Thursday, October 23, 2014

Trans-Pacific Partnership, China and the future of global trade order

Beijing has deep concerns over being left out of the deal, but there is an alternative that could avert trade war

The fact that the US-led Trans-Pacific Partnership (TPP) does not include China raises questions: Is the TPP meant to be an "anyone but China" club to contain the middle kingdom? Will China react with competing trading blocks to escalate economic hostility against the US? What does this mean for the future of the global trade order?

While TPP could eventually help China, Beijing has deep reservations about the rules being drafted. From China's point of view, deepening of the World Trade Organisation with passage of the Doha Round is a greater priority than creating a new trade grouping.

The TPP is a mega-free-trade agreement (FTA) currently under negotiation that encompasses 12 Asia-Pacific countries. In 2006, Brunei, Chile, New Zealand and Singapore initiated a four-way FTA, termed Pacific-4. Later, five additional countries, namely the United States, Australia, Malaysia, Peru and Vietnam, joined the agreement and this led to the creation of TPP, which held its first round negotiations in Australia, March 2010. Since then, Mexico, Canada, Japan and South Korea have requested to join the TPP. Members approved participation of the first three candidates, but did not accept South Korea's application.

The goal of TPP is to "craft a high-standard, 21st-century agreement", as stated by the Office of United States Trade Representative, or USTR. It is reported that TPP aims to achieve duty-free access for trade in industrial products and comprehensive liberalisation in services, and entails deeper regulatory convergence among members in the areas of investment, government procurement, competition policies, technical barriers to trade, intellectual property rights enforcement, state-owned enterprises, e-commerce, labour and environment.

The allegation that the United States is building an "anyone but China" club is hard to substantiate, suggested David Pilling of the Financial Times. In theory, the TPP does not prevent China from membership. As the USTR explained, if an economy is interested in joining TPP, it must send a formal request, and existing members then decide on admission by consensus.

China last expressed interest in TPP was May 2013. A spokesman for the Ministry of Commerce said that China "will analyse the pros and cons as well as the possibility of joining the TPP, based on careful research and according to principles of equality and mutual benefit".

It makes economic sense for China to participate. Excluded from the TPP, Chinese firms would face discriminatory treatment in TPP markets. For example, TPP uses cumulation of origin to encourage member countries' firms to source from within the TPP, instead of from non-members such as China, the world's biggest producer of components.

From a systemic perspective, China would be better off taking part in setting the rules now than to accepting rules passively in the future. Some of the new trade and trade-related norms stemming from TPP will likely supersede those already existing in WTO rules stamped in 1995.

Nevertheless, China has not applied to participate yet and has two kinds of concerns:

First is its domestic stability concern. China could benefit from further liberalisation in manufacturing and services, a high-standard protection and promotion of investment, even from tougher anti-corruption rules, as these issues are in line with the reform agenda of Chinese leaders. China, though, worries about the possible economic hardship resulting from quick, nationwide application of new TPP rules, which may trigger social or even political turmoil.

The second concern is that some high standards of TPP may not be necessarily good standards for China. TPP chapter on intellectual property rights is such an example. As certain public interest groups pointed out, the IP chapter is "heavily weighted toward big industry interests" of developed countries and has "negative impact on development."

Many commentators argue that, in responding to TPP, China has proactively built its own rival trading blocs such as the Regional Comprehensive Economic Partnership, RCEP, and the Free Trade Area of the Asia-Pacific, FTAAP.

Such observations - and perceptions - have factual errors. RCEP is not China's initiative. The Association of Southeast Asian Nations, or Asean, that launched regional group during the 2012 summit in Cambodia, encompassing 10 Asean member countries plus the six countries with which Asean has existing FTAs - Australia, China, India, Japan, South Korea and New Zealand). Members agreed that Asean, not China or any other non-Asean member, is in the driver's seat of these negotiations.

FTAAP is neither a Chinese initiative nor new. As the host of the 2014 Asia Pacific Economic Cooperation summit, China does actively push for the realisation of FTAAP. But Apec leaders agreed to examine the prospect of an FTAAP as early as in 2006. In the recent ministerial meeting in May 2014, all 21 APEC members, including the US and China, agreed to establish a working group to discuss possible way forward for FTAAP.

China does not react by setting up competing FTAs against the US, mainly because China sees not only challenges but also opportunities that TPP may bring, such as a chance for China to study the high standards of developed countries. China aims to become a medium-level developed country until the mid-21st century. In this regard, China has responded by establishing the Shanghai Free Trade Zone in 2013 with the backing of Chinese Premier Li Keqiang. This zone aims to follow emerging international standards and regulations such as those in TPP, and to carry out unilateral liberalisation and autonomous reforms. On the one hand, by limiting the deeper liberalisation and higher standards to a fixed region, such an experiment can control impacts and avoid big scaled economic and social disruptions. On the other hand, it will prepare the nation to join the TPP in the future.

Countries have a right to negotiate mega-FTAs, driven by various geopolitical, economic or commercial considerations.

But these mega-FTA negotiations have two serious problems. Firstly, they take up political and financial resources could otherwise be used in concluding the Doha Round. Secondly, they do not address sensitive but critical issues for the sustainability of the global economy, such as agricultural domestic support and export subsidies, fisheries subsidies, and anti-dumping rules.

Therefore, China, the United States and other major economies can and should do more to reengage in the WTO. A multilateral deal is the most cost-effective legal framework available to ensure non-discriminatory trading terms for all, in particular for the smallest and poorest groups. It is fundamentally essential to foster inclusive globalisation, without which abject poverty gives rise to terrorism and crime.

The Bali Package that all WTO members agreed on in December 2013 offers a silver lining for the multilateral negotiations. At Bali, members also promised to make a post-Bali work programme by the end of 2014 with a view to concluding the Doha Round.

The clock is ticking. When Chinese President Xi and US President Obama meet at the Apec Summit in Beijing next month, or even before, they should focus on neither the TPP nor the FTAAP. Instead, they should manifest their joint leadership, engagement and commitment to conclude the Doha Round, which the Asia-Pacific and the rest of the world badly need.

Shuaihua Cheng is managing director of ICTSD China, International Centre for Trade and Sustainable Development.


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