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What China’s new economic diplomacy means for business

At a crossroad

© The Economist Intelligence Unit Limited 2015

At a crossroad What China’s new economic diplomacy means for business

China has grown to be a significant force in global trade over its 36 years of reform, but for most of that time it has not assumed a strong leadership role in trade governance, opting instead to integrate into existing systems. With the launch of the One Belt, One Road (OBOR) initiative in 2013, and the creation of new multilateral financial institutions led and largely capitalised by China, the country may have turned a corner in its international economic policy.

Does this mark the beginning of the end of China’s engagement with the existing institutions of trade and investment governance? If China is pursuing a new paradigm of international trade liberalisation, what does that entail? This report looks at what China’s new economic diplomacy means for regional and global trade liberalisation, and for business.

The Economist Intelligence Unit (EIU) would like to express our deep gratitude to the experts from multilateral trade governance, academia, government and industry who gave up their time to provide insights for this report. The diverse perspectives which they provided have been invaluable in shaping this analysis. The experts are as follows:

n Amitav Acharya, professor of international relations, American Universityn Iwan Azis, professor of economics, Cornell University and University of Indonesia, and former head of

the Asian Development Bank Office of Regional Economic Integration n Kevin Dixon, managing director of the Asia Pacific and Australasia regions, Mott MacDonaldn Carol Fung, vice president of JD.com and president of JD Mall’s fast-moving consumer goods

business unitn Goh Chee Kiong, executive director, cleantech and cities, infrastructure and industrial solutions,

Economic Development Board (Singapore)n Robert Koopman, chief economist, World Trade Organisationn Gary Sampson, professor of international trade at Melbourne Business School and former director at

the World Trade Organisationn Shen Dingli, vice-dean of the Institute of International Studies, Fudan Universityn Wu Xiaobing, regional president, Pfizer Chinan Pansy Yau, deputy director of research, Hong Kong Suppliers and Hong Kong Manufacturers

ExEcutivE summary

4 © The Economist Intelligence Unit Limited 2015


china’s tradE policy in thE post-doha Era1

Nearly fifteen years on, the assumption needs to be revisited. With the launch of the OBOR plan for promoting trade and investment along westward routes, China’s president, Xi Jinping, announced that China is entering the next stage of its reform process. It does so from a very different starting point, with a different set of domestic priorities and in a much changed global trade and investment environment.

out with the old, in with the new?

China is now the world’s second-largest economy, with one of the world’s most attractive consumer markets. Rather than needing to secure inward investment, it is growing in importance as an international investor. Economic liberalisation has taken a back seat to state-led efforts at rebalancing away from an inefficient and environmentally destructive investment-driven economic model towards one that is more sustainable, based on consumption, innovation and advanced industries. Domestic security considerations have edged forward in priority, with the government acutely aware of the ramifications of a hard landing during this rebalancing act.

On 21st April 1997, Renato Ruggiero, then - director-general of the World Trade Organisation (WTO), addressed an audience at Peking University on the merits of China’s accession to his organisation. “Only inside the system can China take part in writing the trade rules of the twenty-first century,” he said. The Chinese government seemed to agree. Despite resistance from entrenched interests in the state sector as well as from a portion of public opinion, which viewed it as capitulating to the West, Zhu Rongji, China’s former premier, oversaw a series of tough reforms and concessions leading to China’s entry into the WTO in 2001.

Western proponents of free trade had cause to be optimistic at the time. Besides a welcome drop in tariffs—which fell to an average of under 10%—there was an assumption that the state’s role in directing and protecting China’s economy would recede over time. As Robert Koopman, chief economist at the WTO, points out, reformists in the Chinese administration successfully leveraged the external pressure of the WTO accession requirements to press ahead with politically-difficult domestic reforms, such as the privatisation of some state-owned enterprises (SOEs). It was hoped that this would be repeated in subsequent rounds.

