SOAS University of London

SOAS expert gives evidence at Foreign Affairs Committee Inquiry on China and the international rule-based system

10 April 2018

Dr Yuka Kobayashi, Lecturer (Assistant Professor) in China and International Politics at SOAS University of London gave evidence last month to the Foreign Affairs Committee's Inquiry into China and the international rule-based system. The inquiry examines how China has participated and engaged with the international order and how the UK can respond to the process.

The first session examined China in international economic institutions.  Dr Kobayashi discussed how China’s economy had shifted from a planned economy to a ‘socialist market economy’, particularly since WTO accession in 2001, and moved up the economic chain from a manufacturing goods based trading economy to one that is well-balanced in trade in goods, services and investment. Building on expertise cultivated in their activities in Africa, China has developed a niche in financing in infrastructure (Kobayashi and Sanchez 2017). This is also helped by what the ADB estimates as a USD 8 trillion gap in for funding for infrastructure, facilitating China’s reach from Central Asia to East and ultimately West Europe (Dave and Kobayashi 2018).

As such, China has moved from a quite observer in the international economic institutions (World Bank, IMF, WTO) to an active participant, having an impact on the rules of these institutions themselves. Recently, China is creating their own versions of these international economic institutions as the ones under their Belt and Road Initiative (BRI) i.e., the Asian Infrastructural Investment Bank (AIIB) and Silk Road Fund.

These Chinese initiatives are significant given the difficulties in the negotiations for the Doha Development Round and the uncertain future of the multilateral trade regime. This also coincides with a change in the US position on trade, from the Obama administration to the Trump administration. More countries are moving from the multilaterals such as the WTO, to the mega regionals such as the Trans Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP).

Dr Kobayashi discussed UK’s presence and contribution the country had on the discussions regarding the AIIB. Once the UK joined, this signalled to the other countries to follow its lead. In regards to the TPP and RCEP, she said: ”One is led by the United States—TPP [Trans Pacific Partnership]. One is led by China—RCEP [Regional Comprehensive Economic Partnership]. In that sense, it [trade] was really divided into the China and the US camps. However, with the UK joining AIIB [Asian Infrastructure Investment Bank], things have shifted and have moved around so that even in the mega-regionals, you are having the different kinds of sides join.”

“It is quite interesting because in terms of rule-making, TPP reflects the very much rule-based system, and RCEP reflects the very much Chinese-favoured “vaguely, as we go on, and negotiate” system…..the UK has had a significant shift in terms of dialogue and discussion about if we are going to join or resist the Chinese institutions.”

On the benefits and challenges for the UK of the Belt and Road Initiative, Dr Kobayashi said:  “There is a huge opportunity for the UK that has not been picked up on. It is basically a regional, bilateral and multilateral initiative. All these projects have to have joint venture contracts. A lot of those contracts are structured to have arbitration in a third-party country, and a lot of the contracts rely on the UK. One of the biggest [potential for] UK exports is legal services. That has not really been picked up.”

Dr Kobayashi also noted the impact of Brexit on the UK’s potential involvement in the Belt and Road initiative: “The legal side is the major problem/challenges with Belt and Road Initiative. Once the UK leaves EU standards, we are not going to be under that protection.”

 “A lot of standards were all superseded by the EU once the UK became part of it. Once it leaves, we are not part of that anymore…. Basically, if there is an incident where a joint venture poses environmental challenges or any kind of breach of competitive law practices, we won’t have that [EU laws and regulations] anymore to fall back on.”

“It will be the UK [alone, without the EU support] trying to deal with that, [and also] without this kind of structure.”  Dr Kobayashi referred to the on-going investigation for China’s Belt and Road project in Hungary for their section of the Belgrade – Budapest Railway. While Hungary, the EU country is under investigation for potential breach of EU procurement laws, the non-EU country, Serbia is not investigated.  The EU is also currently discussing investment-screening to make sure EU interests are ensured.”

“In a sense, [at the moment] the business is dictating the way forward. ..[however once UK leaves the EU] ….we will not have any kind of EU laws to back us up… We will have to create them one by one, which will involve a lot of manpower and finances to reconstruct these kind of structures to protect our domestic industries [which may not be in time to protect UK interest].”