China’s CPTPP Application: What are the Implications for Canada?

China’s application on September 16 to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), the eleven state plurilateral trade agreement that was signed in 2018 after the United States withdrew from its predecessor, the Trans-Pacific Partnership, is a clever political and strategic move on China’s part. It also raises the question as to whether China is making a serious bid to join the CPTPP or is putting forward its candidacy primarily as a strategic political gambit. If the former, it would appear to indicate a willingness to change, or at least to consider changes, to some fundamental aspects of its state-led economy, thus providing support for economic reformers within China. However, China may consider that its economic heft will allow it to water down some of the CPTPP rules and obtain concessions and exceptions, either in form or timing of implementation. China may also have no real expectation of entering serious accession negotiations but has instead put forward an early application in order to shine a spotlight on the absence of the United States from the Agreement, and from Asia-Pacific trade architecture generally, as well as to scramble the cards on Taiwan’s entry.

China’s bid raises some questions as to its motives given that the CPTPP’s predecessor, the twelve-member Trans-Pacific Partnership, was essentially developed as a counterweight to China’s growing economic and political influence in the region, although that objective was never explicitly stated by the negotiating partners. What has changed is the withdrawal of the United States from the TPP and generally from its longstanding commitment to trade liberalization, the completion of part of the trade architecture for the region with the conclusion of the Regional Comprehensive Economic Partnership Agreement (RCEP) which groups China, Japan, Korea, Australia, New Zealand and the ten ASEAN states, and, possibly, a desire by China to accept additional economic reforms as part of its longer term strategy to encourage balanced domestic economic growth.

China’s application poses some immediate issues for Canada in the aftermath of the resolution of the Meng Wanzhou/Two Michaels case. As a founding member of the CPTPP, Canada will need to take a position on China’s application. This presents Canada with both an opportunity–with regard to leverage on China–as well as a dilemma. Canada will need to develop its position in consultation with other CPTPP members while acknowledging the nature of its relationship with the United States. In this regard, the terms of the CUSMA Trade Agreement (Article 32.10) and the state of US-China relations will need to be taken into account.

There are informed commentators who argue that Beijing is ready to meet the high standards of entry to the CPTPP, has been preparing for some time to do so, and that the necessary policy adjustments would not be overly onerous. Nevertheless, based on current Chinese practices, labour rights, disciplines on State Owned Enterprises (SOEs) and digital trade would present obstacles for China. China would not be the only CPTPP member country with strong state-owned entities (Vietnam, Singapore and Mexico all fit into this category), but the role of SOEs in China’s domestic economy far outweighs the role of state capital in current CPTPP members. The Agreement brings SOEs under “WTO Plus” disciplines, including commitments regarding commercial considerations, transparency, non-discrimination and non-commercial assistance (subsidies).

China reportedly began exploring technical aspects of the agreement with CPTPP members back in May of this year and as a result will have a detailed knowledge of what is expected. While adoption of CPTPP standards would assist domestic economic reformers within China to advance their agenda. However, judging by current policy settings, reformers do not appear to be in the ascendency at present. Despite its strong performance through the first 18 months of the pandemic, China is facing some of the same economic challenges as other economies in terms of economic disruptions from lockdowns, port backups etc. Its highly leveraged property development sector is facing a liquidity crisis. Rolling power outages have been the most recent issue as China grapples with the need to reduce dependency on coal in order to meet environmental targets. Its tepid response to COP26 suggests that the issue of economic growth at all costs versus the need for greater action on the environment remains to be settled. China’s domestic policy setting to date has been to strengthen central state control and government intervention, rather than to relax the heavy hand of the state and give freer play to market forces as would be required under the CPTPP.

If China’s main objective is to water down CPTPP standards as a condition of its entry, this could result in rifts between CPTPP members and undermine the integrity of the Agreement. Already there have been differing responses from CPTPP members regarding China’s application with Australia and Japan expressing caution while Malaysia and Singapore were more welcoming.

