China, economic containment and the TPP

China: economic containment and the TPP, Peter Drysdale,East Asia Forum, 12 de Diciembre 2011

In Washington and Beijing last week there were important meetings that are likely to be influential in where the Trans-Pacific Partnership (TPP) negotiations on regional trade arrangements lead down the track.

In Washington, the US administration called in ambassadors from the eight negotiating partners to up the ante on an early deal. USTR Ron Kirk had declared on 30 November that the US wants a deal by the end of next year, much to the incredulity of Washington observers who doubt that the White House will want a full-on debate about the TPP and the necessary Trade Promotion Authority in the middle of an election year. Now Congressman Kevin Brady, Chairman of the Subcommittee of Trade of the House Committee on Ways and Means, has called Hearings on TPP from Wednesday, 14 December, saying that ‘it is vital that we complete an ambitious and comprehensive 21st century agreement as quickly as possible’.

In Beijing, the Chinese brought together a group from within China and around the region to discuss where the TPP was headed and what its impact would be on regional economies, including China. The debate in China has been intensifying since the Honolulu APEC meeting at which President Obama announced that he was aiming for a TPP deal within the next 12 months. Many are worried that China has been left out and risks being marginalised although many scholars and Caixin, the progressive Chinese media group, think China should step up and muscle in. The ‘TPP’s proposed free trade zone in fact echoes the aims of China’s economic reform policy’, Caixin argues, ‘and should be seen as an opportunity for the Chinese government to liberalise the economy, to the nation’s benefit. Beijing should treat this trade pact as it did its accession to the World Trade Organization, with a proactive yet prudent stance, all the while making decisions strictly based on China’s best interests’.

Were it so simple.

As Shiro Armstrong points out in this week’s lead essay, it will be very difficult for China to join the TPP which is likely to ‘drive the region apart with systematic exclusion of non-members, including China. This wedge through the middle of the Pacific will be political as well as economic. China would have to join the TPP on US terms as the TPP has now become a creature fashioned largely by Washington’.

If China is going to be able to accede to the TPP after an agreement has been negotiated, that agreement would have to be designed to allow open accession. This is not to say China shouldn’t be bound by TPP rules: it’s that the rules need to be structured so that China and other emerging economies, like Indonesia and India, can move to full compliance phased in over time, consistent with their own reform agendas and the interests of the whole region. They cannot possibly conform to US-determined rules immediately. Worse still, if the TPP ends up being a set of related bilateral agreements — and that is the US preference — China and other outsiders like Indonesia will have to negotiate bilaterally with the United States in order to join a broader TPP, no matter what the wishes of other members. Any agreement on entry would require separate approval by the United States Congress. That is rightly viewed as a set-up; a set-up that will keep China out in the cold for a very long time.

Does this matter?

It matters on a number of scores. The TPP is supposed to weld the Asia Pacific region together. It is supposed to deal with ‘behind-the-border’ regulatory (21st century) issues on which other preferential trade agreements fall short. Without careful consideration, design and a manageable framework, it will likely do the reverse — exclude key partners who are at the heart of East Asian economic dynamism by making it near-impossible for the excluded to join. And, despite the rhetoric, the ‘behind-the border’ issues on which US negotiators are especially mandated to focus are ‘labour laws’, ‘environmental laws’ and ‘intellectual property rights’. Those are not priority issues for making regional markets more contestable and efficient.

A one-year time frame to complete negotiation of the TPP is ludicrous. If the TPP is to be meaningful, it must meet its declared aims of creating a substantial region-wide agreement; and this requires a clear and realistic timetable for tackling outstanding issues in the negotiations — not to mention overcome distractions likely to swamp the US in late 2012. An agreement delivered in a one-year timeframe would add little value to the extant agreements between the nine (though incorporating a new US-New Zealand bilateral element) and impact negatively by establishing a semi-permanent barrier to entry by China, India and Indonesia. Whoever dreamt up this strategy has been thinking in the corner of a little box unrelated to geo-economic-political-security reality.

China has not been invited to join the negotiations; Indonesia sees the risks of regional division and does not want to. In the end this may not matter, and both China and Indonesia have cause to be relaxed since, given the way it’s being prosecuted, the TPP may not have a substantial impact after all.

Where to now?

One option is for China and its East Asian partners to accelerate moves towards an East Asian free trade area. This is happening, as Joel Rathus explains. ‘EAFTA’, he says, ‘now seems more a question of when than if’. This too could drive a wedge down the middle of the Pacific, though if it’s ASEAN+6 rather than ASEAN+3 that would be a lesser risk.

China could muscle in and declare its preparedness to join in fashioning a TPP arrangement that it and others could join — one that is also consistent with US trade reform objectives. The risks of this strategy are extremely high: met with likely rejection, the Chinese leadership would be humiliated. There is no Zhu Rongji in Beijing now, on the way to WTO accession no matter what the odds.

It is disingenuous to declare, as Brady did in announcing the congressional hearings last week, that ‘we should also welcome new countries to the TPP if they are willing to meet TPP’s high ambitions and resolve outstanding bilateral issues’. There is absolutely no indication that the intention is to draw China into the TPP process any time soon. Coming to terms with how that can be done are where most of the gains could be. If that is not done, as Armstrong says, it ‘will not only be to China’s cost, but also to the cost of China’s partners in the region’ (including the United States of America) and global welfare.

Peter Drysdale is the Editor of the East Asia Forum