the time, responded to the lessons of the protectionist policies that were seen as contributing to the economic depression of the 1930s and, in some measure, to the war that followed). After the European Union, the North American Free Trade Area (NAFTA) is arguably the most important and venerable of FTAs today. And recent years have brought several initiatives that have established or are working toward FTAs with key trading partners in East Asia, including Singapore (the U.S.’s first Asian FTA partner), Thailand, Malaysia, South Korea and Taiwan (and elsewhere as well, including, for example, the Central American Free Trade Area and FTA talks with countries in every major region around the world).
Several related and mostly widely recognized factors do much to explain the U.S. interest in FTAs generally and in East Asia specifically and strongly suggest that Washington is likely to continue to support or be open to some FTAs in East Asia, although not without controversies and limitations.
First, FTAs (and liberal trading rules more generally) may often serve American national economic interests and (more importantly) be perceived by U.S. lawmakers and policymakers as doing so. As the world’s largest economy and as the developed world’s most resiliently dynamic economy, the U.S. is likely to reap a relatively large share of the gains from a more open international economy. As hegemonic stability theory and kindred analyses of international relations assert, such benefits make it relatively likely that the U.S. will find it worthwhile to bear a disproportionate share of the costs of supporting a liberal order, thus helping to overcome significant international collective action problems.
As something of a corollary, FTAs offer a means of getting benefits of a liberal order (albeit only with some states, but with highly liberal content) at lesser costs and with fewer collective action problems. This can make FTAs attractive partial substitutes and partial complements for the U.S.’s broader pursuit of a generally liberal international economic order. Because the costs of hegemonic underwriting of a liberal order, historically and predictably, include being relatively open even when its trading partners are less so, the "level playing field" of an FTA can be, in that respect, especially attractive (although its substantive requirements, of course, may be a large countervailing concern).
Given the importance of East Asian economies in American trade (and international trade more generally), they make particularly promising potential FTA partners for the United States. Notably, the largest cluster of countries outside of the Americas with which Washington has been negotiating FTAs is, by a great margin, in East Asia. Given the relative openness of many of the region’s economies (particularly in contrast to the import substitution industrialization models that once reigned in many industrializing countries and that still linger in some), there is relatively little distance to be traveled between the status quo ante and the theoretically strict requirements of a WTO-compliant FTA. Given the relative size of the U.S. economy and trade sectors compared to those of its East Asian partners other than Japan and China, the U.S. is often in the position to enjoy the appealing advantages of a favorable imbalance of power in negotiating FTA terms. Given the U.S.’s perennial importance as an export market for many East Asian states, regional governments have good reason to seek-and to pay the necessary price in terms of dislocations caused by greater openness on their part-for liberal trading relations with the U.S.
Such arrangements, again, must in legal principle, though not fully in practice, take the form of true FTAs if they are to be more liberal than the rules governing relations with the full universe of fellow WTO members. To the very considerable extent that FTAs fall short of these ideals, they can include features that can address perceived threats to U.S. interests from potentially more thoroughgoing free trade arrangements.
Second, the U.S. remains generally committed to maintaining relatively liberal foreign trade laws and regulations. Here it matters little whether the reasons for this are deeply entrenched assessments of durable national economic interests, an ideological commitment to international economic liberalism, relatively stable domestic interest group politics, or calculations of lasting and important foreign policy interests. The point is, simply, that a state that favors a relatively internationally open economy and maintains correspondingly liberal trading laws will insist that its trading partners limit their use of illiberal or mercantilist measures, including protectionist policies toward imports or predatory policies toward export competitors. Absent such pressures, the first state’s liberal trade law regime is likely to prove unsustainable politically, most likely due to the perceived costs to the national interest or the harms to particular economic sectors of allowing asymmetrical "cheating" from a liberal order and worse-than-"free-riding" on the benefits of openness that the first state’s unilateral liberalism provides. This account fits reasonably well with patterns in U.S. trade policy and related diplomacy, including toward the East Asian states that are a major source of U.S. trade deficits.
The liberal order-favoring state’s pursuit of reciprocity is, of course, fully compatible with the basic MFN/NTR structure of the WTO, but the WTO’s structure for FTAs is, again, more rigorously reciprocal as well as more liberal (and, indeed, too liberal for most states’ preferences in dealing with most or all of their trading partners). And, again, the pro-liberal order state, other things being equal, is most likely to pursue FTAs with relatively important trading partners that have complementary economies and relatively liberal regimes-features that variously reduce the difficulties and costs of establishing FTAs, increase the economic benefits, and likely reduce the incidence of cheating. To the extent that FTAs asymmetrically reduce barriers imposed by one partner-especially one enjoying a surplus in bilateral trade-the greater beneficiary or deficit state has additional reasons to favor an FTA. Once again, East Asian states often fit this bill for the United States.
