GEGAfrica (Johannesburg)

Africa: China's Reforms, the Global Trading System, and South Africa's Trade Strategy Featured

analysis

Go to any conference in the world and say 'Doha Development Agenda', and the room is likely to empty. But not in China. Recently I was impressed with the degree of interest amongst China's trade policy elite in the future of the World Trade Organization (WTO), and the global trading system of which it is a part.

By contrast, the dominant view amongst US trade policy makers is that the Doha round has failed, and the WTO is moribund. Therefore the US is negotiating two 'mega-regional' trade agreements with the European Union (EU) and certain Asia-Pacific countries: the Transatlantic Trade and Investment Partnership (TTIP) and Trans-Pacific Partnership (TPP) respectively.

The TPP came first, includes 12 countries notably heavyweights Japan and Mexico, and covers approximately a quarter of world trade. Its agenda goes well beyond Doha, and includes issues such as investment and intellectual property rights, potentially even currency management. This is a wide, deep, and ambitious negotiation.

Chinese opinion on the TPP is divided. One camp regards it as a thinly veiled, US driven geopolitical strategy to cement President Obama's 'pivot to Asia' and isolate China in the region. Japan's inclusion reinforces this perspective. It is mirrored in the US security community, parts of which want the TPP to isolate China from regional supply chains.

The other camp is rooted in economics; particularly China's recently announced reforms. Their view is that the TPP should be harnessed as an external prop to drive domestic economic reforms in much the same way that WTO accession was used 20 years ago. This perspective resonates with the Washington trade policy community, which has long favoured a strategy of 'competitive liberalization' whereby, in this case, a juggernaut of liberalising reforms radiates out from China across the global stage, ultimately finding its way back into the WTO on US terms.

The TTIP covers 29 countries, and a third of world trade. In common with the TPP a central objective is to forge common standards in a wide range of regulatory areas, while liberalizing the relatively few remaining tariff barriers. Both sides hope the agreement will boost economic growth, and cement the transatlantic alliance.

Until now the political will to tackle the many variances in regulatory approaches either side of the Atlantic has been lacking. Now China is a significant player in global supply chains, and if its reform drive is successful that position will become more powerful. It will also seriously challenge transatlantic leadership of the global trading system These twin threats constitute the geopolitical glue that may shepherd both the TTIP and TTP negotiations over the success threshold.

What does all this mean for SA's trade strategy?

Much depends on the prospects for the two 'mega-regional' negotiations. Will they successfully conclude? If so, then the impacts outlined above, and particularly the competitive liberalization scenario, are likely to materialise. If not, then the focus will shift to China's reform strategy. Unfortunately, there is very little in the public domain regarding the substance and progress of these negotiations so it is premature to form reliable judgments.

If the TTIP fails Chinese trade diplomats and policy wonks probably wouldn't be surprised. One senior former trade diplomat I spoke to privately described the talks as 'a joke'. But if the TPP fails, the aftermath will be more interesting. The US would have failed to cement its regional leadership, while China will be freer to assert its own. Then US-China-Japan strategic rivalry in the Asia-Pacific will intensify.

Furthermore, the door could open to Chinese leadership in the WTO. Ten to fifteen years after the prospective round of economic reforms begins in China, who knows where that might lead. We have already seen conflicting Chinese messages in the WTO, with implications for BRICS solidarity, inter alia.

For example, China has formally requested to join The Trade in Services Agreement, a WTO-aligned plurilateral negotiation that aims to liberalize services trade amongst a group of like-minded members. Until now the BRICS had steadfastly resisted joining such 'coalitions of the willing' in order to keep the focus on the Doha round. But the services sector is a key focus of China's domestic reforms.

On the other hand China is delaying extension of the International Technology Agreement, an existing plurilateral that eliminates tariffs on a range of IT products. Yet China clearly has a great deal to gain through further liberalization in this area.

These contradictions show that guesswork about China's domestic economic reforms is just that. Nonetheless, in my view they are likely to gather pace. Of core interest is the host of potential reforms concerning domestic competitiveness in key sectors related to China's external relations. The communiqué issued after the third plenum of the Chinese Communist Party's eighteenth central committee makes reference to the private sector assuming a 'decisive role' in the domestic economy. State-owned enterprises, the financial system, foreign investment restrictions, and even currency reforms are all, inter alia, in the liberalization spotlight. The Shanghai free trade pilot zone has become the reference point for experimentation; further reforms will undoubtedly follow.

There will be resistance. But the Xi Xinpeng administration seems determined to have its way. Thus it has tightened political control in order to reduce opposition. The process will be less dramatic and more uneven than the reforms of the late 1970s and mid 1990s, but could be just as defining.

SA is tangential to this new great global game. Our domestic policy trajectory points increasingly inward, while being gradually transposed into the region. That is likely to encounter swelling regional resistance, challenging SA leadership. It also undermines SA's role as the regional economic gateway: since gateways are conduits they must necessarily be open to trade and investment.

Regional markets are no substitute for our companies' broader interests in Europe, the US, and East Asia. We have no trade strategy for the East Asian region, while the inward-looking focus precludes developing one. Our current trade preferences with the EU will be devalued should TTIP be concluded. And the US is likely to impose reciprocal obligations on us if we wish to continue utilising the African Growth and Opportunities Act after the current version expires in 2015.

We could continue to gradually seal off the domestic market and hope that the world will engage us on our terms. But that course will undermine our international competitiveness, and the world is likely to look elsewhere. Instead, we should be thinking seriously about how to position SA for the future global trading system. There is some hard thinking to be done.

Peter Draper is senior research fellow with the South African Institute of International Affairs. He recently spent two weeks in China researching this topic. This article was originally published in the Business Day.

Peter Draper is Senior Research Fellow in the Economic Diplomacy programme at the South African Institute of International Affairs. His other domestic affiliations are: Adjunct Professor at Wits Business School; Senior Consultant to the India, Brazil, and South Africa think tank consortium at the Centre for Development and Enterprise; and Research Associate of the Department of Political Science at the University of Pretoria. His current international affiliations include: board member of the Botswana Institute for Development Policy Analysis; non-resident senior fellow of the Brussels-based European Centre for International Political Economy; vice-chair of the World Economic Forum's Global Agenda Council on Trade; and member of the brains trust of the Evian Group at IMD Lausanne. He holds a Master of Commerce degree from the University of Natal (now University of KwaZulu-Natal).

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