Unity versus Collaboration: Construction of China's Belt and Road Free Trade Agreement 2.0 Network

• Published date: 01 May 2020
• Author: Xiuyang Pan,Zuoling Xie,Jing Lu
• Date: 01 May 2020
• DOI: http://doi.org/10.1111/1468-0106.12323

SPECIAL ISSUE ARTICLE

Unity versus Collaboration: Construction

of China's Belt and Road Free Trade Agreement

2.0 Network

Jing Lu

1

| Xiuyang Pan

2

| Zuoling Xie

3

1

School of Economics, Zhejiang

University, Hangzhou, China

2

School of Economics Center for

Research in Regional Economic Opening

and Development, Zhejiang University,

Hangzhou, China

3

People' Government of Lvshan

Township, Changxing, China

Correspondence

Xiuyang Pan, School of Economics

Center for Research in Regional

Economic Opening and Development,

Zhejiang University, Hangzhou 310027,

China.

Email: xiuyang414@126.com

Abstract

In the context of the United States prioritizing bilateral

as well as trilateral trade agreements and China's

regional economic integration strategy based on the

Belt and Road (B&R) Initiative, the B&R free trade

agreement (FTA) and the US–European–Japanese FTA

(UEJFTA) have become the two regional economic

integration processes with the greatest potential impact

on the world economic landscape. The present paper

examines the game situation as well as the economic

effects of China's B&R-FTA 2.0 network against the

United States' UEJFTA to study the optimization of

China's B&R FTA system. By constructing a four-

country extended game model under a two-part expan-

sion, we find that an increase in members will promote

the welfare of each country when there is a single

regional trade agreement; the potential member coun-

tries tend to choose larger organizations for higher eco-

nomic benefits when there are several regional trade

agreements. Our quantitative simulation shows that

promoting the construction of the FTA 2.0 network

based on the B&R can significantly alleviate the impact

of FTA entered into by the United States with its major

trading partners.

Received: 3 April 2020 Accepted: 9 April 2020

DOI: 10.1111/1468-0106.12323

250 © 2020 John Wiley & Sons Australia, Ltd wileyonlinelibrary.com/journal/paer Pac Econ Rev. 2020;25:250–271.

1|INTRODUCTION

1.1 |Background

From 2016, the traditional large-scale multilateral trading system focused on the World Trade

Organization has weakened the dominance of the United States. The United States has gradually

promoted the formation of high-standard free trade zones with “bilateral first”and “bilaterally pro-

moted multilateral”trade policies, thus abandoning the traditional inte rnational trade rules that

benefit emerging economies. The successive signing of the US–Korea Free Trade Agreement

(FTA), the US–Mexico Trade Agreement, the US–Mexico–Canada Agreement (USMCA), and the

European–Japanese Economic Partnership Agreement, as well as the continued advancement of

negotiations, for instance, for the US–Japan Trade Agreement (UJTAG), the Transatlantic Trade

and Investment Partnership (TTIP), and the US–Europe–Japan FTA (UEJFTA), all reveal that

developed countries such as the United States, Japan, and South Korea are accelerating the pace of

restructuring new international economic and trade rules. Atthe same time, countries in the Asia–

Europe–Pacific region have been exploring the path of economic integration. In terms of bilateral

trade agreements, China–South Korea FTA, China–Australia FTA, five “10 + 1”FTA, and US–

South Korea FTA have been established; at the level of regional trade agreements, the establish-

ment of the Association of Southeast Asian Nations (ASEAN) has greatly promoted the economic

development of South-East Asia. The China–Japan–Korea FTA (CJKFTA), the Comprehensive

and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the Regional Comprehen-

sive Economic Partnership (RCEP) have undergone several rounds of negotiations.

Looking at the current situation of economic integration in the Asia–Europe–Pacific region,

two distinct development paths can be clearly seen. First, with the rising influence of emerging

economies such as China in the global economy, developed countries, including the United

States, Europe, Japan, South Korea, and Australia, have actively promoted the intensification of

bilateral and trilateral trade agreement negotiations, such as the UJTAG, the TTIP, the

US–Australia FTA, and the UEJFTA. Developed countries connect the Pacific and Atlantic free

trade area construction through bilateral advancement and by bilaterally promoting multilat-

eral strategic ideas to regain dominance in rulemaking in the next round of international nego-

tiations and to promote new rules and standards to suit their own interests. In the future, this

US-ledhigh-standard international economic and trade rule will constitute higher trade barriers

to emerging economies such as China, and produce trade transfer and capital transfer effects.

Second, the emerging economies represented by China, facing the risks and pressures of

being marginalized in the construction of free trade areas and the formulation of international

economic and trade rules, are accelerating the transformation and upgrading of their domestic

economies. They have promoted Asia–Europe–Pacific economic integration through ASEAN

and BRICS economic cooperation and the “Belt and Road”(B&R) Initiative to build an FTA 2.0

network system that aligns with their national economic situation and economic interests.

Obviously, the evolving circumstances of the two superpowers is bound to change the nature of

their bilateral relationship (Jaklicˇ, 2018). In view of the changes in the trade pattern as a result

of the China–US trade war, one option for China is to promote the bilateral free trade area strat-

egy with neighbouring countries and mitigate the impact of competitive substitution on China's

domestic economy. Another is to accelerate the RCEP negotiations and form a parallel competi-

tive situation with the UEJFTA. A third option is to construct the B&R bilateral and multilat-

eral China FTA system and rebuild China's leading global value chain network through Asia–

Europe regional economic integration.

LU ET AL. 251