Of course, U.S. trade liberalism has been far from pure. While the advent of the WTO provided such liberalism with a significant institutional boost, the collapse of the Doha Round-amid pressures in many countries to protect vulnerable sectors-has shown that impetus’s limitations. Some of the U.S. domestic legal and structural mechanisms conducive to the maintenance and development of liberal trade and, more narrowly, FTA initiatives are imperiled. The long-lapsed "fast track" authority that helped the U.S. administration secure the establishment of the WTO was reenacted in 2002 but faces expiration again in mid-2007. That authority crucially committed Congress to vote up or down on the packages endorsing and implementing executive branch-negotiated trade agreements, making it easier to bundle together tasteful and distasteful provisions and an appropriate set of benefits and side payments to secure wide support. The impending demise of this Trade Promotion Authority thus spells potential trouble for pending FTAs. Protectionist sentiment in Congress-and among vocal vulnerable constituencies-appears to be at least temporarily on the rise in a period of chronic trade deficits and controversies over outsourcing. More generally, there is little reason to think that FTAs are not, in the end, scarce goods. While each proposed FTA rises or falls largely on its own (for whatever mix of economic and political reasons), and despite Washington’s broad commitment to liberal trade and its accelerated pursuit of FTAs, there is little reason to believe that the U.S. is on an inexorable march toward or has, in the near term, an infinite appetite for FTAs, even of a less than fully free trade sort (although there is equally little reason to believed that the demand is fixed).
In practice, the regime for FTAs has left the U.S. (and other powerful states) free to insert illiberal and asymmetrically favorable terms into FTA agreements. The costs (and benefits) of FTAs are thus less extreme than a simple reading of the WTO’s standard of removing "substantially all" barriers to trade. The FTAs that states, including the U.S., negotiate depart to varying, sometimes considerable, degrees from the WTO treaty-defined standard, yet they generally have escaped condemnation-or even much probing scrutiny-in the WTO process. These departures have several consequences that vary in scale from case to case. The departure from full free trade norms means that the more powerful party has the opportunity to exploit its advantage and get something "better" (in the sense of being tilted to its advantage under mercantilist trading analyses) than the level playing field that a true free trade requirement would impose and likely better than the relatively leveling effect that the multilateralizing WTO process promotes.
Third, interest group politics-rightly regarded as a central factor in shaping U.S. foreign economic policy-on balance often supports liberal trading policies toward, including FTAs with, some East Asian partners. (Even U.S. official policy recognizes this, including benefits to U.S. economic sectors-read, interest groups-among the criteria for entering into FTAs). This point is nicely illustrated-through both similarities and contrasts-by the saga of the U.S.’s decision in 2000 to support WTO membership for the PRC and, concomitantly, to grant China permanent normal trading relations (PNTR) under U.S. law. Pushing against PNTR was organized labor, which was worried about losing jobs due to increased imports of Chinese-made not-top-end but sound quality goods and services produced with low labor costs. On the same side were NGOs and politicians critical of China’s human rights record and seeking to preserve the leverage previously provided by the annual review of Beijing’s human rights record in conjunction with renewal of China’s then-conditional MFN privileges. Those interest groups and their allies, however, could not overcome formidable business interests that-along with arguments rooted in national economic and broader foreign policy interests-pushed in the opposite direction. Such pro-PNTR interests were broad indeed, including firms with substantial investments or potential investments in facilities in China producing goods for export to the U.S.; and manufacturing and service businesses that saw huge potential benefits from easier access to Chinese markets (and which could thereby support employment in the U.S., thus dividing labor interests).
None of this meant an unchallenged and thoroughgoing embrace of a liberal bilateral trading relationship. The PNTR legislation passed only after a perilous near-miss the preceding year when the Clinton administration judged insufficient concessions that Zhu Rongji offered and that differed little from what China later provided to secure the final deal. The price of passage included the U.S.’s retention of ability to impose protectionist measures against Chinese exports, including an especially permissive provision concerning Chinese textiles as well as the general latitude that WTO provides in the form of escape clauses, domestic legislative discretion and, of course, the U.S.’s de facto ability to fail to implement fully its WTO obligations.
The price also included the establishment of new commissions to monitor China’s human rights record and PRC behavior more broadly. It was clear from the beginning that industry groups would undertake and would press executive branch agencies to undertake careful and critical monitoring of China’s compliance with its WTO commitments. The chronic and large bilateral trade imbalance (and its perceived implications for U.S. jobs)-along with high-profile contemplated PRC acquisitions of well-known U.S. companies-have fostered U.S. pressure on China to revalue its currency and spawned congressional consideration of punitive tariffs on Chinese goods (most notably the Schumer-Graham legislation’s 27.5 percent levy). Intellectual property rights protection remains a chronic and festering issue. And, of course, there is no talk of a U.S.-PRC FTA.