There is another potential reason for China’s formal application at this time-strategic. Under this scenario, China realizes that it would be difficult to meet the standards of the CPTPP given current Chinese economic policy yet has little to lose by making an application, knowing that either (1) its application will not be endorsed by all members, yet China will have “demonstrated” its willingness to promote economic liberalization or (2) more likely, there will be cautious endorsement but negotiations will be difficult, protracted and may not reach a conclusion. After all, China’s WTO accession negotiations took over 15 years. Under this scenario China not only buys time, but it shines a spotlight on the absence of the United States from the CPTPP, while scrambling the cards on Taiwan’s entry.

Taiwan has been preparing its CPTPP bid for some time but has proceeded with excessive caution. When the UK launched its own bid to join the CPTPP earlier this year, Taipei took this as an opportunity to further delay, wanting to take stock of how the UK’s negotiating process played out. In addition, President Tsai Ing-wen’s government is facing domestic political constraints arising from the influence of the protectionist agricultural lobby as well as health and safety concerns regarding food imports. However, within a week of Beijing formally submitting its CPTPP application, Taipei suddenly moved and filed its request with New Zealand. With Beijing’s foot in the door first, however, Taiwan will now have to contend with the formula that was invoked when both China and Taiwan joined the WTO. China joined first, with Taiwan following almost simultaneously. One was linked to the other. While CPTPP members are not obliged to follow the WTO precedent, it will be a powerful factor and as long as China drags out the negotiations on its own entry, the longer Taiwan will have to wait. China may have just spiked Taiwan’s cannon.

Having successfully checked Taiwan’s application with its gambit, China has also rubbed salt into a self-inflicted wound created by the Trump Administration when it cancelled US membership in the CPTPP’s predecessor, the twelve nation Trans-Pacific Partnership (TPP). The TPP, US-led and inspired, was often seen as a trade counterweight to China in the region. When the US abandoned–on Trump’s first day in office—the TPP Agreement it had successfully negotiated and signed, this action seemed to signal that the US had turned its back on the region, at least economically. (The Trump Administration replaced its regional approach with bilateral negotiations, or re-negotiations, with key trading partners such as Korea, Japan and China.  This allowed it to exert maximum direct pressure as well as achieving, in some circumstances, managed trade rather than liberalized trade). The Biden Administration now has to consider how best to restore US economic leadership in the Asia-Pacific region. Unfortunately for Biden, most Democrats have little appetite for further trade liberalization and many Republicans are still beholden to Trump’s protectionist policies, destructive though they have been for American interests.

There is a great deal of irony in seeing China use a trade pact originally developed and promoted by the United States as a means to expose the lack of US commitment to the region. At the same time, China could potentially benefit from accepting trade disciplines consistent with CPTPP standards.

In developing its response to China’s application, Canada will need to consult its CPTPP partners but also keep the position of the US in mind. The biggest obstacle, faced by both Canada and Mexico, is Article 32.10 of the CUSMA. This is so-called “poison pill” clause inserted at the insistence of the United States, that, in effect, gives the US a veto over a “free trade agreement” with China signed by any of the other CUSMA partners. The wording doesn’t say this in so many words, but that is the ultimate result. If the US does not like the terms of any future agreement signed by either Canada or Mexico with a “non-market economy” (as specified by any of the CUSMA members on the date of entry of the Agreement), it can withdraw from the trilateral agreement. The only country that meets the definition is China. Article 32.10 also requires a CUSMA member to inform the other partners of its intent to enter negotiations 90 days before doing so, to share negotiating information and the full text prior to the conclusion of negotiations. The US does not want China gaining access to North America through its CUSMA neighbours without having a final say on the terms. Yet if Canada hides behind CUSMA to deny China’s entry, it risks alienating other CPTPP members in addition to closing the door on an important opportunity to bring China into closer alignment with Canada’s trade objectives.

Would the CPTPP fit the definition of a “free trade agreement” as per CUSMA? Most likely. The Global Affairs Canada site describes the CPTPP as a “a free trade agreement between Canada and 10 other countries in the Asia-Pacific”. This issue will have to be handled with great care.

Quite apart from possible constraints imposed by CUSMA, Canada must consider its overall Indo-Pacific strategy in formulating a response to China’s CPTPP application. The US is heavily engaged in forging strategic structures in the region to contain China. These include the “Quad” (a loose political grouping among the US, Japan, Australia and India that has conducted some joint military exercises) and now the AUKUS security pact (Australia, UK, US). This is centred on nuclear submarine technology, but also involves sharing cyber capabilities and other undersea technologies. The US under the Trump Administration also developed an overall Indo-Pacific strategy that has been criticized as likely to lead to confrontation with China. Other countries in the region, including Japan with its “Free and Open Indo-Pacific”, have developed their own regional strategies that are specifically framed as being “non-exclusionary”.

