CESifo, a Munich-based, globe-spanning economic research and policy advice institution Venice Summer Institute 2014 Venice Summer Institute July 2014 REGIONAL MEGA-DEALS: NEW TRENDS, NEW MODELS, NEW INSIGHTS? Organisers: Gabriel Felbermayr and Mario Larch Workshop to be held on 23 24 July 2014 on the island of San Servolo in the Bay of Venice, Italy CHINA AND PROSPECTIVE GLOBAL MEGA TRADE DEALS Chunding Li, Jing Wang and John Whalley CESifo GmbH Poschingerstr. 5 81679 Munich, Germany Tel.: +49 (0) 89 92 24-1410 Fax: +49 (0) 89 92 24-1409 E-Mail: office@cesifo.de www.cesifo.org/venice
China and Prospective Global Mega Trade Deals 1 Chunding Li a, b a Institute of World Economics and Politics, Chinese Academy of Social Sciences; b Central University of Finance and Economics (CUFE); E-mail: chundingli@gmail.com; Tel: +86-13718666210 Jing Wang c c Department of Economics, Western University (UWO); E-mail: jwang624@uwo.ca; Tel: +1-519-6612111 ext 85243 John Whalley c, d, e c Department of Economics, Western University (UWO); d Centre for International Governance Innovation (CIGI), Waterloo, Ontario; e National Bureau of Economic Research (NBER); E-mail: jwhalley@uwo.ca; Tel: +1-519-6613509 1 We are grateful to the Ontario Research Fund and to The Centre for International Governance Innovation (CIGI) for support.
Abstract Following the bilateral negotiation of the Canada-US Free Trade Agreement in 1987, leading to the North American Free Trade Agreement (NAFTA) in 1993, the global economy has witnessed a sharp acceleration in both the number and form of regional trade agreements. As of January 2014, 583 regional trade agreements (counting goods, services and accessions separately) had been notified to the WTO committee on regional trade agreements and 377 were in force (see Whalley (2008), Crawford and Fiorentino (2005), and Fiorentino and et al (2007)). Heavily motivated by security of access more so than improved access, the vast majority of these agreements, however, were either between small countries or between larger and smaller countries, with a few notable exceptions, such as the China-ASEAN agreement, or NAFTA itself. Given large country focus on the WTO, as a forum for substantial negotiations, relatively few agreements had occurred pairwise or bloc-wise between larger economies. However, in the last 12 months there have emerged possibilities for a series of large/large trade negotiations which if successfully concluded in the next few years could likely significantly reshape the global trade policy landscape. These possible (or prospective) trade deals have been labelled mega deals by Francois (2013), Plummer(2013), and Stoler (2013). Here we concentrate on China s potential involvement in these possible deals, how they could affect China s trade and growth prospects, what form negotiations might take, and what concessions both at home and abroad might be at issue. We argue that China may have more at stake in these deals than either the EU or the US and for three reasons. One is that in the tariff component of such deals China has a significantly higher initial tariff than either the US or the EU, giving China both higher potential domestic benefits in liberalization and more negotiating leverage. Another is that the initial coverage of non-wto trade deals in the Chinese case is smaller than for the EU or the US. Yet another is that the higher Chinese growth rate of GDP implies relatively more importance for Chinese trade deals in terms of future trade and growth performance. We first explore the potential for mega deals globally and how China might be involved. We take different criteria for inclusion of potential deals in the mega deal category, including the top 10 economies by GDP size, the top 10 by trade size, and the G20. For each we examine deals in place, prospective deals under negotiations or initial discussion, and deals yet to be initiated. The picture emerging is one of uninitiated deals being the largest category reemphasizing the significance of mega deals. We next explore China s situation regarding deals under current negotiation. We note that for China the ongoing negotiations with India, and Japan/Korea, and ASEAN+6 on RCEP (Regional Comprehensive Economic Partnership), as well as noting possible involvement in the Trans Pacific Partnership (TPP) and even a possible US-China deal. We contrast to the US situation with TPP and negotiations with the EU on a TTIP (Transatlantic Trade and Investment
Partnership). For the EU there are negotiations under way with the US on TTIP, an India negotiation, and an ASEAN negotiation. Our calculations suggest that in terms of trade coverage China would see a larger increment proportionally in trade coverage of RTAs were all agreements listed as under consideration to be completed. China would also see the largest proportional increment of trade coverage by moving to complete coverage of all pairwise possibilities in large-large RTAs ( mega deals). We then turn to the potential impacts of mega deals on trade and growth performance between China, the US and the EU in a comparative analysis. We note that if these mega deals turn out to be predominantly tariff based deals then China has the higher initial tariffs. This suggests more bargaining power for China, more gains relatively from liberalization, and larger impacts on economic performance. We also note in passing that while the EU-US TTIP has by far the largest trade coverage, many trade issues between the EU and US have been dealt with in the WTO, reducing the impact of a EU-US deal. If broader negotiations of substance beyond tariffs occur, then higher initial barriers estimates in the form of trade costs (see Anderson and Wincoop (2003), Li and Whalley (2014)) for China again suggest larger possible impacts on China. Also China s higher GDP growth rate than the EU and US suggests relatively higher medium to longer term impacts. Finally, we briefly report on some numerical calculations by Li and Whalley (2014) of trade and GDP impacts from a 15 country numerical general equilibrium model calibrated to 2011 trade, production, and consumption by country. This model captures two alternative representatives of trade barriers, one as tariff, and the other as trade costs. Its results highlight the themes above of larger proportional impacts of mega deals on China, the sharp difference between bolder (trade costs) negotiations and tariff negotiations, and the seeming greater importance of future impacts for China. We conclude with remarks on mega deals and China s growth prospects. More than the EU and the US China s growth strategy remains outward/ trade oriented, and hence the access benefits for mega deal negotiations are paramount in China s strategy towards them. Having said that, China s growth in trade lies more with large population developing countries with more rapid growth rates (Brazil, India, Turkey, and Mexico) than it does with the OECD (the US and EU). As such, mega deals as currently cast may be an important part of a bridging strategy for China s trade while higher Southern growth performance comes on stream.
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