Some of the same types of interest group alignments greet FTAs or potential FTAs with East Asian partners. In some respects, these face hurdles that may be greater than those that China PNTR/WTO overcame. All other things being equal, an FTA agreement is more likely to draw earnest opposition from affected groups than would lesser trade liberalization or (as occurred with China) merely making an unconditional commitment to a formerly conditional but long-standing status quo of standard trade barriers. And the U.S. jobs and industries imperiled by FTAs with more advanced industrialized East Asian countries are ones that are higher-end than those immediately imperiled by the PRC’s WTO entry and that arguably are more central to American national economic interests. Indeed, the fear of the damage to a high tech sector and the loss of the positive externalities it provides in the domestic economy has become a prominent argument against free trade and trade liberalizations, and one that is increasingly applied to China as well as to previously more developed trading partners of the U.S.
On the other hand, organized labor interests have less at stake in such sectors and have an even weaker political voice in a period of Republican control of Congress and the White House. Possible midterm election shifts to slim Democratic majorities one or both houses would not likely bring a great strengthening of trade illiberalism in Washington. Again, the substantial latitude in practice for FTAs to depart from true free trade norms leaves room for crafting deals that protect economically sensitive and politically influential sectors that would suffer from deep liberalization of relevant trade rules. Human rights constituencies have far less basis for opposition to trade deals with Korea, Taiwan, even Singapore, Malaysia, Thailand and the like than they did with China. Indeed, proponents of FTAs with East Asian states often invoke such partners’ positive records on human rights and democracy. This has been especially prominent in the case of Taiwan and, notably, the coup ousting the democratic (if unpopular and inept) government in Thailand has become new hurdle in the FTA process. And such potential partners to FTAs are generally seen in the U.S. as less threatening economically (not least because of the much lesser volume of trade at stake and the smaller bilateral trade imbalances) and more likely to play fair and play by the rules of the relevant trade regime than China has been. Moreover, the stalling of the Doha Round and a broader dimming of the apparent prospects for the WTO process as a principal driver of trade liberalization leave proponents of trade liberalism with fewer reasons not to embrace FTAs.
Partly for such reasons, FTA negotiations with East Asian partners have proceeded a good deal more expeditiously than the fifteen year long march to U.S. support for China’s mere WTO accession. On the other hand, the most often-cited reasons on the U.S. side for the hold-up in FTAs with East Asian partners, tellingly, are those that reflect the concerns of key economic interest groups, and primarily business groups of the sort whose support for China PNTR was crucial. For example, opponents or critics of a U.S.-Taiwan FTA commonly point to IPR concerns (long a central issue that has recently faced), telecommunications, agriculture and pharmaceutical pricing and regulation, financial services and so on.
Fourth, FTAs can serve as an economic instrument in the pursuit of security goals that loom large in U.S. foreign policy, especially in the post-9/11 world and (more diffusely and, for now, less prominently) in the face of rising Chinese power. Simply and broadly, FTAs-along with other mechanisms that deepen members’ economic integration or grant partners greater access to desirable American markets-can be means for strengthening economic relations that can create greater coincidence of overall interests and in turn greater security cooperation or strategic alignment. More crassly instrumentally, they can serve as economic goodies that Washington can dole out to serve political ends of building or reinforcing alliance-like arrangements.
This fits the U.S.-ROK proposed FTA and more clearly the much-discussed U.S.-ROC FTA. Congressional and other U.S. proponents of the Taiwan FTA have quite clearly asserted that it has a major political and security dimension, affirming the U.S.’s support for Taiwan’s continued autonomy. President Chen Shui-bian and others in Taiwan have made parallel argument and stressed the importance of a U.S.-Taiwan FTA (and other possible Taiwan FTAs in the region) for safeguarding Taiwan’s democracy as well as its ability to endure the consequences of China’s effort to marginalize Taiwan.
Finally, this political dimension of U.S. FTA possibilities in East Asia also has a defensive aspect. Whatever otherwise might be FTAs’ or contemplated FTAs’ in contributions to enhancing U.S. relations with East Asian partner states, they also can serve as a counter to China’s mounting drive to establish FTAs-and, in turn, political influence-with many of the same states, as well as China’s broader drive to accumulate political influence in the region, sometimes in ways that pointedly exclude the United States.
For China, as for the U.S., there are several powerful and durable reasons for pursuing some FTAs and broader integration in a liberal international economic order-and for being wary of FTAs and other liberalization measures-that are not rooted in the simple liberal economic logic of the WTO’s international law of FTAs. Compared to the U.S., the political dimension is even larger for Beijing and the commitment to the relatively radical economic liberalism ideals behind FTAs (or of the broader international trade regime) less established and robust.
First, a broadly liberal international trading order that includes China serves the national economic interests that reform-era Chinese leaders have defined. For nearly thirty years, economic development has been the predominant goal, pursued through market-oriented reform at home and openness to the international economy. Especially in the early years but also continuing today, Beijing has pursued a Chinese variation on the venerable East Asian development strategy of export-led growth and attendant specialization according to China’s evolving comparative economic advantage. On almost every assessment, trade and foreign investment have made disproportionately large contributions to China’s growth. Foreign investment-especially in the early years but continuing to some degree today-has been skewed toward export sectors. Thus, the link between foreign investment liberalization and seeking a liberal external environment for trade came early-and has stayed long-for reform-era China.
