4 - The Political Economy of a Free Trade Area of the Asia-Pacific: A China Perspective

Summary

INTRODUCTION

APEC has long been relevant for China's economic diplomacy although its significance has been relatively weakened since China's accession to the World Trade Organization (WTO) in 2001. However, China still attaches great importance to the Asia-Pacific Economic Cooperation (APEC) activities because the “APEC approach” that stresses concerted unilateralism, voluntarism and flexibility provides a unique means of regional co-operation on an experimental basis. As such, APEC can serve strategically for China to implement its Asia-Pacific foreign policy in the long run. Meanwhile, with the rapid proliferation of regional trade agreement and free trade agreements (RTAs/FTAs) in the region, China has also started to set up its own RTAs/FTAs network in the manner of a hub-and-spoke system. Among many proposals, the East Asian Free Trade Area (EAFTA) was particularly favoured by Chinese leaders, in contrast to the ambiguous idea of a Free Trade Area of the Asia-Pacific (FTAAP), which was brought forward and widely advocated by the APEC Business Advisory Council (ABAC). On the one hand, there is little doubt that further trade and investment liberalization and facilitation with institutional reforms and a binding treaty would benefit China in terms of enhancing welfare and structural changes. But, on the other hand, it is uncertain whether the proposed FTAAP would challenge China's prevailing strategy for APEC, given the expected institutionalization of the process. Additionally, economic issues, such as the protection of sensitive sectors, and political issues like the U.S.-China relationship and the status of Taiwan, make it more complicated for China to hold a positive attitude towards the FTAAP proposal.

Against such a background, it is important to have an insight of China's policy towards the FTAAP from a political economy perspective. This paper aims to review the current Chinese overall strategy and policies towards APEC and regional agreements, and extrapolate the likely position that China would have for the proposed FTAAP based on a political economy analysis of the benefits and costs of the agreement.