Thursday, October 15, 2015

The Trans-Pacific Partnership (TPP) and China: The Elephant That Wasn’t in the Room

The trade deal will have huge implications for the region, and for U.S.-China competition.

The U.S.-led Trans-Pacific Partnership (TPP) is a very big deal. After five years of negotiations between 12 countries that represent 40 percent of global trade, the TPP was finally signed on October 5. The deal is now being hailed as the most significant step toward trade liberalization since the WTO Uruguay round in 1995 – the largest trade negotiation ever. Indeed, the TPP’s significance extends well beyond the 12 signatory countries, which include the U.S., Canada, Japan, Chile, Peru, New Zealand, Australia, Brunei, Malaysia, Vietnam, and Singapore. The deal will expedite economic integration in Asia, but it will also intensify the competition between the U.S. and China. This is because TPP is as much about political and economic dominance in Asia as it is about reducing trade barriers.

Negotiating the deal, which reduces tariffs across most goods and services and aims to establish a “gold standard” on labor and environmental practices, has been a fraught process. Sticking points have included market access for dairy products, terms for the auto sector, preferential treatment for state-owned enterprise, environmental regulations as well as intellectual property rights. But the impetus to seal the deal came, in all likelihood, from Tokyo and Washington following the creation of the China-led Asian Infrastructure Investment Bank (AIIB) and Western countries’ appetite to join it. The AIIB suddenly symbolized Beijing’s growing influence and ability to shape the rules of the investment game in Asia.

In this respect, the TPP’s conclusion marks a diplomatic victory for Washington and Tokyo: Not only have they created a substantial economic bloc that counters China’s dominance in Asia, but the deal that they have championed also establishes new rules of trade engagement that will extend well beyond Asia. And as a pillar of Washington’s “pivot” to Asia, it is a testament to America’s staying power in the region.

To be sure, the TPP deal signed last week may not be the “golden standard” that Washington had initially intended it to be. Moreover, ratification will be a slow and politically messy process: The TPP could get caught up in the upcoming elections in Canada, and if Prime Minister Stephen Harper isn’t re-elected, a very real possibility, the TPP’s ratification will become highly uncertain. In the U.S., too, ratification could fall prey to electoral politics. Democratic candidate Hillary Clinton, who had backed the trade agreement during her time at the State Department, is now cautioning against it. Foot dragging because of domestic politics could delay ratification in Japan until late 2016, and in the U.S. until as late as 2017.

On balance, though, the deal is likely to overcome these political hurdles, not least because the negotiating countries are all set to benefit from it. The fine print of the deal has not yet been published, but preliminary studies – conducted for example by the Peterson Institute – expect the TPP to enlarge the participating economies by $285 billion by 2025. The study also estimates that of the Asian signatories, Vietnam, Malaysia and New Zealand will see the biggest increases to their GDP growth, while Japan, Malaysia and Vietnam are expected to see the largest gains in terms of increased exports. The TPP is also set to boost the production and export of electrical equipment, textiles, construction and machinery in Vietnam and Malaysia as well as transport equipment in Japan.

But the impact of the TPP extends beyond the 12 signatory countries. Already, fear of potential economic losses has prompted South Korea to express interest in joining. South Korean President Park Geun-hye has been visiting the U.S. this year, together with 166 ROK business leaders. Even China, the elephant that wasn’t in the room, is sounding a little less hostile toward the trade deal. In response to the news that the TPP was signed, China’s Commerce Ministry’s spokesperson said that China “always keeps an open mind toward the construction of systems that are in accordance with World Trade Organization rules and are helpful for promoting economic integration in the Asia-Pacific region.”

Beyond these sanguine words, the response in Beijing has been mixed: On the one hand, a trade bloc in Asia promoted by the U.S. that excludes China smacks of containment. At the same time, reformers in China are using the TPP to argue for accelerating efforts to liberalize the domestic economy: promoting better protection of intellectual property rights, moving forward with state-owned enterprise reform, and cutting red tape for investments, among other initiatives.

Moreover, during the years of TPP negotiations, Beijing hasn’t been sitting idly by. Concerned at the potential losses stemming for being excluded from regional mega trade deals such as the TPP and its EU-US cousin, the TTIP, Beijing has been pursuing its own trade architectures in Asia. These include the less ambitious Regional Comprehensive Economic Partnership (RCEP), which will exclude the U.S. but include ASEAN, India, Japan, Australia, New Zealand, and South Korea. China’s foreign minister had expressed hope of wrapping up RCEP talks by the end of the year, since this should help mitigate some of TPP’s negative impact on the Chinese economy, estimated at anywhere from $47 billion to $89 billion in lost income. China will also emphasize its One Belt, One Road initiative, since it counters the TPP by placing China at the heart of Asian and Eurasian manufacturing links. The scheme will have a more immediate impact in Asia than the TPP will, as it will generate economic activity in Asia and Eurasia well before the TPP comes into effect.

Even as the final details of the TPP emerge, it is clear that it is a big deal: It will benefit Asian growth and trade, and as such it will also bolster global growth and trade integration. But the TPP also highlights that there is a deeper competition now at play between the U.S. and China: The quest for defining the rules of engagement in the 21st century. And that remains an open, deeply contested question.

Michal Meidan is an Associate Fellow of the Asia Programme at Chatham House.

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