The world’s largest free trade zone landed this week

This article is reproduced from the WeChat official account of Huang Hancheng (ID: zgtrendPlus) in Mong Kok.
Author: Huang Seoul

The world is changing dramatically.

Various signals indicate that the RCEP (Regional Comprehensive Economic Partnership) led by China will be officially signed this Sunday (15th).

This is the largest free trade zone in the history of mankind, and it is also the first super-large multilateral free trade zone with Eastern countries as its core after the great maritime era in the 15th century.

For this moment, China has waited for 8 years.

Its significance is not just as simple as accelerating the transfer of the world economic center to East Asia. The bigger symbol is that on the eve of the WTO “disintegration”, when the world is about to usher in turbulent waves, China has finally grasped a stable anchor.

Moreover, using this as a springboard, China can also further win the China-Japan-Korea Free Trade Area, the China-EU Investment Agreement, and join the extremely difficult CPTPP for China.

At the beginning of next year, 78-year-old Biden is very likely to enter the White House, and Sino-US friction will switch to a new model. If the Cold War of the last century used military competition to bring down the Soviet Union, the United States under Biden’s helm tried to use “economic islandization” to lock China’s development.

A big screen of encirclement and suppression was opened between the two most powerful economies in the world.

China has never felt more oppressive like this time.

01

Starting from Wednesday (12th), the 37th ASEAN Summit will be held in a video format for several days. At the summit on the 15th, countries are expected to sign the RCEP agreement.

The agreement includes ASEAN, 15 economies including China, Japan, South Korea, Australia, and New Zealand, covering 29.7% of the world’s population and 28.9% of GDP.

Previous news said that in terms of trade in goods, the signatories agreed to remove at least 90.3% of the tariffs on products within 5 to 10 years, and will introduce more transparent rules to lower non-tariff barriers. In terms of investment, a negative list system was implemented to further lower the market entry barriers.

In a word, in these 15 economies in the future, the flow of goods and capital will be as free as in a country, without all kinds of chaotic barriers.

This is of great significance to China.

As the world’s factory, China is at the heart of the global industrial chain, and trade in intermediate goods occupies a very large proportion. In 2018, China’s processing trade import and export amounted to 8.4 trillion yuan, accounting for more than a quarter of the total import and export volume.

Intermediate goods require multiple cross-border trades, so that tariffs are constantly superimposed and magnified, reducing the price competitive advantage of final products. Under the framework of RCEP, China can greatly reduce production costs.

Let me give you an example. Huawei’s P30 Pro contains 1631 components, more than half of which come from the number of components produced in Japan (869), and the value is 23%.

The China-Japan-Korea Free Trade Area is under arduous negotiations and has not yet been able to land. The landing of RCEP is equivalent to China indirectly signing a preliminary free trade agreement with Japan.

In the future, these parts and components may enter China with zero tariffs and be processed and assembled in factories. As a result of saving various tariffs, Chinese consumers can buy P30 at a lower price.

Not only that, P30 exports to non-RCEP countries, such as Europe, the Middle East and other places, can also gain a greater price advantage and expand global market share.

Regardless of whether the Honor brand will be sold to China in the future, China’s mobile phone manufacturing industry will benefit as a whole in the future.

Japan is the third largest source of Chinese imports and the third largest source of exports. This country alone can release a dividend that cannot be underestimated for China. You can imagine the superimposed effect of a dozen economies.

Although in the past, China has signed free trade agreements with other members of RCEP, such as South Korea, Australia, and New Zealand. However, the mutually agreed tariff concession period is too long. For many products, tariffs will be cancelled after 10, 15 or 20 years.

The RCEP not only cuts tariffs more aggressively than the existing free trade agreements, but also greatly shortens the concession period (probably 5-10 years).

Therefore, China can enter the zero-tariff stage ahead of schedule with these dozen members, and hedge against the islanding trap set by the United States.

02

Having said that, I first want to popularize the significance of zero tariffs for global economic growth.

As you all know, the level of development across the world is not consistent. Many countries, in order to protect the relatively weak domestic industries and allow their own companies to have room for survival, will set high tariffs to artificially lower the competitive advantage of overseas imported products.

In fact, this is very unfavorable to the global specialization of labor.

More than two hundred years ago, Adam Smith, Ricardo and others said that if countries concentrate on developing their own industries with absolute/comparative advantages and weak products are made up for by global trade, it will not only greatly increase global productivity, but also Expand the wealth of the whole society.

Do you think about it?

