COMMENT: A China-Russia free trade deal is still many years away

COMMENT: A China-Russia free trade deal is still many years away
Vladimir Putin and Xi Jinping greet each other at the G20 meeting in China in September 2016.
By Jeff Schubert of the International Center for Eurasian Research January 17, 2017

Russia is interested in a free trade agreement (FTA) with China, and in May 2015 Vladimir Putin and Xi Jinping signed an agreement to consider in detail how this might be achieved. Or more precisely, the Russian president signed an agreement to “consider the long-term goal of moving toward a free trade zone between China and the Eurasian Economic Union (EEU)”.

There is considerable political posturing in all this as Putin and Xi try to build on their good personal relationship to broaden business contacts between their countries. After a slow start it seems that research is underway for the proposed FTA. But despite political will at the leadership level, the negotiations will not be easy, will take much time and may ultimately not succeed.

China now has FTAs with quite a few countries and has become very sophisticated at negotiating these. While its agreements have broadened from emphasis on trade in goods and tariff reductions to include services and investments, China is selective in its approach and sees FTAs as part of an overall diplomacy and security policy.

One of China’s most recent agreements is the China-Australia Free Trade Agreement (ChAFTA). On the face of it, this could give an indication of its approach to an FTA with Russia, because Australia, like Russia, is often considered a “resource cursed” country – that is, a country that is rich in natural resources and which often finds that price swings in its resource exports impede the development of the non-resource sector.

A recent high-level joint Australia-China research report described ChAFTA as “the most open and liberalizing such arrangement that China has entered into with any developed economy”. 

China signed ChAFTA for several reasons, including an understanding that Australia’s sophisticated services providers can help improve such services in China; the Chinese domestic demand for high-quality Australian agriculture products; and the fact that Australian manufacturers can provide next-to-no competition to Chinese manufacturers. Moreover, the overall scale of such Australian activities is comparatively small in world terms and, thus, not a significant threat to Chinese entities involved in such activities.

However, China would not regard a China-Russia (FTA as providing any sort of sophisticated service industry lessons for China, and Russian agricultural products have no reputation for “quality” in China. While there is probably little potential for Russian manufactured products to provide stiff competition to Chinese companies, Russia is a much bigger country than Australia.

China may also have felt that tying Australia closer to itself in economic terms would weaken Canberra’s political and security relationship with the US. On the Australian side, there was no particular policy goal to escape the “resources curse”; indeed, Australian negotiators effectively took advantage of it to play on China’s insecurity in the resources area.

The new Donald Trump administration in the US will probably try to play China and Russia off against each other, and the potential for China-Russia strategic competition in the greater Eurasian space means that it is very unlikely that China will see Russia in the same resources security light that it saw Australia. However, China will almost certainly see some non-Russian members of the EEU (eg. Kazakhstan) in a resources security light and will ultimately seek bilateral agreements with them rather than through the Russian-dominated EEU, which as well as Kazakhstan includes Armenia, Belarus and Kyrgyzstan.

As such, China will not be hurrying to the negotiating table for an FTA with Russia or the Russian-dominated EEU.

Shanghai’d

On the Russian side, the reality is that Russia (and indeed the EEU) presently has an “industrialization” policy that includes both the development of high-technology industries and more basic “import substitution”. Neither Russia (nor the EEU) want to see their markets swamped with cheap Chinese manufactured products.

China is presently most interested in something close to a genuine free trade deal and peaceful general economic development in the Eurasian region, and in the past has suggested that this might be accomplished within the framework of the Shanghai Cooperation Organization (SCO) – a Eurasian political, economic and military organization, which was founded in 2001 in Shanghai by the leaders of China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan and Uzbekistan.

But, like China, Russia sees economic agreements in diplomatic and security terms; and this is actually the driving force for its enthusiasm of the EEU – although the desire for immediate and complete control is extremely strong. Russian resistance to the idea of an SCO FTA, which it saw as weakening its control over the EEU, was one of the reasons for China’s initial development of the “Silk Road Economic Belt” (ie. the land part of the “One Belt, One Road” or OBOR initiative).

China is presently largely prepared to go along with the Russian idea that it is the main provider of security in the Central Asian region, while China provides and receives economic benefits. However, in the longer term it is hard to see this implicit arrangement surviving and, as already noted, this will impact on any FTA negotiations.

It also needs to be noted that the development of the China-Australia economic and trade relationship was essentially driven by the business sectors of both countries. Existing strong business ties greatly assist FTA negotiations by helping negotiators understand the consequences of individual concessions and lack of concessions. Such existing China-Russia ties are very weak.

ChAFTA was also assisted by the fact that about 2% of Australia’s population of nearly 25mn were born in China, and many others have recent Chinese ancestry. In addition, there are about 140,000 students from China studying in Australia, while Russia appears to have less than 25,000.   

A China-Russia FTA would seem to be many years away.

Jeff Schubert is Head / Director of the International Center for Eurasian Research at the Russian Academy of National Economy and Public Administration in Moscow. His full “National Technology Initiative” paper is now available on the Russian Economic Reform site. You can reach him on schubert-jb@ranepa.ru.

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