What China stands to gain by joining US-led trade pact TPP

China cannot afford to miss out on the Trans-Pacifc Partnership (TPP) and will eventually sign up for the United States-initiated trade and investment pact that currently covers 26 per cent of global trade, according to CLSA senior economist Anthony Nafte.

The case for China to join the TPP, Nafte wrote in a report, is twofold: China risks losing trade-boosting competitiveness and market access if it does not join; and the TPP – covering issues way beyond tariff reductions – will help China narrow its long-running deficit in the services trade and force a reform of bloated state firms.

“It is questionable whether China, which is so reliant on trade, would choose to stay out of the TPP,” wrote Nafte. “The TPP partners, including the large US and Japanese markets, comprise over 25 per cent of China’s exports. If the TPP is signed and Korea applies for early entry, China will be wary of staying out.”

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Nafte compares the current situation with the one facing China 15 years ago when it was mulling whether or not to join the World Trade Organisation.

“China faced a similar dilemma when it was considering WTO accession in late 2001. Many advisers argued against WTO entry on the basis that exposure to more competitive foreign firms will kill China’s manufacturing industry. In the event, China’s share of global trade expanded from 4.1 per cent in 2001 to 11.4 per cent in 2014. As China’s share of global trade reaches a plateau, it will be required to make another bold decision on TPP entry.”

But unlike the WTO, joining which was mobilised into a nationwide campaign by the authorities for support, the TPP has failed to gain domestic popularity. “The way that the United States has approached and talked about the TPP has made such a prospect less appealing in China domestically,” wrote Tristram Sainsbury, a research fellow at Australian think tank Lowy Institute for International Policy.

In Nafte’s view, TPP is a comprehensive trade pact and “its stringent criteria make it a high-quality agreement which will be effective in achieving free and fair trade”.

If China is on board, it would have to stop giving handouts to state-owned enterprises. In return, China will gain better access to the US market, with the dismantling of investment barriers that Washington often uses to ward off Chinese firms.

“China will baulk at the tough conditionality of TPP but the cost of staying out of TPP will be too high. A compromise, of sorts, is possible,” Nafte wrote.

The perfect solution, in Nafte’s view, is that China joins the TPP and the US signs up for the Asia Infrastructure Investment Bank. “Thereby, the face saving which is so important in this part of the world.”

A possible final compromise between China and the US could also come from combining the TPP with the Regional Comprehensive Economic Partnership (RCEP), an alternative mega-regional trade bloc being pushed forward by China, said Sainsbury, who suspects the TPP is yet another regional bloc that will lead to trade diversion while offering limited economic benefits.

“A possible compromise might be a combination of the TPP and RCEP (once both are finalised), or at least complementary dimensions of the two agreements, into a ‘super-mega-regional arrangement’. This could be a way for the United States and China to forge a consensus in areas of mutual interest and collectively contribute to the setting of international trading rules.”