During the imperialist era of the 19th century, Britain, France and other countries used strong ships and guns to forcibly shape the earth into a society of labor: after the textile industry of China and India was destroyed by dumping, it was reduced to underdeveloped areas that provided cotton, while Britain became the world. The factory uses advanced steam engines to produce larger-scale output.

Although this colonial model is extremely cruel, objectively speaking, it has also led to a more extensive and effective use of the world’s human and material resources, and the world’s productivity has been greatly improved-between 1860-1890, global industrial production increased by three times It increased by 7 times between 1860-1913.

Today, the method of force is no longer feasible. Therefore, the world will produce the General Agreement on Tariffs and Trade and the WTO. Reduce tariffs as much as possible through negotiations.

Of course, the lower the tariff, the better.

But there is also a problem here, that is, the WTO is a huge complex, with more than 160 member states.

According to the most important principle of the WTO, “Most Favored Nation Treatment”, a country must reduce tariffs on a certain product of a certain country at the same time to reduce the same tariff for all the remaining more than 100 members, and the door is fully opened.

Therefore, within the framework of the WTO, it is difficult to lower tariffs anymore, let alone zero tariffs.

Take India and Brazil as examples. Although they are the same four BRIC countries, their manufacturing level is obviously lower than that of China, so the average weighted tariff rate is also higher, respectively 9.65% and 6.22% (2016), which are several times that of China.

Attention! This is only an average line, and the tariffs in some industries are as high as 20% and 30%. I would rather let domestic consumers pay the bill at a high price than make you comfortable.

The dream of zero tariffs has been delayed. This is why the United Kingdom, France and others have signed the EU agreement, the United States, Canada, and Mexico have formed the North American Free Trade Area, and Vietnam and Thailand have established the ASEAN Free Trade Area.

The RCEP to be signed in a few days is equivalent to cutting away a third of the WTO’s territory and establishing a free trade zone by itself.

By that time, more than 90% of products will gradually have zero tariffs, which will greatly promote the economic vitality of more than a dozen members, including China.

First, because there is almost no obstacle to international trade, the import industry intensifies competition, and low-efficiency companies are forced to phase out and withdraw. High-efficiency enterprises in the export industry have expanded their output space and are more willing to adopt advanced production technologies suitable for large markets.

Second, the industrial chain will be reorganized within the region to form a more refined value chain division of labor system. Multinational companies will place production departments in the member countries that best match. And this country may be China.

The research results show that when RCEP achieves trade liberalization in all sectors except the agricultural sector, China’s real GDP growth rate will increase by 0.22%, export growth rate by 11.44%, and import growth rate by 17.12%.

Under the friction between China and the United States, such growth is very valuable!

03

You know, there is not much time left for China.

With the “approval” of the United States in 2001, China successfully joined the WTO. This is a major turning point in China’s historical process.

At that time, the United States was wishful thinking, thinking about integrating the closed China into the world industrial chain. As long as the economy develops, its political and social fields will change in the direction envisioned by the United States. But in recent years, the intestines of the United States have been regretted.

The United States believes that the WTO’s sanctions and restraint mechanisms have no effect on the “rogue” China. Therefore, the United States kicked off the WTO and led the promotion of the TPP (Trans-Pacific Partnership Agreement).

Although Trump began to withdraw from the group after he took office, and the TPP was downgraded to CPTPP, the current Biden has already vowed to come back and pull in various allies to isolate China.

The world’s third largest free trade zone covers developed countries such as Japan, Canada, and Australia, as well as emerging economies such as Vietnam, Malaysia, and Mexico. There are both the most important export market for China and China’s strongest competitor.

If the United States rejoins, the TPP members will include China’s largest, third, and fifth largest export markets, and the third, fourth, fifth, eighth, and ninth largest import markets.

Compared with RCEP, CPTPP rules are more advanced, more comprehensive and more modern. In addition to the principle of zero tariffs, it also implements zero subsidies and zero barriers. The movement of capital, goods, information, and population in this region will be more liberalized than RCEP.

All member states have a richer choice of import and export, which will cause a certain degree of substitution for China, and negative effects on trade and capital transfer.

Let me make an analogy. Everyone knows that Vietnam’s labor and land costs are particularly cheap. This is a major advantage for Vietnam to develop low-end manufacturing. If Vietnam’s light industrial products are shipped to the United States, the tariff will be reduced to zero, making the CIF price lower than that of Chinese manufacturing. , What do you think will happen next?

The United States will definitely import large quantities from Vietnam and kick China away. The business world doesn’t talk about friendship.

Capital has no borders. In order to survive, Chinese companies in this industry will definitely move their families and move to Vietnam for production, which will intensify the hollowing out of the domestic industry. The new global investment will also bypass China and flood into Vietnam.