5© The Economist Intelligence Unit Limited 2015


At the international level, the Doha Round has been unable to reach a conclusion after a gruelling 14 years of talks, resulting in fragmentation of trade negotiations into bilateral, regional and “mega-regional” groupings—including the Trans-Pacific Partnership (TPP), a preferential deal which includes the US and Japan, but conspicuously excludes China. Meanwhile, the slow pace of reform in other multilateral institutions, notably the IMF, has driven China to establish alternatives such as the New Development Bank (commonly known as the BRICS Bank) and the Asian Infrastructure Investment Bank (AIIB).

If China’s WTO accession marked the second stage in China’s reforms, following from the creation of special economic zones which opened China’s east coast to trade in 1979, what will the third stage of China’s liberalisation mean for business? China has gained a great deal from trade liberalisation over the past 35 years, and there is no question that it will

continue to promote trade growth in Asia and beyond, just as Chinese firms are eager to develop their own international supply chains. Yet some important questions remain:

n Is China still on a liberalising trajectory, and where do the limits to this liberalisation lie?

n Might the Chinese leadership use the TPP in the same way as their predecessors used China’s WTO accession, to bring external pressure to bear on the domestic reform process?

n Or is China heading in another direction, putting its weight behind an alternative paradigm of global trade governance; if so, what does that mean for global trade liberalisation?

0

2,000

1,000

3,000

4,000

5,000

0

200

100

300

1995 2000 2005 2010 2015

Imports and exports, left axis

US$

bn

US$

bn

Outward direct investment, right axis

Chinese outbound investment has spiked in the post-global financial crisis years, even as trade has levelled off

Source: The Economist Intelligence Unit.



thE tpp: china’s Wto accEssion 2.0 or not? 2

considerations and entrenched interest groups. The idea that the TPP could be China’s next WTO accession may be wishful thinking.

market forces, previously thought unstoppable, meet immoveable objectsOver the last fifteen years, the SOEs that survived the reforms of the 1990s have been consolidated into ever-larger conglomerates They have only grown in political influence, while a private-sector lobby remains more or less non-existent. As Mr Koopman explains, in nurturing these state-owned giants from the old economic model, the government has created a significant obstacle to its attempts to rebalance. In the November 2013 plenum, which set the tone for the current round of reforms, the Chinese leadership reiterated its commitment to “the principal role of the public ownership system”. Despite some encouraging moves, for instance in the banking sector, most people interviewed for this study did not expect to see much progress on reforms in the next five years. Given that the TPP is expected to push hard into the areas of competition and public procurement, it does not appear to be having much impact on China’s SOE reform process.

Some proponents of the TPP present it as an opportunity for a “WTO accession 2.0” for China. From the US perspective, it could enable the US to continue to set the agenda and the bar for trade agreements in Asia. If China were incentivised to make the necessary reforms to join, it would not only achieve many of the foreign trade objectives of the US with regard to China, such as better intellectual property (IP) protection, greater market access and a reduction in non-tariff barriers, but could also make a revival of WTO talks more realistic.

The TPP also holds appeal for some reformists in China. Shen Dingli, professor at Fudan University’s Institute of International Studies, believes it could be used to help price labour and environmental costs more realistically, — essential to meeting Chinese people’s aspirations for a better quality of life. Given China’s advantages as a location for R&D and production, reducing barriers to foreign competition would likely entice more firms to carry out high value-added industrial activities.

It is crucial to draw a distinction between what is theoretically in China’s interests, as defined by its current economic policy objectives, and the course that China appears to be taking. The latter is strongly affected by political security

1Though the US was not a founding member of the precursor to the TPP, it insisted on a new start to the negotiations once it joined, in order to have more influence on the agenda and to avoid the disadvantages faced by latecomers to such agreements. See Hamanaka, S. (2014) ‘Trans-Pacific Partnership versus Regional Comprehensive Economic Partnership: Control of membership and agenda setting.’ ADB Working Paper Series on Regional Economic Integration, No. 146, December 2014.