Especially during the final pre-accession period, China’s zealous and protracted pursuit of membership in the WTO-the key global institution for trade liberalization and the treaty-based regime that defines the fundamental international legal framework for FTAs-reflected the close connection between the PRC’s integration in a liberalizing international trade regime and domestic economic reform. A quite plausible and widespread view-reportedly embraced by no less than then-Premier Zhu Rongji-held that WTO membership and the resulting openness to international trade and investment would prod necessary reforms of domestic enterprises by subjecting them to competition from-and transformative partnerships with-foreign firms.
In recent years, the link between trade and investment has added another dimension. As Chinese firms have heeded the government’s call to "go out," their early and prospective investments abroad include a significant share in ventures that focus on exporting inputs or goods to China or marketing Chinese-made goods abroad.
Further, Beijing has stressed that there is no significant tension between its interests in the high politics of international security affairs and these low politics of economic integration with the outside world. From the early days of the reform era, economic development and, thus, the engagement with a liberal international trading order that helped fuel such development was seen as indispensably providing the material preconditions for national strength, including military modernization. In more recent years, key PRC foreign policy doctrines such as China’s "peaceful rise" or China’s "new security concept" assert the lasting compatibility between the PRC’s strategic interests and China’s ongoing integration with the international economy.
Second, on the other hand and as the asymmetrically non-free-trade quality of real-world FTAs facilitates and reflects, PRC ideology and practice have stopped well short of establishing significant FTAs or even providing much support for trade liberalization beyond the extant international norms. When seeking WTO entry and since becoming a member, China has remained largely a "regime taker"-accepting the existing rules, including the basic MFN/NTR principles, and pledging to abide by them. For a time during its protracted pursuit of accession, Beijing had sought to benefit from many of the special exceptions that permit developing or post-socialist transitional countries to employ limited protectionist policies or to benefit from special preferences allowing asymmetrical access to foreign markets. In the end, China received few concessions on this score, consisting mostly of limited phase-in periods for meeting standard WTO obligations and implementing particular pledges of access to Chinese markets (particularly through foreign investment) that were incorporated in China’s protocol of accession.
Since joining the WTO, the PRC’s few departures from mainstream positions have consisted mostly of fairly tepid support for a developing countries’ agenda that has included moderately illiberal elements. And Beijing’s creation of FTAs or FTA-like arrangements has been limited, with Closer Economic Partnership Agreements for the already-deeply-integrated Hong Kong and Macao SARs, a significant but long-term effort focusing only on the ASEAN group, more speculative or rhetorical talk of FTAs with Japan and Korea or with the members of the Shanghai Cooperation Organization, and a complicated discourse over a CEPA or FTA-like arrangement with Taiwan for which Beijing insists conditions are not yet ripe.
Also, like the U.S., China is in a position to reap the gains of selective and asymmetrical illiberalism that can come to the more dominant trading partner and larger economy in bilateral or limited multilateral negotiations that result in the well-short-of-free-trade FTAs that are becoming common features on the international economic legal landscape. In the most developed Chinese FTA pursuit to date, the ASEAN-China FTA partners China with mostly much smaller stated and will build primarily on bilateral deals between China and the ASEAN members. Tellingly, such bilateralism long characterized China’s diplomacy over what had been previously a principal perennial point of foreign relations between China and many of the ASEAN states-the South China Sea territorial disputes.
In addition, the WTO regime and China’s political and regulatory structure permit much of what might be called sneaky or semi-sneaky protectionism and, thus, further divergence from liberal-much less FTA-principles of international trade. The WTO-centered regime’s relative strength lies in its policing of national laws and policies that, when implemented, impede or distort trade in ways that transgress WTO obligations. The WTO’s formidable formal dispute resolution mechanisms and the more diffuse multilateral politics of challenging non-compliance are far less effective when trade barriers take many of the overlapping the forms that are prominent among the list of complaints about Chinese practices. These overlapping issues include those that are difficult to detect and to attribute to central authorities, those that are hard to prove and measure, and those that are not immediately related to trade: local protectionism; shadowy collaboration between local authorities and government-linked enterprises; trade-affecting business decisions that are based on considerations other than arm’s-length bargaining over price and quality; poor implementation of WTO-conforming or WTO-mandated national laws and policies; opaque de facto subsidies to state-owned companies; trade-affecting foreign investment rules and their application to specific projects; and a fixed exchange rate policy that confers trade advantages that are an uncertain function of the renminbi’s much-disputed degree of undervaluation; and so on.
