MNI: China To Leverage U.S Tariffs, Target Deals With EU, Asia

China will seek to leverage the opportunity presented by U.S. tariffs to accelerate trade negotiations with Europe, Japan, and South Korea, as well as to consolidate its commerce in Asia by upgrading the Regional Comprehensive Economic Partnership (RCEP), trade officials and advisors told MNI. 

China is ready for another push with the European Union for a Comprehensive Agreement on Investment, which was originally concluded in December 2020 but later blocked by the European Parliament, a former official familiar with the negotiations at the time told MNI.

The original CAI deal included substantial concessions from China, including granting EU firms equal treatment to Chinese state-owned enterprises and opening up services sectors such as healthcare and financial services, the former official said. This time China is likely to want a more ambitious agreement, with the two sides pledging to further open up their markets, he added, noting that the chances for success should be high considering how both sides are being targeted by U.S. President Donald Trump’s tariff threats. (See MNI INTERVIEW: China-US Deal Possible After Leaders Meet)

A source close to EU trade policymakers told MNI that the bloc remains divided over China. While some member states, such as Italy, Portugal and Hungary, are in favour of a deal, Germany is more ambivalent, weighing the importance of its own investments in the Asian giant against concerns over growing Chinese influence in strategic sectors. Commission President Ursula von der Leyen remains an advocate for derisking the EU’s exposure to China, the source said.

JAPAN, SOUTH KOREA

China is already participating in a push for a China-Japan-South Korea Free Trade Agreement, and, while an overall deal may be challenging in the short term, talks could make progress in key sectors such as semiconductors and chips within the framework of RCEP, an advisor to the Ministry of Commerce told MNI.

In addition, China could commit to unilateral opening measures, such as implementing more preferential tariff reductions under existing free-trade agreements in line with World Trade Organisation rules, the advisor said.

The former official expected that China may also move to shorten the transition period for tariff reductions in certain sectors, particularly in services, within RCEP, the world’s largest free trade agreement, covering 30% of global GDP and population.

Under RCEP rules, eight member countries including China, Vietnam, the Philippines which restrict services trade without specific exemptions under a positive list approach should transition to a negative list model with a default setting of unrestricted services trade by Jan 1, 2028.

China may look to move to a negative list more quickly, the former official said, noting that the country has already moved to open up its financial, communication, and healthcare sectors. 

OVERLAPPING AGREEMENTS

RCEP became effective on Jan 1, 2022 between 10 ASEAN nations, together with China, Japan, South Korea, Australia and New Zealand, with the objective of eliminating 90% of tariffs on goods trade within 20 years. Beijing will actively promote its expansion, the former official said, adding that improving relations with Japan could pave the way for accession by Hong Kong, whose application has so far been blocked by Tokyo.(See MNI INTERVIEW2: China-U.S Trade Deal Possible But Not On Yuan)

But, while China may wish to spearhead a drive towards free trade, its manufacturing competitiveness may make some countries leery of joining in, noted a Chinese university professor, pointing to how India in particular has failed to pursue an FTA with Beijing.

Overlapping trade agreements create confusion over which rules apply, the professor said, adding that RCEP’s provisions are underutilised due to the lack of a cohesive regional framework in Asia.

Currently China’s effective applied tariff rate stands at 3%, compared to 1.5% in the U.S. and most developed economies, according to the Ministry of Commerce advisor. The country has higher tariffs on select goods such as textiles, which are often leveraged as bargaining chips in trade negotiations, and imported goods sold in China also incur 13% value-added tax, making their total cost significantly higher than in other countries, he said.

(With additional reporting by David Thomas in Brussels)