Furthermore, with its emphasis on opening up services, the TPP would likely require more opening of the telecommunications sector. As demonstrated through the introduction of a new national security law in mid-2015, the government remains committed to controlling flows and storage of data within its borders. If not quite “immoveable”, the obstacles of vested SOE interests and a controlling national security apparatus represent important hurdles to a Chinese TPP accession.

From rule-taker to rule-maker

Taking a step back from narrow interests to China’s top-level approach to international trade, over the last few years there have been signs that China has made a conceptual leap from rule-taker to rule-maker. This is not to say that China is a renegade: it actively participates in WTO processes and complies with its rulings. However, the slow pace of reform in Western-dominated multilateral institutions such as the IMF, and the inability of the WTO to reach consensus on the Doha Round, have left many countries searching for other options. China is one of the few parties to be in a position to offer alternatives.

Without abandoning existing institutions, China is therefore taking steps to set up new ones over which it has more influence, such as the BRICS bank, AIIB and Silk Road Fund. There is a domestic dimension to such initiatives, Mr Shen explains. Now that China is the second-largest global economy, its citizens have heightened

expectations of its ability to project power. By assuming a leadership role in new international financial institutions, China’s leadership can demonstrate to a domestic audience that China is becoming an influential global power; by making such institutions multilateral, they can persuade international observers that China will also be a responsible one.

Without abandoning

existing institutions, China

is therefore taking steps to

set up new ones over which

it has more influence.

If the transition to rule-maker is to feature in the third stage of China’s opening up and strengthen the government’s domestic legitimacy, then being perceived to rush through concessions in a bid to join the TPP would seem to run counter to the government’s interests.

the tpp: a geopolitical animal

Having considered from China’s perspective why it is unlikely to join the TPP, it is also worth looking at whether its existing members would allow China to join. After all, the US took an interest in the TPP at the time of its strategic



pivot to Asia, and there is general consensus that geopolitics is an important driver of interest in the deal for all involved. Amitav Acharya, professor of international relations at American University and author of The end

of American world order (Polity, 2014), says most Asian participants are not very interested in its trade liberalisation aspects, which run counter to the mainstream Asian approach to trade. Sometimes described as developmental regionalism, this refers to the flexible, non-binding approach to trade relations pursued by ASEAN, which leaves much more space for Asia’s state-led economies to direct and protect their markets as they see fit. Rather, Mr Acharya believes that a large part of the TPP’s

appeal is to counterbalance Chinese economic power. If a core driver of the deal is to reduce the region’s economic dependence on China by diverting trade away from it, while shoring up security relations between the US and the Asian participants, then the likelihood of China being granted admission to the club is very low.

The chances of China thus attempting to join the TPP, or of being accepted, appear slim. In order to understand the role that China will play in regional and global trade in the coming five years, we must turn instead to the roadmap which Xi Jinping has laid out for its trade and investment initiatives: One Belt, One Road.



onE bElt, onE road, and china’s nEW approach to tradE3

What makes it interesting, aside from the grand scale of expected investments, is the way that Xi Jinping has positioned it as a grand strategy marking the start of the third phase of China’s reform. This implies a shift in China’s overall approach to international trade. The government itself has described OBOR as “a positive endeavour to seek new models of international cooperation and global governance”. Coming hand-in-hand with new Chinese-led multilateral financial institutions, the overall impression is of China growing into a role as regional leader and provider of public goods.