Third, as this list of complaints suggests, China’s uneven and ambivalent approach to trade liberalization generally-and, by extension, the deep if narrow liberalization that each FTA would bring-can be partly explained in terms of something like interest group politics with Chinese characteristics. The PRC’s sharply expanded engagement with the generally and increasingly liberal international trade order has notoriously delivered unevenly distributed benefits (and expectations of benefits) within China. The well-known, simple story has been one of support for trade liberalization from the "winners"-central and southern coastal provinces, internationally competitive sectors (initially, light industry and export-oriented enterprises), ministries associated with those sectors and with foreign trade and investment, and elite leaders (including the so-called "Shanghai gang") whose political careers were rooted among the winning areas. It was, of course, former Shanghai chief Jiang Zemin who, as president and general secretary, led China through its accession to the WTO, closer economic integration with Hong Kong and Taiwan, the genesis of the ASEAN-China FTA proposal, and the adoption of the "three represents" as an ideological embrace of the rising, largely coastal urban and often internationally engaged stratum of entrepreneurs.
On the other side of the story, there has been growing discontent and resistance focusing on the costs of WTO-mandated changes, trade liberalization more generally, and reform and opening still more generally among the "losers"-inland and northeastern provinces, unreconstructed state enterprises, inefficient industrial sectors, ministries associated with them, and an increasingly restive laid-off or poorly paid collection of factory workers, dispossessed farmers (their land-use rights often lost to development projects), and rural-to-urban economic migrants. Amid growing concern about resulting threats to political and social stability, President and Party General Secretary Hu Jintao and Premier Wen Jiabao have paid more attention, and given greater voice, to these constituencies’ concerns and views amid the Hu-Wen leadership’s largely successful drive to increase its power at the expense of Jiang’s acolytes among the PRC’s top elite.
The implications for Beijing’s approach to FTAs, and trade liberalism more broadly, are more complex than the simple story might seem to suggest. Even some of those who have been "winners" in China’s long era of reform and opening might not be interested in, or be sure to benefit from, a series of true FTAs. A coalition in which some members thrive because of limited protectionism would fragment in a shift to a genuine free trade regime. Moreover, FTAs in practice are forged with specific partners. The contemplated FTA with ASEAN would involve partners with a very different profile of complementarities with China’s economy than has been the case with the industrialized nations of the West and Northeast Asia that have been mainstays of China’s export- and foreign investment-led growth strategy to date. The CEPA with Hong Kong and arrangements that might increase economic integration with Taiwan also would change the relevant composition of China’s trade, though mostly by building upon established trends. Floated ideas of Japan-Korea-China or SCO FTAs would have still other distributive effects (indeed, with especially striking contrasts likely between these two).
More broadly, trade liberalization and related undertakings that are well short of FTAs face potentially growing resistance and opposition. For some initial losers, the WTO era has meant successful adaptation, reduction of influence or simple disappearance. And many initial winners continue to face a bright future. As WTO obligations have come fully on line, and if the currently stalled WTO process resumes its prior "mission creep" toward greater liberalization, however, even former "winners" in China face the prospect of becoming "losers" and many losers may face more severe losses. Newly vulnerable sectors include banking and financial services (despite a rush of joint venture arrangements with foreign partners and substantial improvements to domestic entities), agriculture (which is losing prior protection from competition from imports), intellectual property-pirating enterprises (though enforcement and implementation have lagged) and other sectors that have been the object of specific WTO-related liberalization commitments (such as telecommunications and autos as well as financial services). While any prediction of a significant reorientation from the venerable policies of reform and opening is, at best, wildly premature, the rising protests among workers, migrants, and peasants suggest the possibility that some substance-perhaps most likely in the undramatic form of poor implementation and foot-dragging-may follow the Hu-Wen leadership’s so-far largely rhetorical shift to concern for the less well-off and an emphasis of equity and "human development" along side economic development and "GDP-ism."
Fourth and finally, in the cases in which China has engaged the question of FTAs, political considerations seem undeniably to loom large. And, in China, the phenomena akin to interest group politics still do relatively little to constrain the leadership’s pursuit of what it sees as the national interest. The CEPA with Hong Kong is perhaps a symbolically important step in the SAR’s long-evolving and pervasive economic integration with the core PRC area, but it was, by all accounts, of little economic significance, given the impending phase in of FTA-like trade rules between the SAR and the PRC under the WTO, given the already-extensive investment presence of Hong Kong firms on the PRC prior to the new openness promised by CEPA, and given skepticism about how thoroughly the mainland would implement its CEPA commitments. Tellingly, the CEPA seemed politically timed, coming at a moment when Beijing would want to buoy Hong Kong’s often-troubled post-reversion administration. The possibly empty but still much-played claim that CEPA would boost the economy, along with the signal of political support CEPA conveyed, arrived amid significant local discontent with Hong Kong’s Beijing-mandated Chief Executive’s government over the floundering economy and massive protests against civil liberties-threatening legislation to implement a provision of the Hong Kong Basic Law that Beijing, at least upon reflection, decided it could wait to see implemented. (The Macao CEPA, like almost everything else Beijing does with respect to Macao, was a delayed copy of the Hong Kong model and of far less economic and political import.)
