INTERNATIONAL TRADE

‘The US, not China, should write the rules of the global economy’: Is Beijing ready for a new Asia-Pacific trade pact led by the US?

The Trans-Pacific Partnership will have a strong systemic impact on China and potentially transform the future of global trade - but Washington wants to be the one steering the ship to secure Obama’s legacy

PUBLISHED : Friday, 23 October, 2015, 8:18am
UPDATED : Friday, 23 October, 2015, 2:24pm

When the exclusive “TPP club” concluded their negotiations in Atlanta, the United States in the first week of October, most Chinese were still celebrating their National Holiday.

Although the economic damage to China from the Trans-Pacific Partnership - a trade pact led by the US, Japan including 10 other countries from the Asia-Pacific region - will probably be minimal, it could have a powerful systemic impact on the country and the future of global trade.

Moreover, it was by no accident that China has been excluded from the group. The strategic reason for this is, as US President Barack Obama has openly said: “The US, not China, should write the rules of the global economy.”

But the pace of negotiations has been driven by tactical considerations: Obama wants the TPP in his legacy basket.

Although bringing China would make economic sense for the US to boost its economy, Obama worries that getting China on board might drag the negotiations longer than his time in the White House.

Moreover, the geopolitical significance of the TPP vis-a-vis China is a convenient card for Obama to sell the deal to US Congress.

Should China panic? Not at this moment. The TPP won’t have any immediate impact on China until it is ratified by the parliaments of all 12 countries.

And the ratification in Japan, Canada, in particular in the US, will be an uphill journey. So far, not a single member of Congress has publicly backed the deal.

US presidential candidate Hillary Rodham Clinton said in the first Democratic Party debate on CNN that she “does not support” the TPP, which shows how unpredictable the political climate will be in respect to its ratification.

Bear in mind that even if the deal is passed, the process could take months or even years. Three free trade agreements the US has signed with South Korea, Colombia and Panama were voted on and approved by Congress four years after the deals are concluded. The US actually had to renegotiate the details with Korea later.

If the TPP finally gets passed in all 12 countries in 2016, would it damage the Chinese economy?

The immediate economic losses the TPP may cause to China would be trivial. This is largely because China’s main competitiveness is in the manufacturing sector, and tariffs on manufacturing goods in developed countries belonging to the TPP are already very low.

Since the end of Uruguay Round that established the World Trade Organization (WTO) in 1995, 55 per cent of industrial goods in Japan and 47 per cent of those in the US already have zero tariffs.

A big market-opening achievement of the TPP is lowering the tariffs on rice, beef, dairy products, sugar and other agricultural products among its members. But China does not lose out because it is already a net importer of these products.

However, the systemic impact of the TPP on China could be extraordinary.

First of all, there is the potential spillover effect on Chinese business practices through global value chains. Some of these chains in TPP member nations would urge the implementation of higher standards – from product standards to environmental and labour standards. And Chinese suppliers would have to meet these, even though China is not a member of the TPP.

This is because, in global supply chains led by large multinational corporations, Chinese firms very likely have an upstream partner in one TPP economy and a downstream business in another. This would be a new game for Chinese businesses, as they attempt to race to the top.

The second-tier impact of the TPP’s systemic footprint would be that, like it or not, it may become a de facto benchmark for future FTAs both at a regional and multilateral level.

The TPP is the first regional trade agreement of this scale - representing 40 per cent of global GDP - and ambition in terms of market access.

More striking yet are the regulations involved for state-owned enterprises, the enforcement of intellectual property rights, and environmental and labour rights protection.

Some intellectual property rules related to access to medicine remain highly controversial. Whether the environmental and labour rights provisions will be fully implemented remains to be seen.

Like it or not, China will have to confront a new playing field if the TPP is ratified.

China has reacted swiftly to the TPP by plugging itself in to various FTA talks. This is aimed at offsetting waning exports to some TPP members.

For example, China is an active member of the RCEP negotiations, which encompasses 16 countries, including seven from the TPP.

The China-Japan-Korea FTA negotiations have recently been stepped up, too, after China and Korea recently signed the deal.

Meanwhile, China’s proposed “One Belt One Road” initiative has made trade one of five key elements of the project. China and the European Union recently initiated a feasibility study about the China-EU FTA, which is another positive development.

Engaging in more trade negotiations is a necessary provision, but not enough in itself.

If China’s accession to the WTO is a “first-generation” reform in terms of the country’s market opening, it is high time for the nation to realise a “second-generation” one with a new focus on the regulatory side of things.

Two specific regulatory reforms may become a prerequisite for the Chinese economy to compete in the post-TPP era.

First of all it would be important to enforce the competitive neutrality of SOEs, for example to level the playing field by eliminating the political advantages and market monopoly these public businesses have been enjoying.

According to the standards promoted by the TPP, the business operations of China’s SOEs would fall under stricter scrutiny due to the value chains as long as their activities are linked to a TPP economy.

Secondly, the level of environmental and labour rights protection would need to be upgraded.

China has well-established laws and regulations in these areas, but their implementation has been severely compromised by local politics focused on GDP, a controlled media, and a lack of judicial independence.

China should ensure that local governments are more accountable when it comes to implementing environmental and labour rights laws. They should also be mandated to protect and encourage proactive judicial authorities, and grant the media more licence.

It may take a while yet for the TPP to be approved and implemented. China should use this brief window of opportunity to carry out regulatory reforms to prepare for a post-TPP world.

 

Shuaihua Wallace Cheng, PhD, is the managing director for China at the International Centre for Trade and Sustainable Development, and a 2015 Yale World Fellow. The opinions expressed are his own.