How many world-class

airports does a country need?

investing in regime survival

This is something of an exaggeration, says Mr Shen, even if the rhetoric implies as much. Rather, OBOR is a survival imperative for the Chinese government. As Mr Shen explains, if growth of around 7% annually cannot be maintained, there are significant economic and political risks. People expect wages to continue to rise; yet the investment-driven model has neared its limits, domestically, of

OBOR, in its geographical scope and range of activities, does not represent a significant new direction for China. The plan involves accelerating outwards investment in infrastructure, logistics and telecommunications along westward routes that have long been of interest to China as part of the supply chains in which it plays a major role. The Silk Road Economic Belt covers overland routes through Central Asia to Western Europe, while the 21st Century Maritime Silk Road refers to sea routes from China’s east coast, through South-East Asia and South Asia, up the East African coast and to the Mediterranean. In addition to investing in infrastructure, China is creating mechanisms to facilitate investments, as well as engaging with states along the routes on relatively uncontroversial matters such as customs harmonisation and logistical interoperability.

According to Mr Goh Chee Kiong, executive director of cleantech and cities, infrastructure & industrial solutions at Singapore’s Economic Development Board (EDB), the “trade barriers” that OBOR will address include a lack of access to capital for major infrastructure projects—in essence, physical barriers. “Trade routes will be shorter and equipped with more efficient transport technologies, increasing trade flow and volume along the belt,” he says.



what the environment can bear and even what infrastructure is needed. “How many world-class airports does a country need?” asks Mr Shen. “By 2020, China might well have the best infrastructure in the world. What then—should we tear down some structures to re-build them?”

After the conclusion of the party’s fifth plenum on 29th October 2015, Li Keqiang announced that the government would target average annual economic growth of 6.5% during 2016–20. However, the EIU’s forecast for the same period is significantly lower, at 5.6%. With the economic slowdown threatening to be sharper than expected, it is becoming apparent that China’s dependence on investment-led growth will need to go on a while longer, if a major downturn and the associated potential for political instability are to be avoided. The government needs to buy time to pursue its efforts at economic rebalancing and upgrading, while dealing with industrial over-capacity, which is damaging SOE profitability and foreign relations.

OBOR offers solutions to many of these problems. It justifies further stimulus to the western regions of China which will form the gateways to the new silk road which in turn will prop up growth and continue a long-standing policy of rebalancing development towards western provinces—and will generate demand for the glut of construction materials that has depressed global prices. With China’s middle class clamouring for cleaner air and water, shifting industrial and infrastructure investments into Central, South and South-East Asia will also ease the environmental strains on Chinese cities. This is starting to happen in any case, driven by rising labour costs in China.

belting up the value chain OBOR is also raising to maintain interest among MNCs in partnering with Chinese firms, even as the economy slows. Knowledge transfer through joint ventures and other partnerships

The advantages of knowledge sharing

Wu Xiaobing, president of Pfizer China, subsidiary of the US-based pharmaceutical firm, oversees a global R&D facility in Shanghai of around a thousand staff. Despite ongoing concerns among MNCs about IP protection in China, Pfizer collaborates with multiple local partner firms and research institutes. Mr Wu notes that his firm still faces multiple market- access challenges, including trying to achieve simultaneous global development and registration of new medicines. Yet despite IP risks and regulatory hurdles, Pfizer has made a long-term commitment to China. Above all, the draw is the country’s large market, which is set to expand fast as healthcare reforms proceed. The inclusion of biomedical innovation as a key investment area under the Made in China 2025 plan also means that pharmaceutical firms are eligible for tax incentives. Given the potential benefits, many MNCs are willing to open up their R&D processes to include local partners.



remains central to China’s plan to transition its economy to higher value-added activities. The more that the foreign party has to gain from the partnership, the more willing it will be to share its technology, know-how and business links.