In a word, the zero-tariff rule will artificially interrupt the regional production network, impact China’s automobile, textile and other industries, and squeeze out China’s export market share.

In January 2019, CPTPP officially came into effect. The Peterson Institute for International Economics in the United States predicts that CPTPP will reduce China’s GDP by 0.04% and the value of trade in goods by 0.2%.

The impact is controllable and limited, but don’t forget that this is only in the absence of the world’s largest economy, the United States.

Now, Biden has vowed to return to the CPTPP, and this year the UK has reached a free trade agreement with Japan. This veteran capitalist country regards this as a springboard to join the CPTPP (Japan dominates the CPTPP), and wants to take this opportunity to expand in the Asia-Pacific. Divide into larger cakes.

In the future, as Britain, the United States and other major countries join in and further absorb China’s Taiwan, Indonesia, the Philippines, and South Korea, the economic impact on the Chinese mainland will increase exponentially!

In other words, the economic benefits brought by RCEP to China are not enough to offset the losses caused by the US returning to the TPP.

After all, it may be nearly half of the global market in the future, and it is still a super free trade zone lacking China. The negative impact on China cannot be taken lightly.

04

This is why China has a strong sense of urgency.

Not long ago, the senior executives delivered a keynote speech at the 3rd Shanghai Import Expo, mentioning that bilateral, multilateral and regional cooperation will be deepened in the future.

“China is willing to negotiate high-standard free trade agreements with more countries, promote the signing of regional comprehensive economic partnership agreements as soon as possible, accelerate the negotiation process of China-EU investment agreements, China-Japan-Korea free trade agreements, and strengthen exchanges and mutual exchanges with world high-standard free trade areas. Jian.”

RCEP is far from being able to break the trap of “economic islandization” that the United States is laying out. Therefore, China is seizing the time to implement the China-EU Investment Agreement and the China-Japan-Korea Free Trade Area.

Take the China-Europe Investment Agreement (BIT) as an example. Since 2014, BIT has conducted at least 33 rounds of negotiations. In September this year, high-level leaders held a video meeting with German Chancellor Angela Merkel, President of the European Council, and President of the European Commission von der Lein.

The leaders of China and the European Union confirmed that they will complete the negotiation goals within this year, which is the 45th anniversary of the establishment of diplomatic relations between China and the EU. For China, this will be the first bilateral investment agreement in history that includes market access.

China will open up some areas that were considered restricted areas in the past, or further remove the proportion of equity restrictions, which will stimulate foreign investment in Europe.

Secondly, China may adopt the principle of competition neutrality for state-owned enterprises for the first time, reducing financial subsidies, preferential loans, and land allocation to state-owned enterprises. This will have a series of very far-reaching effects on China’s economy.

On the one hand, domestic private enterprises and foreign enterprises will get the same competitive conditions as state-owned enterprises. You know what this means.

On the other hand, it will allow Europe to reduce political review of Chinese state-owned enterprises, help state-owned enterprises to invest in overseas mergers and acquisitions, and expand China’s GNP and global influence.

In this way, even if there is friction between China and the United States, China can accelerate its integration with the huge EU market and obtain EU technology and intellectual property rights.

The world is in a process of violent turmoil, and Sino-US friction has entered a time of race against time. It depends on who goes faster.

CPTPP’s requirements for freedom of labor association, collective bargaining, high standards in environmental protection and intellectual property rights, and the adoption of investor-state dispute mechanisms have destined China to join in and collapse from within.

Therefore, China’s idea is to use the China-EU Investment Agreement and the China-Japan-Korea Free Trade Area to approach these new gameplays step by step, to use openness to force reforms, and to eliminate the drawbacks of the mechanism that cannot keep up with internationally accepted rules.

I have said before that if Biden comes to power, as a traditional establishment, although he will not be like Trump, he will use “legal” market means to contain China and isolate China.

This type of attack is even more terrifying.

Because when the United States reorganizes new rules and establishes a new political and economic order, the United States does not need to worry about killing one thousand enemies and self-defeating eight hundred, like a trade war.

These new rules have increased the interests of the United States and its allies, and can automatically and openly hold back China’s pace, so it is more effective to implement them.

The world is on the eve of great changes.

Whether China can seize the opportunity of a new round of globalization at the node where the WTO is on the verge of “disintegration” depends on the two-year window period.

- END -

1 Response

  1. Amoret says:

    For the first time in American history, negotiations for a free trade area are moving forward in both the Pacific and Atlantic.

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