SCO states discuss the creation of a new free trade area

Li Keqiang, Premier of the State Council of China, called for a free trade area to be implemented among members of the Shanghai Cooperation Organisation (SCO), at the 15th meeting between heads of state of the six nation-strong organisation in November 2016. The SCO is a political, economy, and military organisations whose membership includes China, the Russian Federation, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. Other Asian countries are likely to accede in the near future.

“Member countries should break restrictions in the economy and trade by establishing a free-trade zone to expand wider-scale exchanges in this field,” Li said, noting that trade barriers have unnaturally inhibited trade flows.

Shifting dynamics between powers, Central Asia: The proposal can be seen in light of Li Keqiang’s role as an advocate for trade reforms and investment liberalisation in China, notably through Free Trade Zones like the Shanghai Pilot FTZ, and in light of China’s One Belt, One Road initiative (OBOR), which calls for heavy infrastructure investment in the less-developed but resource-rich Western China and in neighbouring Central Asian states.

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China’s investment in Central Asia has skyrocketed in recent years, and it has surpassed Russia as the largest foreign investor in the region. Chinese President Xi Jinping made the original announcement for the OBOR initiative in Kazakhstan’s capital, Astana, and China took the initiative in developing the Khorgos Free Trade Zone on the border between China and Kazakhstan, a project aimed at creating a vibrant economic hub in an underdeveloped region and lubricating trade between the two countries. The Astana Times reports that in 2015 China agreed to $50 billion in planned investment in Kazakhstan, principally in energy, mining, and infrastructure.

There are concerns about expanded trade and the proposed SCO free trade area. Russia does roughly $90 billion in annual trade with China, with a $13 billion trade deficit in 2015, while exporting $13 billion annually to Kazakhstan with a $6 billion positive trade balance. Kazakhstan is a net exporter to China, and many in the country fear that a free trade area would mean Chinese labour and goods gaining too strong a purchase in the local economy. Russia meanwhile does not wish to lose market share or political clout in Kazakhstan and other Central Asian states.

Slow and steady?: Such political concerns are likely why Russian Prime Minister Dimitry Medvedyev made somewhat equivocal statements about the possible arrangement (as quoted in The Diplomat, 4 November 2016), still however endorsing the idea in principal:

“The transition to a preferential trade regime within the SCO is a complicated matter given that any preferential regime always requires renunciation of internal decisions of one kind or another. We have agreed to continue our work in this area.”

It seems likely that as OBOR progresses, questions of free trade among the SCO will move to the fore – but for now competing national interests may make real liberalisation move slowly.

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