The investment figures involved are certainly enticing, given capitalisation of around US$40bn in the Silk Road Fund, US$100bn in the AIIB and US$100bn in the New Development Bank, not to mention potential loans from China’s state-owned banks. Unsurprisingly, government agencies in the UK, Australia, Singapore, Hong Kong and other advanced economies are promoting OBOR as an opportunity to be seized with both hands. Pansy Yau, Deputy Director of Research at HKTDC, the Hong Kong government’s trade promotion agency, expects Hong Kong-based consultancies to play an important role in match-making mainland Chinese firms with foreign partners, as well as providing services to such partnerships. EDB’s Mr Goh similarly harbours hopes for Singapore-based firms to facilitate OBOR-related projects in South-East and South Asia, leveraging Singapore’s reputation for representing international best practices in infrastructure financing and development, as well as its firms’ knowledge of the surrounding region, to attract partnership opportunities with Chinese state-owned and private firms.

china as public goods provider: renminbi internationalisationRenminbi (RMB) internationalisation will be an important element within OBOR, both

on a practical level of trade and investment facilitation, and in terms of the high-level aim of increasing China’s international economic influence. Progress on RMB internationalisation has been rapid in the last few years. As of August 2015, the currency already ranked fourth globally by value of payments, according to SWIFT, a financial communications network.2 China’s bid to have the RMB designated a special drawing rights (SDR) currency by the IMF may have an element of status-building behind it, but it has given the government further impetus to push through supporting policies, such as broadening the band within which the Renminbi can trade and liberalising capital controls.

One of the most promising areas of RMB internationalisation is in regional trade settlements. Speaking to the EIU in October 2015, a senior official from the People’s Bank of China said that in the first half of the year, over a quarter of China’s trade by volume was settled in RMB, up from 1% six years before.3

OBOR will facilitate more Chinese firms to invest outwards, and RMB internationalisation will play an important role in this process. Iwan Azis, professor of economics at Cornell University and University of Indonesia, and former head of the ADB’s Office of Regional Economic Integration, says that in recent months a number of ASEAN countries have seen the conclusion of government-to-government and business-to-business agreements on loans from China, which are typically split in their denomination, with about 70% in US dollars and 30% in renminbi.

2Swift, RMB Tracker, Renminbi’s stellar ascension: Are you on top of it? October 2015. 3EIU, A delicate stage: The future of the renminbi as a global currency, August 2015.



Borrowing and settling payments in RMB makes sense for firms who do most of their trade with China, as it reduces both transaction costs and currency fluctuation risk. Exchange rate fluctuation has been a particular problem in the years since the 2008 global financial crisis, with some Asian currencies swinging wildly at times against the dollar. Given that the currencies of some of China’s Asian trading partners have started to track the RMB more closely than the dollar, there is a strong incentive to switch to RMB settlements.

Using the RMB in international transactions is also becoming more convenient: in another example of China assuming the role of regional provider of public goods, it has just launched the China International Payment System (CIPS), a RMB payment platform which unifies onshore and offshore clearing markets as well as selected banks, and is designed to reduce the time and cost of making cross-border RMB payments.

china as a rule-setter in regional trade and investment: What will this mean in practice?Through OBOR, China is defining a broad geographical direction for future investment and trade growth, and will have significant sway over which large-scale projects go ahead. To what extent will it also try to set the rules of global trade?

By offering a practical

alternative for foreign

governments’ trade agencies

... China is diverting

attention away from both

the TPP and the WTO.

0

1,200

1,000

800

600

400

200

2011 2012 2013 2014

RMB

bn

20%

15%

10%

5%

0%2011 2012 2013 2014

Outbound direct investment using RMB In-bound direct investmentusing RMB

Direct investments (in and out of China) using RMB

The proportion of China’s outbound direct investment conducted in RMB

Source: People’s Bank of China.



In the broadest sense, by offering a practical alternative for foreign governments’ trade agencies to focus on with immediate, bankable opportunities for their respective countries’ firms, China is diverting attention away from both the TPP and the WTO. It is promoting its own preferred approach to international economic relations simply by going ahead

with it. Whether or not this will succeed in establishing a strong alternative paradigm will depend on issues such as trust building and risk management.

When it comes to rule-setting in a narrower sense, China has shown interest in setting technical and quality standards in some

4Reuters, “Sri Lanka to review China port deal amid security concerns”, 16 January 2015.