The most significant PRC FTA proposal to date-the ASEAN-China Free Trade Area, envisioned as a roughly decade-long project-closely entwines politics with its economics. If the adoption-and even the pursuit-of this FTA achieves the intended and expected effect of increasing economic ties between China and Southeast Asia states, the FTA can be expected correspondingly to raise China’s political influence in an area that is vital to its ambitions to be a major power in the region.
Well before such economic effects-or even an FTA agreement-arrive, Beijing’s ACFTA gambit provides a means for the PRC to pursue key political ends. This includes trying to soothe regional states’ fears about the implications for them of China’s rise. The ostensibly economic agenda of the ACFTA provides a focused and concrete way of presenting and selling the "peaceful rise" argument to these suspicious neighbors. The FTA gambit came amid concerted broader efforts by PRC leaders to assure China’s near-neighbors to the south that a more rich and powerful China posed no threat, would remain focused on economic development, was committed to a stable and calm environment to facilitate that developmentalist agenda, would not use its growing clout and leverage to coerce smaller regional states, and would cooperate-and not just compete-with ASEAN states economically.
The relevant background also included the PRC’s having sought to cast itself as a responsible and, indeed, burden-bearing power in the international economic order and especially toward East and Southeast Asian states. The most notable move here was the PRC’s pointedly proclaimed decision not to devalue the renminbi amid the massive declines in many regional currencies and despite the threat such falling exchange rates posed to China’s crucial export sectors. This Beijing-touted past sign of good faith was ripe for packaging as reassurance about the benign nature of growing economic dependence on China that would come with China’s inexorable ascension and, more rapidly, with an ACFTA. The relevant context also included China’s broader pursuit of engagement in multilateral regional fora to address a host of economic and non-economic issues. Significant examples include the various "ASEAN-plus" groupings, the ASEAN Regional Forum, and the multilateral process that produced a code of conduct to govern the often tension-ridden (and occasionally armed skirmish-producing) issue of competing territorial claims in the South China Sea.
In this ACFTA (and broader) approach to Southeast Asia, there also are elements of PRC rivalry with the U.S. and Japan for regional influence, in part using FTAs to counter other dimensions of American and Japanese influence in the region and in part to anticipate the political gains that Washington and Tokyo have begun to seek through their stepped-up pursuit of FTAs with regional states. Even the purely economic dimensions of an ACFTA have some purchase here. It serves Beijing’s interests in diversifying its trade dependence away from the often-troublesome and meddlesome U.S. and its closest regional ally. Beijing’s efforts to woo and reassure Southeast Asian states surely addresses the concern that those states might otherwise be more inclined to balance China through strengthened ties with the U.S. or Japan. Notably, Beijing’s moves to sell the ACFTA and closer economic ties more generally to ASEAN states and other regional states have emphasized contrasts with Washington’s unappealing war on terrorism agenda-one that leads to frictions with and potentially trouble for Southeast Asian governments (especially in states with significant Muslim populations) and that distracts from the trade and development agendas that such governments have preferred to place at the center of their external relations. While the impetus behind anti-Japanese sentiments in China lies elsewhere, recurrent Chinese invocations of the history do resonate with-and may thereby exploit to Beijing’s advantage-lingering resentments in the region over past Japanese aggression and imperialism. Japan’s growing pursuit of FTAs in the region and the U.S.’s foray into a Singapore FTA provide further defensive or responsive reasons for Beijing to press for the ACFTA and to oppose Japanese or U.S. FTAs with regional states.
Beijing’s ACFTA strategy may be less promising or fruitful than it appears. Among the several possible reasons for this is the possibility that the political gains are front-loaded while the economic costs for China are yet to accrue. That is, the PRC has already been reaping some of the diplomatic benefits from its reassurance, engagement, and economics-over-politics tactics. But, with the details of FTAs still in the works and their implementation still farther off, it remains an unsettled question how much China will be willing to open its economy-and, specifically, vulnerable sectors-to the threats that true FTAs or arrangements close to them will pose, and how disappointed and discontented China’s ACFTA partners will be if they see China as being recalcitrant or unfair in this regard. It is, of course, possible that the Chinese economy will have become sufficiently robust and competitive and the Chinese leadership sufficiently confident in the Chinese economy that Beijing will be willing and able to satisfy ACFTA partners’ demands and expectations. But that cannot be securely assumed. The same concerns likely will apply to other Chinese FTA proposals if they go forward.
