If RCEP comes, can CPTPP be far behind for China?

Editor's note: Dr. John Gong is a professor at the University of International Business and Economics and a research fellow at the Academy of China Open Economy Studies, University of International Business and Economics. The article reflects the author's opinion, and not necessarily the views of CGTN.

President Xi Jinping's statement at Friday's APEC Economic Leaders' Meeting that China will "favorably consider" joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is bombshell news in my opinion in pointing to China's future economic development direction.

The signing of the Regional Comprehensive Economic Partnership (RCEP) last week has already formed the world's largest free trade area, with roughly one third of the world's population and one third of the world's GDP. If China commits to joining the CPTPP, the APEC free trade area will potentially significantly enlarge its footprint with China tying knots with four additional east Pacific countries: Canada, Mexico, Peru and Chile. This certainly provides a further anchoring effect to the economic sphere across the Pacific, as the global economic epicenter is fast shifting to this area.

However, the significance of joining the CPTPP isn't restricted to more export opportunities, such as for China's service and high-tech industries or digital economy. The much larger significance lies in potentially reconciling the biggest and the last difference between China's unique economic system and the established world trade and investment order, which is the thorny issue related to China's omnipresent and omnipotent SOE (state-owned enterprises) phenomenon.

CPTPP and RCEP belong to a more advanced category of a new generation of free trade agreements in that they regulate not just free flow of goods and services, but also encompass a set of political and social objectives related to free market and fair competition. But CPTPP is further ahead of RCEP in several areas, including labor rights protection, environmental protection and more importantly the SOE issue.

CPTPP used to be simply called TPP. It was basically an American invention during the Obama years, concocted squarely to target China. It was designed to organize a trading bloc to counter China's economic weight and possibly to exclude it as well. Ironically, after the Trump administration came to power, it scrapped the whole thing, as Trump's America First banner dictated a bilateral trade agreement framework instead. However, Japan and Canada took the opportunity to lead the rest of the TPP pack to work out a somewhat watered-down version of the TPP as a reincarnation called CPTPP.

The part pertaining to the SOE issue in the CPTPP agreement is spelled out in Chapter 17, or more specifically Article 17.4 to Article 17.6. These clauses are basically about non-discriminatory treatment of SOEs. The requirement of SOE operations based on commercial considerations came from the original Competitive Neutrality concept that was first proposed in the Hilmer report in Australia in 1993, and later widely promulgated by the OECD in Europe.

President Xi's statement that China is willing to join the CPTPP is clearly an indication of endorsement of the most important part of the Competitive Neutrality principle that is imprinted in the CPTPP agreement. If it eventually materializes, that would be a gigantic step forward in terms of China's further reform and opening-up.

So far, all the common issues related to China's development model that are purportedly at odds with the U.S., such as state aid, industrial policy, forced technology transfer and intellectual property rights protection are in the process of being negotiated and addressed, other than the SOE issue that pertains to the foundation of China's political and economic system.

But the Hilmer report points out that SOEs and free trade can coexist harmoniously as long as a set of neutrality regulatory principles are implemented.

The SOE phenomenon is not unique in China. It exists in Australia where this wonderful principle came from; it exists in the European Union where this wonderful principle is widely adopted; and it can and should also be implemented here in China.