One belt, one road, many risks

The various proposed supply chain routes running between China and Europe look convenient on a map, but will be enormously complex to realise. Some run through troubled areas, such as parts of Pakistan, where many contractors outright refuse to work. Others present geopolitical risks. India has long been concerned about China developing a series of military bases that could end up dominating India’s naval space, described as a “string of pearls”, and last year it voiced its concern about the frequency of Chinese ships visiting Sri Lankan ports.4 India’s discomfort may have played a role in the decision of Maithripala Sirisena, the newly-elected Sri Lankan president, to put the brakes on a major Chinese port investment in Sri Lanka and launch a corruption investigation. Russia remains similarly wary of Chinese incursions into its neighbourhood, and as Mr Shen points out, it might only take a brief rapprochement between Russia and the US for China to find its proposed infrastructure links to Moscow suddenly unwelcome.

The domestic risks within China have not been widely discussed, but are also significant. As Mr Shen describes, if more major Chinese projects, like the Sri Lankan port, are left to rust, these could become potent symbols of the Chinese government’s failed foreign economic policy—and of wasted public money. By inflating OBOR into a flagship initiative and turning point in Chinese history, Xi Jinping has significantly raised the stakes of his plan.

Most of the above risks could be mitigated by careful evaluation of proposed routes and projects, and by market-based investment decisions. However, in practice many investments are likely to be politically-driven, led by SOEs and financed by Chinese state-owned or state-influenced financial institutions. The multilateral nature of the AIIB and Silk Road Fund is encouraging, and the extent to which these manage to provide strong oversight and good decision-making is likely to have an important impact on the success or failure of OBOR.



industries, just as other powers have done before it, in ways that offer advantages to its own industries. Given the focus on telecommunications infrastructure under OBOR—a sector in which China has several globally competitive multinationals—China may well seek to use this as an opportunity to further

roll out its technical standards. However, progress on this type of rule-making is likely to be quite limited in the short-to medium-term, in part because trust is still lacking between China and many of its regional trade partners, but also because China is still struggling to implement single standards across its many provinces.



looking ahEad: What doEs china’s approach to tradE libEralisation mEan For businEss?

4state’s role in trade has grown, not shrunk, in prominence. This goes for the US-led geopolitically-driven and preferential TPP as much as for the state-directed (and also geopolitically-driven) OBOR scheme. Under OBOR, government-to-government (G2G) projects are likely to become more prominent, such as the one recently signed between China and Singapore to co-develop several sectors in the western Chinese city of Chongqing—one of the gateways to the ‘belt’. Neither the US nor China is pursuing classic trade liberalisation, in which the state limits its role in either unduly boosting or restraining trade.

In the post-Doha years, the

state’s role in trade has grown,

not shrunk, in prominence.

While the WTO is imperfect, it represents an attempt to reduce the importance of state influence in determining terms of trade and resolving conflicts. According to Gary Sampson, professor of international trade at Melbourne Business School, trade rivalry can be a good thing when channelled through peaceful

The Chinese government has declared its intention to invest generously in developing new trade routes under the OBOR umbrella. Firms around the world are being invited to partner with Chinese firms in their outbound investments, and this is expected to be the best way of accessing opportunities.

Those participating in the OBOR initiative will need to actively manage the many short- and medium-term risks it involves. Projects will need to be carefully assessed, though risks are likely to be lower where multilateral or private finance is involved.

Yet there is an important long-term risk that has yet to be discussed: that of the WTO becoming further marginalised, and of a general shift away from a multilateral, non-discriminatory and rules-based approach to global trade relations.

rearing its head again: the role of the state in international tradeThis may turn out to be more important to businesses trading with China, and to Chinese businesses with international supply chains, in the long run. In the post-Doha years, the



dispute-resolution mechanisms. But if the largest players in the global economy start to step outside of this framework, rivalry could become a cause for concern.

