China-USA: The Economics That Drive Politics In The Pacific
In 2003, when Singapore, New Zealand and Chile launched the Pacific Three (P3) Closer Economic Partnership, few could have predicted that this agreement would grow into the greatest force driving the economic and political landscape of the region.
The changes began in 2008 when the United States joined the negotiations and proposed launching the Trans-Pacific Partnership (TPP) based on the P4 — the P3 had grown after the inclusion of Brunei in 2005 — and invited Australia, Peru and Vietnam to participate. Ever since, America has led the push for the partnership.
In the just-ended Asia-Pacific Economic Cooperation (APEC) summit, U.S. Secretary of State John Kerry said that TPP negotiations are set to end this year.
Why does America have such an affinity for the TPP? And why is it that this agreement, which is open to all APEC member states, happens to leave out China, the world’s No. 2 economy and top exporter?
What TPP implies
Characterized as “the 21st century agreement,” the TPP possesses certain particularities. “Whereas it was once about opening up borders, now it is moving inside them,” says Zhang Yunling, director of the International Studies Division at the Chinese Academy of Social Sciences. In other words, not only is the TPP concerned about issues such as tariffs and quotas typically at the center of free trade agreements, but it also sets very high requirements for the whole supply chain: labor conditions, governmental procurement, state-owned enterprises, intellectual property and environmental protection. It’s more like an “upgraded” trade agreement, and will affect the core of a country’s business model.
Since the 12 TPP member countries have different economic development levels, as well as intertwined interests, issues such as intellectual property and state-owned enterprises are bound to arouse considerable disagreement. Moreover, the demands of new members joining will exacerbate already complex negotiations.
Nevertheless, negotiators are relatively optimistic that the TPP agreement will be reached. Chen Fengying, director of the World Economy Department at the China Institute of Contemporary International Relations, notes that while the Obama administration is hampered by America’s domestic political polarization, it sees the agreement as one major way it can at least achieve something internationally.
The role of the TPP
Admittedly, it was precisely at the moment of America’s pivot to Asia and at the end of China’s “Smiling Diplomacy,” that Washington began to push hard for the TPP. Unlike the U.S.-Soviet competition, which was more focused on the military level, Sino-U.S. relations seem to manifest far more often in economics.
Matthew Goodman, a former White House official charged with Asian affairs and current research fellow at the Center for Strategic & International Studies, pointed out in a recent article that right from the beginning the core tool of the “U.S rebalance to Asia-Pacific” has been the economy. Goodman believes that the U.S. must achieve tangible and visible economic results and promote more export-led economic growth and employment through its new focus eastward, otherwise the public will no longer support the government’s military deployment in this region.
As Chen Fengying notes, America hopes to develop the Asia-Pacific rules through the TPP, just as it has long steered rules through the World Trade Organization. The U.S. had not imagined that most emerging countries — China in particular — would have ridden on the wave of Obama’s multilateralism and risen so quickly, at the same time that the U.S. itself suffered from the 2008 outbreak of the financial crisis and subsequent recession. As a result, America has begun to regulate the developing countries’ competitiveness and raise competitive costs for emerging economies.
Promoting reform with openess
Over the years, China’s attitude towards the TPP has also changed, from strong criticism to cautious support. In May this year, Shen Danyang, the Ministry of Commerce spokesman stated that China will conduct a serious study and analyze the pros and cons of the possibility of joining the TPP.
For China, both domestic and international situations have changed. As Wang Yong, Director of the Center for International Political Economy at Peking University, pointed out to Caixin, the most crucial factor that has changed China’s attitude is its slowing economy and the fact that it requires external force to push forward with domestic reforms.
Meanwhile, Chen Fengying believes that the current Chinese government is more open and willing to work within international arrangements. For instance, its presentation of a "negative list" in the newly opened Shanghai Free Trade Area is a demonstration of full internationalization.
Many now believe that the TPP is an opportunity to force China to reform, just like when China entered the WTO in 2001. However, even if China intends to join the TPP, a gap exists that can’t be ignored. In Zhang Yunling’s view, China has to adjust itself in the long term — but the TPP gives the country a little bit of breathing room to allow it to adapt to global conditions.
When it comes down to specific gaps, Wang Yong is convinced that China would have to make major concessions, including crucial changes to the state-owned enterprises (SOEs). The TPP specifies the neutrality principle of competitiveness of SOEs, and yet the 86 Chinese companies that make it into the World Top 500 are essentially SOEs. Even Huawei, a non-SOE and without governmental subsidies, is backed by the state as well.
The increasingly intense pressure
Up to now, 19 rounds of TPP negotiations have taken place. In Zhang Yunling’s opinion, since participation in the agreement has to start with the bilateral consultations and agreement to the already reached agreements, China has very little room for bargaining. “China might as well wait until it has a relatively stronger competitive basis so the cost is smaller while its bargaining chip is bigger”, she reckoned.
Meanwhile, Wang Yong estimates that due to the high standards required, China is unlikely to join before the current negotiations are concluded. And joining afterwards as a “latecomer”, not as an original negotiating state, means that “the deals will be different and will have a greater impact on the Chinese economy and trade.”
Thus, Zhang Yunling advocates that China actively promotes the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement that includes the 16 ASEAN summit member states of Southeast Asia, because the RCEP is mainly composed of developing countries, and is more focused on development. “The optimal condition is that RCEP sets the developing standards while the TPP sets the competition.”
As Premier Li Keqiang tried to sell the RCEP idea in the latest East Asia Summit, “Many of the East Asian countries eat with chopsticks,” he noted. “It is hard to eat with one stick.”