To the extent that the CPTPP can be seen to be an extension of its own Indo-Pacific strategy, Japan’s ultimate response to China’s application must surely be to welcome its participation provided that China demonstrates it is ready to meet the high standards of the Agreement. Also worth noting is the fact that both Japan and China (but not Canada or the US) are members of another recently-concluded regional trade pact, the Regional Comprehensive Economic Partnership Agreement (RCEP).

Canada has not yet formulated an updated strategy for the Asia-Pacific, or “Indo-Pacific”, the latter a term coming into increasing use. However, in recent congratulatory remarks to the new Japanese Prime Minister Kishida Fumio, the Canadian government used the term “Indo-Pacific” twice to refer to Canada’s shared interests with Japan. This appears to mark a subtle change in Canada’s approach to the region, and is an acknowledgement of the growing strategic nature of regional relationships.

With a new government settling into place, Canada does not need to take the lead in responding to China’s CPTPP gambit. It can bide its time and let other CPTPP members with clearer views, such as Australia, take the lead in setting the conditions for China’s entry. However, at some point Canadian officials are going to have to respond to Chinese (and Taiwanese) overtures and the Government of Canada will need to publicly articulate its position. Canada should insist that all applicants seeking CPTPP entry, whether the UK, China, Taiwan (as a customs territory) or any other country, clearly indicate a readiness and willingness to meet the existing entry conditions, with very limited derogations and phase-ins. If China can be induced to engage on the CPTPP’s terms, this would be positive not only for Canada but also for the international trading system.

It also cannot be excluded that at some point the US will also be able to re-engage. This would entail some negotiation over the CPTPP’s suspended provisions. These are several articles that were included in the original twelve-nation Trans-Pacific Partnership (TPP) but which were put in abeyance after the US withdrew, given that they were measures that were of primary interest and benefit to the United States. Apart from agreeing with the other CPTPP members to suspend certain provisions, Canada also sought and obtained side letters from each CPTPP signatory clarifying the exclusion of measures affecting Canadian cultural industries from the terms of the Agreement. Presumably Canada will make acceptance of similar side letters by new entrants a condition for its agreement to begin negotiations.

It is yet to be determined if China’s unexpected interest in joining the CPTPP is a short term, tactical, politically motivated ploy or whether it represents a longer-term strategic economic move. It is likely a combination of both. Canada and other CPTPP members will not be able to assess the bona fides of China’s application until they have held preliminary discussions with Chinese officials. In doing so, Canada should adhere to a couple of core principles; China should not be allowed to subvert the terms of the Agreement nor should it be allowed to dictate entry conditions for other potential members. At the same time, China’s bid deserves to be taken seriously and Chinese officials should be given every opportunity to explore thoroughly the conditions relating to China’s potential accession. Canada earned its seat at the CPTPP table through a prolonged and at times difficult negotiation and we should not hesitate to use this position to advance Canadian trade, economic and strategic interests vis a vis China.

Canada will also need to pay special attention to its relationship with the United States with respect to China’s application. Non-members of the CPTPP should not have a veto over prospective applicants although CUSMA Article 32.10 presents a hurdle. The US may eventually come to appreciate the potential benefits of an agreement that could prod China further in the direction of market opening and may one day itself add CPTPP membership to its repertoire of other security-focused initiatives in the region.

China’s gambit to join the CPTPP presents both a challenge and an opportunity for Canada. Canada needs to avoid being caught between the US and China (as happened with Meng Wanzhou and Huawei). At the same time, we have the opportunity to use China’s application to make the CPTPP—where Canada has a “founder’s seat” at the table– more central to both economic and strategic relations in the region, and to use it to help resolve the ever-growing and increasingly dangerous rift between China and the United States.

© Hugh Stephens 2020. All Rights Reserved.

Hugh Stephens is an Executive Fellow, The School of Public Policy; and Distinguished Fellow, Asia Pacific Foundation of Canada

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