China’s participation in the Trans-Pacific Partnership

China’s participation in the Trans-Pacific Partnership, Shiro Armstrong, ANU, 11 de Diciembre 2011

In President Obama’s landmark speech in Canberra last month, an over-riding theme was that the United States welcomes China’s rise so long as it plays by the global rules.

Yet those rules are dynamic, and there is a need to have China involved in setting them given the scale of China and its importance to the regional and global economy, as well as to global security.

China needs to help set the rules and agree to them so that it has buy-in — not have those rules created around it. The latter scenario may have been possible a decade ago, but not now. It is crucial, then, that a major trade policy initiative in the Asia Pacific, such as the Trans-Pacific Partnership (TPP), include China, else it will become one of the set of rules created around China, constraining not promoting one of the main trans-Pacific economic relationships.

As the major growth engine of the global economy, China’s exclusion from the TPP raises questions about the TPP’s likely success. The TPP’s purpose is to weld the region together and lock in growth of trans-Pacific economic relationships. The central strategic challenge for the TPP, therefore, relates to China’s membership.

But can China join? And should it join? The biggest risk of the TPP is political: that it might divide the region strategically between its members and the rest, with China being on the outside. The TPP has been supported by two prominent US trade policy figures, Fred Bergsten and Jeffrey Schott of the Petersen Institute of International Economics, as a way, they say, for the US to engage in East Asia as ‘China propelled the advance of Asian regionalism’. ‘These countries are well on the way toward creating an Asian bloc, a development that could “draw a line down the Pacific” by discriminating against [the US]’, they add.

Yet if the TPP proceeds on terms set by the US, it would be very difficult for China to join, and the TPP itself, according to Christopher Findlay, may ‘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. Bergsten and Schott give priority to Japanese and Korean membership, envisioning the use of those strengthened alliance relationships to balance the influence of China.

The difficulty for China in joining the TPP stems from aiming for an agreement designed by, and for, countries able to digest US-moulded intellectual property rights (IPR), labour and environment standards, and other commercial settings. Many will be watching the conditions which are defined for Vietnam’s entry, the least developed country in the current TPP line-up. If the standards of entry for Vietnam are appropriate, there will need to be long phase-in periods to meet them. The benefits of US market access may dominate potential costs for Vietnam; this is not necessarily the case with China.

The US has been pushing for more regulatory discipline for state-owned enterprises (SOEs) in the negotiations around the TPP and, in particular, competitive neutrality between SOEs and private enterprises in member economies. Vietnam and Malaysia are the two economies currently involved in the TPP negotiations in which SOEs are prominent or dominant. Reform of SOEs and the privatisation process is a deeply domestic issue that will not be resolved quickly in China.

The WTO accession experience shows that locking China into reforms can only occur, especially now given its size, when it is committed to using external institutions as tools in its own interest to open up and reform its domestic economy. A TPP agenda and negotiations in which the US effectively declares itself the gatekeeper is likely to make it extremely difficult for China to commit to the TPP and join.

If China is ever to accede to the TPP, the agreement would need to be designed with open accession terms that allow China to meet its own interests. It is not that China should not be bound by TPP rules: it is that China would need to be persuaded to bind itself, consistently with its own reform agenda, in the areas covered by the TPP and on its own terms. If the TPP ends up being a set of related bilateral agreements (a bowl of noodles within a bowl of noodles), for which the US has thus far revealed a preference (see Claude Barfield), China will have to negotiate bilaterally with the US in order to join a broader TPP — no matter what the wishes of other members; and any agreement would require separate approval by the United States Congress. That is rightly viewed as a set-up.

Expansion of membership and creation of an inclusive agreement was the original aim of the TPP, and that is where its potential economic benefits lie. But easy expansion of membership is perhaps the biggest challenge. The risk is that, once an agreement is negotiated in whatever shape or form, sign-on by non-members in the region (an explicit goal) will be difficult with extra requirements for new members and individual-member veto over new membership, notably, by the US. If the agreement requires consensus from members (or incumbents) on new entrants rather than the meeting of carefully-constructed and transparent rules of entry, effective veto-power on new membership will be built into the arrangement.

A transparent and established process with clear criteria in application for membership is needed for two reasons. First, it will give members less discretion over the conditionality they can add to individual members for accession. Second, a membership bid would not have to be triggered by an invitation from members — membership that is contingent on invitation would create maximum discretion for incumbents and is not congenial to expanding membership. Automatic sign-on is not constitutionally easy for the US given that Congress will have to approve each new member separately. But that was exactly the original idea of the TPP’s predecessor, the P3 and P4 agreements with Chile, Brunei, New Zealand and Singapore.

Perhaps China should announce it wants to join negotiations right away, not to play spoiler, but so that it can engage directly in defining what the rules for much of Asia Pacific trade should be. That would be the surest strategy in ensuring that the TPP was open and dynamic, not static and exclusive. Otherwise there are likely to be one of two broad outcomes from the TPP initiative. The first is that the US succeeds quickly, as it has signalled it wants to, in locking the other 8 pliant negotiators into an early deal that is full of exceptions and has limited or negative liberalising effect but the exclusionary features of which maintain symbolic pressure on non-members like China. This might be called the just-another-trivial-FTA-outcome. The second is that the negotiators hold to more rigorous liberalising targets that will take much longer to negotiate. That is likely to entrench Chinese exclusion more deeply. Either way there is no indication that the intention is to draw China into the process. And that will not only be to China’s cost, but also to cost of China’s partners in the region and global welfare.

Shiro Armstrong is a research fellow at the Crawford School of Economics and Government at the Australian National University and is co-editor of the East Asia Forum. He is also editor of the new book The Politics and the Economics of Integration in Asia and the Pacific (Routledge, 2011).