Index > Briefing
Sunday, November 22, 2020
"New Space Theory" Explains Why Multilateral Trade Agreements Increase

After eight years of negotiations, China has signed the world's largest regional free trade agreement with 15 countries, including the 10 ASEAN countries, Japan, Australia, and New Zealand. The agreement, known as the Regional Comprehensive Economic Partnership (RCEP) Agreement, has lower barriers to entry than the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), but it still carries considerable symbolic significance. The agreement covers 2.2 billion people and USD 26.2 trillion in global output, both accounting for 30% of the world's total. The RCEP agreement has provided China with a rare geo-economic and geopolitical space in the face of anti-globalization and COVID-19 pandemic shock.

During the APEC Economic Leaders' Meeting held recently, President Xi Jinping, on behalf of China, said that China will continue to press ahead for regional economic integration for the early realization of a Free Trade Area of the Asia-Pacific (FTAAP). China welcomes the signing of the RCEP, and will favorably consider joining the CPTPP.

This is the first time that a Chinese leader stated that China is considering to join the CPTPP. It is interesting to note that CPTPP's predecessor, the Trans-Pacific Partnership (TPP), was pushed hard by the U.S. under the Obama administration, being an agreement with a broader scope than RCEP and with stronger geopolitical significance. Indeed, the TPP is seen as the economic and trade embodiment of America's strategy of "pivot" to the Asia-Pacific, and is widely seen as the U.S.-led response to China's growing influence on the region. However, four years ago, President Donald Trump pulled the United States out of the TPP. It is thought that President-elect Joe Biden would be inclined to join CPTPP. Therefore, China's proposal to join CPTPP at the time of the transition of power between the U.S. Presidents has undoubtedly sensitive geopolitical and geo-economic implications.

It is now clear that against the backdrop of anti-globalization, China is joining several multilateral organizations to counter both the anti-globalization and the U.S.-driven move to decouple from China. In this regard, China's accession to the RCEP and its bid to join the CPTPP is of positive significance for easing geopolitical dilemmas. However, will China's accession to the similar regional multilateral economic and trade organizations reverse its current passivity in the geopolitical and geo-economic fields? This requires further rational, multifaceted thinking and analysis of its impact.

The "new space theory" in geopolitics proposed by Chan Kung, founder of ANBOUND, offers a novel perspective on the current environment and situation in China. "New space theory" holds that the core of modern national economic competition lies in the competition for market space, which has core value for economic growth. The importance of market space lies in the fact that its size and influence determine the shape and balance of the world and form the basis of world leadership. Economic factors such as capital, production, consumption, and the value of technology are subject to space. In addition to the economic factors, the ascendancy of a country and the ups and downs of its economy all also depend on space, and space is needed to avoid risks and economic crises.

Trade agreements similar to RCEP and CPTPP, on the one hand, form a common market of a certain scale and increase the convenience of entering the market space within the region; on the other hand, these agreements also have certain limitations and fail to solve the market space competition from a global perspective. In an internal discussion, Chan suggested that when assessing the role and impact of regional trade agreements, it is important to look at the changes that are taking place in the world.

First, current trends are changing. From the perspective of "new space theory", the status of "buyers" and "sellers" in the past world economic and trade cooperation is changing, and the old globalization model has changed as well. How useful would a new trade agreement be if only the "sellers" were involved in it? It is necessary to think and judge rationally if all parties involved in trade agreements are all producing countries/regions, when encountering common trade orders (i.e., market space), should everyone prioritize solidarity, or fight for the market space undiplomatically? Will countries' re-exports to each other hold up in the face of trade standards and trade barriers? These are all questionable.

Second, there are buyers and sellers in the international trade, but who are the ones having the final say? Are they the buyers or the sellers? This question has long been answered in the "new space theory". In the current RCEP agreement, the major buyers in the world market are not involved, while the U.S. and the EU are watching from the sidelines. If the major Western countries, as the major consumer market, do not support the RCEP agreement, then the value of the relevant agreement will be greatly reduced. For the producing countries, the internal excess capacity that could easily arise is competitive.

Third, we need to be clear about China's goals and intentions. In view of the current world situation, we tend to think that China's efforts to join more regional trade agreements should be based on solidarity, so as to avoid China playing the game with developed countries alone, which can increase the bargaining power of buyers. It should be said that China's aspiration is objective and a rational decision based on reality. That said, the true effect of joining multilateral trade agreements on a global competition-centered market space remains to be seen.

Chan Kung further pointed out that trade organizations such as the World Trade Organization (WTO), regional trade organizations, as well as the international trade and regional trade, are stepping back from globalization to regionalization. A key judgment is involved here: Does globalization continue, or has a phase of anti-globalization begun? Different judgments will lead to different results and decisions. In terms of market space, RECP consists mainly of the "sellers", of which there are only two developed countries, i.e., Japan and Australia. Although the two developed countries are the "buyers", Japan is also a seller of high-end products, while Australia is an exporter of mineral raw materials and a supplier of materials to the "sellers". Therefore, RECP is basically a community of "sellers", and rational judgment needs to be applied as to whether it will have the intended effect.

If the U.S. seeks to join the CPTPP, it will be more difficult for China to join in the future. If the U.S. were to join, it will add USD 21 trillion market space for CPTPP, which will form a huge market with a size of more than USD 34 trillion. More importantly, the U.S. entry will bring buyers and sellers together again, creating a global market. If China were to join such a large market, its market size would be close to USD 49 trillion, equivalent to 56.3% of the world economy in 2019. Such a buyer-seller fusion of trade organization is not very different from the WTO, and the fact that the WTO is now almost paralyzed shows the fierce degree of competition in the market space.

Final analysis conclusion:

Against the backdrop of anti-globalization and "decoupling", it is rational for China to seek to join more multilateral trade agreements in order to increase its bargaining power over developed countries (buyer's market). However, in the era when the market space has become the core of national competition, it is not advisable to expect too much from the formation of a community of sellers.

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