The appeal to China of a Japan-Korea-China FTA or an SCO FTA is broadly parallel to that of the ACFTA but a good deal less achievable. With Japan and Korea already among China’s key trading and investment partners, an FTA would have significant economic potential-and peril. With deepened economic ties (of whatever net or distributive economic impact), China could reasonably hope for increased political influence. The result could be an acceleration of what critics fear could be an asymmetric economic interdependence-driven Finlandization of Japan and Korea. While such worries and any such trilateral FTA remain speculative, Beijing’s efforts in that direction can provide, first, some counter-pressure to what the PRC sees as the tightening of the U.S.-Japan security relationship (driven in no small part by China’s growing military capacity and the poor state of Sino-Japanese relations) and, second, some capitalizing on recently increased Anti-Americanism in South Korea (fueled by generational transition in South Korea and friction over Washington’s approach to North Korea). Here too, U.S. consideration of an FTA with Korea provides an additional, defensive or responsive element to PRC reasons for floating an FTA that includes the ROK.
An SCO FTA remains a less serious pursuit. Its economic appeal for China is relatively straightforward. But even talk of it could enhance the economic leg of the broader diplomatic effort of China to build cooperation among central and northern Asian mainland states (including especially Russia, which chafes at its diminished global political influence) to balance and check U.S. hegemony in a one-superpower world.
The most political aspect of Beijing’s approach to FTAs, however, has lain elsewhere. As in so many areas of China’s foreign policy, the most volatile politics involve Taiwan-here, the question of its exclusion from Beijing-centered FTAs and its possible inclusion in an FTA with the United States.
While calculations of international political interests play a major role in FTA consideration for the U.S. and China (and surely their potential partners and others as well), the political element looms especially large with respect to Taiwan. There are significant economic interests at stake in potential moves that would bring Taiwan into an FTA or exclude it from one.
Taiwan is, on economic grounds, an obvious FTA candidate. It has a quite open economy, one that has moved far from its more protectionist and otherwise illiberal past (which included a large role for state- or party-owned enterprises, poor intellectual property protection and the like), and one that has the high trade to GDP ratios that one would expect from a small, developed and internationally integrated economy. It is a major trading partner for both China and the U.S. As with FTAs generally, membership in FTAs with major trading partners would expand trade among the partners and increase each partner’s total trade and gains from trade. Failure or refusal to enter into an FTA with Taiwan, of course, would mean foregoing those effects. While these economic effects likely would not be large (especially in the case of U.S.-Taiwan FTA), that does not distinguish Taiwan-including FTAs from many others that are on the table (including some currently pursued U.S. FTAs).
Any given FTA, of course, would also skew Taiwan’s trade toward its FTA partners and away from the broader group of fellow WTO members (and, for that matter, non-WTO-member trading partners). A U.S.-Taiwan FTA could be expected to have these typical diverting effects of a bilateral FTA of increasing each partner’s share in the other’s trade (and, as with many FTAs, this diversion effect is predicted to be larger than any trade-creation effect). An ACFTA excluding Taiwan likely would divert some of the ASEAN states’ trade from Taiwan to the PRC (though this would be limited given the very different economies and patterns of traded goods and services that characterize the entities on opposite sides of the Strait). It would also encourage the substitution of ASEAN-produced goods for some of China’s imports from Taiwan, cutting into the growth cross-Strait trade that has become important to Taiwan. The more inchoate ideas of a Japan-Korea-China FTA or SCO FTA-both excluding Taiwan-would have broadly similar effects, with the economic impact for Taiwan, of course, being a good deal more significant with respect to its important trading partners in Northeast Asia than with the Asian mainland states other than China.
For Taiwan, even the seemingly economic is fraught with security implications, however. The great concern for Taiwan of a Taiwan-excluding ACFTA is that it will achieve precisely the economic dependence-increasing and political ties-promoting effect between the ASEAN states and China that Beijing apparently and presumably seeks. Already relatively to thoroughly unsupportive of Taipei on issues of Taiwan’s autonomy and international status, China’s ACFTA partners would be even more reluctant to roil relations with the PRC and more likely to fear Beijing’s use of economic leverage if they were to be too "soft" on the Taiwan issue. The real fear from Taipei is that an ACFTA would represent another potent tool, firmly rooted in China’s burgeoning international trade prowess, in Beijing’s diplomatic kit for marginalizing the ROC. Much the same would apply if the PRC’s notion of a China-Japan-Korea FTA were to gain much traction. The potential political loss for Taiwan would be especially great in the case of Japan, which remains the principal regional state that has the will and the capacity to work to balance China and that has recently and controversially articulated an interest in Taiwan’s security. An SCO FTA, of course, would be less significant, given the SCO states’ more limited economic relations with and lack of diplomatic support for Taiwan.
Here there is perhaps some minor solace for Taiwan in the ambivalence of Chinese strategy. To the extent that the economics of an ACFTA (or a China-Japan-Korea FTA or even perhaps an SCO FTA) serves Beijing’s agenda of isolating Taiwan politically (and perhaps marginally weakening it economically), it is hard to square with the PRC’s parallel effort to increase Taiwan’s economic dependence on the mainland and, thus, its political pliability on unification/independence issues. True, there is no logical contradiction between the floated Taiwan-excluding ACFTA and an even more hypothetical cross-Strait FTA or CEPA. In combination, they would pull consistently in the direction of turning Taiwan’s trade ties and economic interdependence away from Southeast Asia and toward the mainland. (Notably, the Taiwan government’s "go south" investment policy, indeed, had sought to promote trade and investment redirection from the mainland and toward ASEAN and other regional states to counter precisely this trend.) Moreover, a cross-Strait FTA would have another significant political benefit for Beijing: it likely would take PRC-Taiwan trade relations out of the ordinary WTO framework, wherein Taiwan has sought, and Beijing has sought to avoid, occasions to make use of consultation and dispute resolution mechanisms that would cast the two as equal parties.
