Expanding Influence: China’s Evolving Trade Agreements in the Asia-Pacific

While recent attention has focused on direct U.S.-China trade tensions, the more subtle but potentially more significant long-term strategic trade competition in the Asia-Pacific continues. Aside from deepening economic cooperation resulting from its Belt and Road Initiative (BRI), China has concluded and extended a number of important regional trade agreements in the last two decades. Both these developments, along with the U.S. withdrawal from the Trans-Pacific Partnership (TPP), have been widely interpreted as indicating China’s growing regional influence. Crucially, however, the ways in which the design of China’s regional trade agreements may serve to buttress its regional position have not been fully appreciated.

It has long been suggested that China’s regional trade agreements are more political than economic, or at least have a more significant political dimension than trade agreements concluded by other major economic powers. One reason for this is the limited nature of many of these agreements, both in terms of economic sectors covered, and the levels of tariff reduction entailed. Another reason is the unusually generous terms China has sometimes offered its regional trade partners, allowing, for example, more junior partners to liberalize tariffs at a slower rate than China. Beijing’s regional agreements have often therefore been seen as a tool by which it has sought to increase its regional influence, or even to establish a new regional order. But China is of course not the only country to link trade with geopolitics, and almost all trade agreements are driven by both political and economic considerations.

What is more interesting about China’s approach is not the political implications of the agreements per se, but rather the particular form of its agreements and the implications that result. Unlike agreements signed by other major powers, China’s trade deals are characterized by their initially very limited nature and are gradually expanded over time through ongoing negotiations. Because of this, the impact of China’s trade agreements on its evolving regional position must be understood not as a one-off event but as an ongoing dynamic.

Economic Cooperation in the Asia-Pacific

Currently China has trade agreements in Asia and the Pacific with ASEAN, Australia, South Korea, New Zealand, Pakistan, and Singapore, as well as with the Chinese special administrative regions of Hong Kong and Macau. In almost all cases, Beijing’s negotiators have pushed for agreements that are relatively narrow, entail limited liberalization, and are subsequently expanded in numerous later negotiation rounds.

This leads to two important consequences. First, the initial agreement naturally incentivizes partner states – and businesses within these states – to invest resources in orienting more toward the Chinese economy, both as a source of imports and a market for exports. Second, due to the size of the Chinese market, and China’s relatively higher levels of economic growth in recent years vis-a-vis its trade partners in the region, the dependence of China’s trade partners has often increased over time. Therefore, there is a desire to expand and renegotiate the agreements, and as this occurs, it provides Beijing with opportunities to link growing economic cooperation to collaboration in other spheres.

In other words, by concluding limited initial deals, China has the opportunity to utilize its growing bargaining advantage to exert greater influence at subsequent negotiation points. Were China to adopt the same approach as other major economic powers by negotiating comprehensive deals from the beginning, there would be fewer opportunities for such ongoing issue linkage. By foregoing greater initial gains with more limited agreements, China may therefore reap greater rewards in the longer term. To gain a fuller picture of China’s evolving role in the region, we consequently need to understand how these trade agreements have developed over time.

China’s Expanding Trade Agreements

China’s approach to trade deals was clear from the conclusion of its first regional agreement with Hong Kong – a very limited deal that stipulated further negotiations at later stages. When the agreement entered into force in 2004, it covered just a few service sectors and investment. Today, it comprises several supplementary agreements. The ninth supplementary agreement, signed in 2012, expanded the number of service sectors, while the tenth entered into force in 2014, further expanding market access. During this time the interdependence of the two parties has increased and as of 2018, China was responsible for around half of Hong Kong’s total trade, compared with 25 percent in 1997. China is also the source of 46.3 percent of Hong Kong’s imports and the destination of 44.2 percent of its exports.

Similarly, the trade agreement between China and ASEAN, concluded in 2004, was originally limited to goods and liberalized relatively little compared to international standards. It also allowed each party to register hundreds of goods that were not subject to tariff reductions until 2020. There is now an additional agreement on investment, concluded in 2009, and the deal underwent further expansion in 2010. Since the conclusion of the initial deal, ASEAN’s trade in goods with China went from a surplus to a deficit of over $43 billion in 2017. Nevertheless, a further protocol was signed in 2015 to upgrade the agreement.

In China’s deal with Pakistan the outcome of negotiations was a similarly limited agreement on trade in goods that required subsequent expansion. Despite extensions to cover services, investment, and banking, negotiations have been ongoing to extend the agreement further. In the last few years many of Pakistan’s domestic producers have faced increasing competition with their Chinese counterparts, and as a result the agreement continues to be controversial domestically. Despite this, the two countries have expanded their trade relationship even further. As of 2018, Pakistan had an annual trade deficit with China of over $12 billion, even before the second phase of the agreement came into effect at the end of 2019. At the same time, this gradual expansion of the trading relationship has been accompanied by growing cooperation in the form of the China-Pakistan Economic Corridor (CPEC) and on security issues. The link between economic and security cooperation is made explicit in the so-called China-Pakistan all-weather strategic cooperative partnership, which has deepened in recent years, most recently manifesting in the sixth bilateral naval exercise between the two countries.

Meanwhile, China’s agreement with Australia, concluded in 2015, took more than a decade to finalize. This slow progress was at least partially the result of the inability of the two sides to agree on the scope of the deal. Australian negotiators wanted a comprehensive agreement, while their Chinese counterparts preferred a limited, gradual approach. Today, China is Australia’s top trading partner both in terms of exports and imports. China is the market for nearly 30 percent of Australia’s exports and the source of 21 percent of its imports. In 2018, there were indications that the Chinese government targeted Australian exports of beef, wine, tourism services, and higher education in response to political tensions. Despite this, as of late 2019, there have been calls from Australia to further expand the existing agreement.

Influence by Design?

It is clear that China has adopted a very specific approach toward negotiating its regional trade agreements, which has the effect of extending trade negotiations over a number of years. Part of this approach might be explained as a learning process due to Beijing’s relative late coming to negotiating trade agreements after 2001, or it might simply be a consequence of its more cautious approach to liberalization.

Nevertheless, the broader political implications of this approach should not be ignored. Following the conclusion of these deals, China’s regional trade partners have naturally become more economically connected with China over time. China has taken up a more significant proportion of their trade and become a more important destination for their exports. Moreover, this trade is also often concentrated in politically sensitive sectors in partner countries. While the political significance of trade deficits can be debated, there is little doubt that a high percentage of exports from sensitive sectors to China means that its trade partners have an increased interest in maintaining good relations with China more broadly. This tendency is only exacerbated by the possibility, inherent in the limited initial agreements, of expanding and deepening the trade relationship further.

While trade has long been used as a mechanism of political influence, the bargaining opportunities provided to a growing economic power like China by extending the negotiation process over many years should not be ignored. If China’s regional influence continues to grow, as seems likely, the continued development of its existing trade agreements will be an important factor.

This article is a shorter version of a research paper published in The Pacific Review, a journal focused on the international interactions of the countries of the Pacific Basin. The Pacific Review covers political, security, military, economic, and cultural exchanges in seeking greater understanding of the region.