As China moves decisively into a phase of outward investment and finance and if the state’s role in trade moves further to the fore, delegating rules and open competition to

Opportunities under OBOR According to Ms Yau of HKTDC and Mr Goh Chee Kiong of Singapore’s EDB, as well as information from other countries’ trade promotion agencies, the main opportunities presented to international businesses by OBOR are likely to be as follows:

n Transportation infrastructure n Telecommunications infrastructure and services n Logistics n Energy n Oil and gas n Facilitating PPPs (largely in the above sectors) n Legal services, including enabling joint ventures and providing neutral and reliable

arbitration venuesn Project management n Financial services, particularly in offshore RMB hubs n Risk assessment and market insight n Government relations

Case study: Mott MacDonald Mott MacDonald, a UK-based engineering and infrastructure development consultancy, remains limited to a narrow range of specialist services in China, unable to exercise its strength in infrastructure design as a result of strict rules which keep this the preserve of local design institutes. Nonetheless, the firm has been operating in China for around 30 years, and managing director of the Asia Pacific and Australasia region, Kevin Dixon, is convinced of its growth potential. Rather than waiting for greater market access, Mott has focused on forming partnerships with local players who can open more doors, and has recently received more interest from firms looking to invest outwards. It has formed a three-way partnership with China Petroleum Engineering and China Financing and Investment Property Corporation, to pursue a variety of infrastructure, utilities and oil and gas opportunities under the auspices of OBOR.



the background, then two things are likely to happen. First, there will probably be more cases like Sri Lanka, where a change of government or a swing in public sentiment results in failed investments. A bilateral deal is much easier to renege on than a multilateral framework with established enforcement mechanisms.

short-term benefits, but at what cost?

Second, without a multilateral and non-discriminatory framework, market access will become increasingly lopsided. The UK is a case in point. In recent years, the UK government has been actively courting Chinese investment in Britain’s infrastructure, opening up traditionally sensitive sectors such as telecoms and nuclear power to Chinese firms and offering attractive terms of investment. But Mott MacDonald’s Mr Dixon does not anticipate any change in China’s market openness to British firms as a result—the difference being that the austere UK is not offering to finance similar investments in China. In the long run, this may lead to levels of resentment capable of causing a swing back towards protectionism against Chinese firms.

In another scenario, peering ahead to a point at which many Chinese firms have achieved globally-competitive levels of technological prowess, innovation and knowledge of international business, what then for the firms which have based their Asia strategy on partnering and sharing knowledge with Chinese firms? The roles open to them are likely to be whittled down over time to fewer and fewer niche areas of expertise. From this perspective, joining in the bonanza of Chinese outbound investment

while abandoning efforts at reciprocal market access seems short-sighted.

all take, no give The most successful forum for achieving reciprocal and non-discriminatory trade liberalisation remains the WTO. Is a revival of its multilateral trade talks possible? Mr Sampson points out that a failed Doha Round is not a failed WTO, and that there is nothing inherent about OBOR that makes it incompatible with future multilateral talks. Mr Koopman suggests that in the future, the distance between the interests of China and the US on many economic issues that present challenges in 2015 is likely to shrink. For instance, IP protection is increasingly in China’s own interest as domestic innovation and brand-building takes off. As more sectors in China become globally competitive, opening them to foreign competition will be less controversial. But the issue of SOEs and the use of monetary policies to direct the economy will be critical.

If the Chinese government reaches a point at which it is able to push through far-reaching reforms of the large SOEs, which have become reactionary forces in its economy, without causing a problematic economic downturn, then many of the frictions between China and the US could start to melt away. In the long term this is quite possible, though by no means guaranteed. But the risk is that in the meantime global trade governance continues to fragment, the WTO becomes sidelined and frictions between the world’s largest economies escalate. If a compromise can be found to re-energise multilateral talks, there are large potential long-term economic and geopolitical benefits. But at present, neither side appears willing to give.

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