Nonetheless, the politics would be exceedingly messy. China’s then-minister of MOFTEC, Shi Guangsheng (and others) have declared that circumstances are not yet ripe for a cross-Strait free trade zone, partly to press Taiwan on other interim measures (including the three links), partly surely in recognition of the Taiwanese administration’s clearly expressed rejection of the idea. Whatever prospect there might be for selling a cross-Strait FTA or CEPA in Taiwan (or, more realistically, more incremental moves to reduce trade barriers and increase economic integration), those are surely diminished by the backdrop of a pointedly Taiwan-shunning ACFTA and the suspicions about Beijing’s intent that that engenders. At the same time, Beijing’s urgings of ACFTA governments (and governments of other East Asian states, including Japan) to eschew political connections with or signs of support for Taiwan-in part through arrangements that include foregoing what might be appealing economic gains that might come from an FTA that extended Taiwan-would risk ringing a bit hollow if the PRC established (or even pursued or purported to pursue) an FTA with Taiwan. Broadly similar dynamics apply to any China-Japan-Korea FTA and, to a lesser extent, to an SCO FTA.
The politics of a U.S.-Taiwan FTA are simpler fare. For Taiwan, U.S. willingness to enter into an FTA would be an affirmation of the broader U.S. commitment to Taiwan. President Chen and others have phrased it as such. So too have congressional supporters of a U.S.-Taiwan FTA. While it of course formally implies nothing about statehood or state-like status, Taiwan’s status as a partner in an FTA-or even being under serious contemplation as an FTA partner-would imply standing with the U.S. akin to that of Canada, Mexico, Singapore, and Korea. Chinese sources have made this basic argument, suggesting that an FTA would be a step along the road to Taiwan independence. Moreover, Taiwanese sources and American supporters have played the democracy and human rights card, linking a U.S.-Taiwan FTA to support for those values, as they are embodied in Taiwan-and thereby invoking principles that also are relevant to claiming state- or state-like status in the post-Cold War international order.
For precisely such reasons, Beijing does not welcome the prospect and has (albeit a bit more quietly) been no less chilly to the prospect U.S.-Taiwan FTA than it was to the more easily deterred prospects of a Japan-Taiwan or Singapore-Taiwan FTA . Partly because much of Washington does not want such diplomatic frictions with Beijing, the Taiwan FTA faces an uphill fight and, at best, a place in the queue behind others. The steepness of the hill is further increased by the waning of the influence of the Taiwan caucus and Taiwan lobbying in Congress and by the increasing tendency in Washington to regard Taiwan as a subordinate issue in the broader universe of U.S.-PRC relations.
Here, the problem is largely structural, reflecting the rising relative power and importance of China. But, in additions, some of the tactics that Taiwan and its friends in Washington have pursued have contributed to the problem. This is not to say that those tactics are clearly wrong-headed. Rather, those who have used them have suffered from their encounter with a common conundrum that faces ostensibly status-unrelated moves from Taipei. The argument that a Taiwan-U.S. FTA is purely about trade and economics (and that the impediments to it are merely economic ones, such as the complaints about Taiwanese IPR protection, implementation of WTO commitments and the like) inevitably-and rightly-sounds disingenuous. Because there is undeniably a component that is political and that does have implications for Taiwan’s international status and standing, there is an understandable temptation to engage in arguments that address that-making the claims about security commitments and recognition of Taiwan’s democracy or even not subjecting Taiwan to the indignity of a "CEPA" label rather than the ordinary "FTA" label for any agreement. Indeed, it may be almost necessary to do so, given Taiwan’s economic unimportance relative to the PRC and given that Beijing has politicized the issue. But once these political elements are fully on the table, the useful claim that an FTA is really just about economic interests and principles becomes unsustainable and Taiwan and its Washington allies are problematically cast in the role of engaging in "status politics" and being at fault in any resulting roiling of cross-Strait and U.S.-PRC relations.
There are, of course, genuine international economic issues and domestic interest group issues for the U.S. with a Taiwan FTA. Some are relatively generic to FTAs and some are specific to the Taiwan case (including concerns over IPR, telecommunications, agriculture and pharmaceuticals). But what remains most distinctive about the case of a possible U.S. FTA with Taiwan is that, like all matters involving Taiwan, it is deeply entangled with the politics of the Sino-American bilateral relationship and the politics of Taiwan’s international status as a state or state-like entity.
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