China, while a member of the Regional Comprehensive Economic Partnership, remains wary of the Trans-Pacific Partnership: it sees the TPP as an American effort to contain Chinese influence in the region. It might behoove Beijing to join the partnership, however, so as to have greater influence over negotiations. It certainly behooves all concerned to work together to keep Asia’s economic dynamism rolling.
The Trans-Pacific Partnership (TPP) left the dock several years ago, with China seemingly happy to let it sail without providing a cabin for the soon to be designated world’s largest trading nation. Was this a good decision for the world’s second-largest economy? Will that trade grouping compete with or complement the Regional Comprehensive Economic Partnership (RCEP) that China is already involved with? Getting the details of these mega-regional trade deals wrong could seriously damage Asia’s regional economic infrastructure – a point which is often overlooked, not to mention China’s own longer-term interests in shaping the outlines of such initiatives.
US policy-makers stress that the TPP is designed to set the highest standards for future trade and investment treaties including principles that would affect a number of sensitive issues including intellectual property rights (IPR), labor and environmental regulations and treatment of state enterprises. In doing so, it would influence the framework for future multilateral or bilateral negotiations including help build a platform for the seemingly moribund WTO sponsored discussions. Clearly setting such high standards is also in America’s interests since in most areas, it is seen as the benchmark for global standards.
Suspicion and Interest
Many Chinese policy-makers, however, view the TPP with suspicion, charging that it is part of a containment strategy by the US. Yes, the deal may be presented as setting a twenty-first century, high standard agreement that will benefit the global economy, but it is also seen as furthering America’s strategic interests in the Asia-Pacific. After all, how else can one explain why an initiative that began in 2005 among four relatively minor global players (Singapore, Brunei, Chile and New Zealand) was taken over by the US in 2008 and elevated into a mega regional pact that has now brought in such major economies as Japan, Canada, Mexico and possibly even South Korea and Thailand in due course.
That the TPP got so much play at the same time that the much heralded American “pivot” or rebalancing toward Asia was announced has only strengthened perceptions among many Chinese policy-makers that the TPP is part of some kind of strategy to check its growing regional clout. This would explain the interests of countries like Vietnam and Malaysia whose position on issues like the role of state enterprises and IPR is closer to that of China than the U.S.
But China’s policy-makers should understand that it does not matter which of these views is true. In fact, the two views might both be true. The more important question for China is what position it will take on the TPP given that it is already actively engaged in the ASEAN-centric RCEP.
China believes that it will be very difficult for it to meet the high standards being negotiated under the TPP. Disciplines on state-owned enterprises, government procurement and stricter protection of intellectual property rights are potential stumbling blocks for Beijing. But China is not the only one who will find it difficult to meet these high standards.
The TPP negotiating partners are a diverse group of countries with vastly different sizes and levels of development. Vietnam, Malaysia and Singapore all have important state enterprises that receive preferential government treatment. Malaysia’s prime minister, weakened by recent elections, is being criticized for selling out the country’s interests to outsiders. Poorer countries such as Vietnam will be challenged in trying to conform to strict labor, legal and environmental regulations. Protectionist sentiments toward agricultural interests are strong within many of the supposedly high-standard economies, such as Canada and Japan and even the United States itself. Prime Minister Abe of Japan faces especially strong opposition in trying to override the historic support for protecting agrarian interests – a group that can make or break established political parties.
The TPP is perceived as providing less flexibility and making fewer allowances than the RCEP. But given the diversity of the negotiating partners and the tensions that have already been raised, this should not be seen as an insurmountable barrier for China. In the short term, the stricter standards may not seem compatible with China’s current strategic objectives. But viewed over the long term, China’s interests in issues such as IPR protection are likely to move closer to the TPP standard, even as it continues to disagree on some issues such as defining key sectors for state involvement.
On many key issues, China’s long-term interests may actually not be that different from what is envisaged for the TPP. The leadership has iterated that eventually there should be no preferential treatment of state enterprises relative to the private sector except for strategic industries.
China’s promotion of a special free trade zone in Shanghai (SFTZ) represents a pilot of principles that are consistent with the TPP objectives. The proposed reforms appear to have the strong backing of the Premier Li Keqiang. These include zero tariffs on all imports (including agricultural products), protection of intellectual property rights and assurances that labor and environmental standards will be honored. There will also be measures to promote equitable treatment of foreign companies relative to national firms and to reduce preferential support for specific industries and state-owned enterprises. Lastly, the SFTZ will serve as a pilot for liberalizing financial services and capital movements that could eventually lead to free convertibility of the renminbi. Among the important principles being tested is use of a negative list approach to granting access for foreign investors.
There are many skeptics about how the zone would actually operate and in fact success would come from the fact that such reforms are being adopted nationwide, rendering the zone itself unnecessary. In moving forward with the SFTZ, China is in fact signaling its interest in exploring the possibility of joining the TPP discussions.
Indeed, China should become actively involved in TPP negotiations as early as possible. This will give it more say in shaping standards, rather than coming in later and being forced to accept a fully formed agreement. Entering now rather than later avoids the possibility of being blacklisted for non-economic reasons, given that new applicants require unanimous approval from current members. Even if China’s request to join the TPP is denied, this is still advantageous from its strategic perspective. Receiving clarity on whether it is actually welcome to join is much preferable to passively waiting for an invitation.
The addition of China to the TPP would also greatly benefit the deal itself. While some have argued that its presence would be disruptive because it is harder to grant exemptions for a large country, Japan’s accession, carrying its own set of sensitive issues, makes this reasoning less convincing. In fact, building trade architecture with multiple large economies makes more sense for the future of the “living agreement” than having a single dominant country negotiate with many smaller ones.
Some argue against China’s involvement with the TPP because it already has a role in RCEP. The latter group has many of the same objectives as the TPP, to be sure, but it tackles a slightly more limited range of issues, and its lower standards and promises of development assistance make it more easily accessible to developing countries.
Realistically, both the TPP and the RCEP negotiating processes could end up taking a long time and, uncoordinated, could well lead to conflicting results. This would be harmful for the regional economy because much of the economic activity in East Asia depends on the operation of the production-sharing network that links countries.
East Asian economic success over the past several decades has been shaped by the emergence of this production-sharing network, which allowed even the smallest country to achieve scale economies and specialization by producing components rather than having to produce the entire product. China then served as the base for final assembly given the size of its labor force. Therefore, any regional trade pact should support this kind of fragmented production which has turned out to be a highly efficient process. As countries proceed with trade liberalization – either through the TPP, the RCEP or both forums simultaneously – it is critical to make sure this process does not harm the production-sharing network by creating conflicting regulations or restrictive rules of origin.
Protecting the underlying structures that have made Asia the most economically dynamic region in the world requires linking the TPP and the RCEP more closely. China’s involvement in both negotiations is vital in this respect.
This article was originally published in ASPENIA 63-64, September 2014.