Why China needs to champion free trade

In the decade to come, China has a huge opportunity to seize the initiative and become an architect of free trade.

Anchoring new free trade areas would help it make the transition to a more sustainable growth model, based on consumption rather than low-cost exports, a goal set out in its 13th Five-Year Plan (2016-20). It would also help with the country's other economic goals, namely internationalization of its currency and liberalization of capital account regulations.

China has an opportunity to make the Belt and Road Initiative the foundation of a huge East-West free trade area, with itself as a major consumer and lower-cost locations as manufacturing centers.

Spanning 65 countries across Asia, the Middle East, West Africa and Europe, the Silk Road Economic Belt and the 21st Century Maritime Silk Road aim to create two huge trade corridors that would encompass a total population of 4.4 billion and 40 percent of the global GDP. Together they would rival the US-led Trans-Pacific Partnership Agreement in size.

Agreed in October, the TPP covers 12 Pacific Rim countries, including the United States and Japan, which account for 40 percent of world trade. It is the biggest trade agreement since the mid-1990s.

China has been one of the biggest beneficiaries of free trade. Its role as a manufacturer for the world has attracted a huge amount of investment and propelled it to the status of No 1 or No 2 trading partner to most large nations. This growth has transformed the country. Since 1995, average annual GDP growth of more than 7 percent has transformed the economy and the living standards of many of its people.

China's economic goals have changed, but free trade remains important. However, rather than driving export-led growth, China aims to move up the value chain, importing consumer goods and exporting higher-value products and services.

The danger of the TPP to China is that it could impact the country's trade opportunities over time. When trade barriers are reduced, countries tend to specialize in the sectors where they are most efficient, companies invest in economies of scale, the costs of production fall, consumers become better off and economic growth rises.

Forming a free trade area based on the Belt and Road Initiative would help China fulfill many of its goals, as China would become the economic anchor for the free trade area, so the renminbi could become its currency anchor, making it a major trading currency.

The Belt and Road Initiative is likely to deliver more sustainable growth to all economies along the routes. Asia's economies have huge infrastructure requirements over the next decade, as they seek to move up the value chain while absorbing fast-growing populations. China can pave the way for greater growth by helping to finance high-quality roads, railways, ports and other infrastructure. But if a Belt and Road free trade area is established, the benefits would be even greater.

Regardless of the framework, China needs to accelerate reforms and integrate its economy further with the rest of the region and the world. This means exposing its industries to more competition and giving foreign investors greater onshore access. The TPP promotes a high standard for such integration among its members, and China will also need to step up.

Trade agreements are generally anchored to one economic powerhouse, which tends to set the rules. While the Belt and Road Initiative provides the perfect opportunity for such a free trade area, the TPP shows the potential danger to China of not taking such an initiative.

With China entering a new economic era, achieving sustainable growth, and successfully moving up the value chain and becoming a consumer of goods made elsewhere, the time has come for the country to take a lead in free trade.

The author is managing director and regional head of transaction banking in Greater China and North Asia for Standard Chartered Bank. The views do not necessarily reflect those of China Daily.

(China Daily Africa Weekly 03/25/2016 page13)