The View

America’s trade pact woes a boost for Beijing

Donald Trump is riling up free-trade resentment among the white working-class Republican Party base

PUBLISHED : Monday, 04 April, 2016, 10:24am
UPDATED : Monday, 04 April, 2016, 10:24am

The US trade agenda might be about to have a “supercollider” moment, and China, ironically, stands to benefit.

The Superconducting Super Collider is the most famous particle accelerator never made. Some US$2 billion had already been spent when the US Congress cancelled the spectacular Texas-based project in 1993. Jobs were lost, and dreams shattered.

Such ambitious undertakings take years to finalise, and along the way, the mood of a country can change. In the supercollider’s case, the fall of the Berlin Wall in 1989 sapped enthusiasm for the costly science and space race against the Soviet Union.

This year we may see another major initiative torpedoed after years of work. The US-led Trans-Pacific Partnership (TPP) took eight years to negotiate, and when 12 countries signed the deal in February, this “new generation” trade pact was billed as the biggest ever.

The China shock is mostly in the rear-view mirror, and trying to unwind now would be costly and wasteful

But it still has to be ratified by the US Congress, and the mood of the country has changed, to put it lightly. On the left, popular presidential candidate Bernie Sanders calls the deal a “disaster” and even the centrist Democratic Party candidate for president, Hillary Clinton, has turned tail on her previous support for TPP.

Meanwhile there is even more trouble on the right. Donald Trump is riling up free-trade resentment among the white working-class Republican Party base. For Republican legislators, the political risk of casting a pro-TPP vote is high and rising.

China is not a signatory to the TPP, but rather the driving force behind another major trade initiative – the Regional Comprehensive Economic Partnership (RCEP) – that could end up involving 16 countries and span Asia from Japan to India.

The TPP includes specifications that seem to be aimed at containing China’s brand of authoritarian, state-led capitalism. There is, for example, language in the deal about a free and open internet, and tougher rules on government procurement and state subsidies to companies.

Mostly, however, the TPP is focused on forging openings in areas where the developed nations have advantages, such as services and intellectual property, while the RCEP is focused on goods manufacturing. This is “consistent with their comparative advantages”, according to trade experts Peter Petri and Michael Plummer, who have deeply researched both initiatives, in some cases teaming up with Fan Zhai of China Investment Corporation.

Still, the researchers estimate that if the TPP were expanded to include five other countries, including China, it could bring China US$800 billion in additional income by 2025. Which is why Beijing is likely to eventually join if the TPP is passed. Petri, Plummer and Fan have argued for convergence. In this scenario, China joins TPP but also pushes through with RCEP, and eventually an even bigger, more global, trade pact is signed that bridges the two models.

American diplomats and free-trade advocates say TPP’s defeat would be a tragedy. They acknowledge that mistakes were made in the past 20 years of increased globalisation: in particular, the shock of China’s opening was larger than expected, and little was done to help those displaced in China’s rapid transformation to the world’s biggest exporter.

But the China shock is mostly in the rear-view mirror, and trying to unwind now would be costly and wasteful. Economists funded by the Peterson Institute for International Economics, a think tank based in Washington, published an analysis that shows the economic benefits of TPP would be dispersed among many income groups, not just given to the 1 per cent.

So what would happen if the TPP was torpedoed? Of course, many around the world would celebrate its demise, as a victory for labour and localism and a defeat for global corporatism.

But it would not “end free trade”. The likeliest scenario is that we default to the current trade dynamics – a model closer to the RCEP.

Most likely the next US president will not be Trump or Sanders, each of whom have promised to increase protectionism. The next US president – probably Clinton but maybe even Ted Cruz – would embrace the status quo of globalised free trade.

But by then the TPP would be on the scrap heap of history, buried next to the supercollider. The ball would be in China’s court and Beijing might just be thinking, “Thank you, Mr Trump.”

Cathy Holcombe in a Hong Kong-based financial writer