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It's the geopolitics, stupid: US-led TPP trade pact less about boosting economies than about containing China's rise

Don't let the names fool you - the US-led TPP 'trade pact' and China's RCEP are more about influence on the global stage than economics

PUBLISHED : Friday, 06 November, 2015, 3:23am
UPDATED : Friday, 06 November, 2015, 4:07am

Trade pacts, as their name suggests, should be all about economics. So it would be easy to believe that by lowering trade barriers among the 12 nations scattered around the Pacific Rim, the Trans-Pacific Partnership (TPP) was aimed at increasing trade and investment among its partners and stimulating growth.

Yet from the start, this particular trade pact has been as much about geopolitics as economics. President Barack Obama, who has pushed for the trade pact as a centrepiece of his "Pivot to Asia" policy, did not hide US motives - saying the pact was important because "we can't let countries like China write the rules of the global economy".

Some Chinese officials view the pact as a US conspiracy aimed at the economic containment of the mainland.

The US-led free-trade agreement, joined by Japan, Canada, Mexico, Chile, Peru, Australia, New Zealand, Singapore, Brunei, Vietnam and Malaysia, represents 40 per cent of global gross domestic product, 30 per cent of global exports, 25 per cent of imports and 793 million consumers.

The exclusion of China, the world's largest merchandise trader with combined exports and imports worth US$4.3 trillion last year, speaks volumes.

"It is more than just a trade agreement and it represents a large market led by the US," said Jianguang Shen, chief economist with Mizuho Securities Asia.

Matt Ferchen, a resident scholar at the Carnegie-Tsinghua Centre for Global Policy, in Beijing, said: "Geopolitically, and especially in terms of US versus Chinese influence in the Asia Pacific, the TPP deal is important because it is the most tangible economic element of America's 'pivot' towards Asia."

Analysts said the sheer size of the bloc's total economy was not the only important element. Led by the US, the world's No 1 economy, and Japan, the No 3 economy, the TPP would become the world's most important platform for setting new rules and norms for global trade and commerce.

Like other multilateral trade organs, such as the World Trade Organisation, the TPP will prove very powerful.

Clearly, China has much to lose because of its exclusion.

Gary Hufbauer, an international trade expert at the US-based Peterson Institute for International Economics, estimated the pact would deprive China of about US$100 billion of exports annually.

Ma Jun, chief economist of the People's Bank of China's research bureau, said China would lose 2.2 percentage points in GDP if it did not join.

This is why some Chinese officials regard the pact as a US conspiracy aimed at containing China: the club seems welcome to anyone but the world's second-largest economy.

After initially dismissing the TPP, Chinese officials have now expressed some interest in joining. But China does not want only to follow the rules, but also to set them.

So Beijing has responded to America's plan to form a trade bloc with its own regional initiatives. It has also moved quickly to adapt to the new trends in international trade to engage in regional free trade agreements.

China is actively pushing to negotiate the Regional Comprehensive Economic Partnership (RCEP), involving members of the Association of Southeast Asian Nations plus China, Japan, South Korea, New Zealand, Australia, and India, but also excluding the US. Beijing is also leading the Asia-Pacific Economic Cooperation-based Free Trade Area of the Asia-Pacific, featuring Pacific Rim nations.

These Asian-centric free-trade agreements have been touted as alternatives to the TPP.

President Xi Jinping has also introduced the New Silk Road strategy. Also known as "One Belt, One Road", the development strategy comprises the New Silk Road Economic Belt, which will link China with Europe through central and western Asia, and the 21st century Maritime Silk Road, which will connect China with Southeast Asian countries, Africa and Europe.

China has also recently launched two multinational financial institutions - the New Development Bank and the Asian Infrastructure Investment Bank (AIIB) to help developing countries in Asia and elsewhere finance their badly needed infrastructure projects.

Both China-led institutions are seen as a challenge to the post-second world war, US-centric international institutions - the Washington-based International Monetary Fund, the World Bank, and regional bodies, such as the Asian Development Bank.

Fifty-seven countries - many of them America's allies, including Britain, Germany, and Australia - signed up to the AIIB as founding members despite opposition from Washington.

Some observers see the TPP and AIIB as symbols of the US and China's battle for control of global trade.

"The [TPP] pact is a win for the United States in its contest with China for clout in Asia," said Alicia García-Herrero, an economist and special adviser to the non-resident faculty at China-Europe International Business School in Shanghai.

However, Chengxin Pan, a professor of international relations at Deakin University in Australia, said the influence of the AIIB or the TPP might well be offset by further "counter-measures" and "counter-initiatives" by either side.

"The larger point here is that in the age of increasingly networked economic activities across national boundaries, attempts to use traditional-alliance politics to build exclusive clubs are going to be rather blunt instruments and unlikely to be effective," Pan said.

Kamel Mellahi, an expert on China business at Warwick Business School in Britain, said the TPP had many advantages, but the Silk Road strategy was a better fit for China as "its vision, goals and objectives are aligned more closely with China's economic goals than the TPP".

Analysts said the TPP aimed to redirect trade to the US and solidify America's economic position in Asia by pressuring China into adhering to Washington's rules and standards. Indeed, the TPP, more than a trade pact, also contains a variety of economic-policy matters that China, should it wish to join, would force it to carry out radical reforms.

All but five of the TPP's total 29 draft chapters set rules on non-trade issues, such as regulatory directives and standards about the protection of intellectual property, labour, and the environment, and standards about the equal treatment of state-run enterprises. Some rules and standards are apparently too politically sensitive for the Communist Party to make any compromise in order to accept.

For instance, joining the TPP would require opening up markets to foreign investors in areas such as the internet and media, which, up to now, have been under strict state-control.

Some provisions such as the investor-state dispute resolution, that enables companies to contest national government policies at supra-national courts, are not acceptable under the mainland's party-ruled political system, in which the ruling party is superior to law.

The toughest challenge is a rule about the privatisation of state-owned enterprises (SOEs). China has the world's largest collection of SOEs, which dominate every strategic business sector, such as banking, insurance, energy, ports, aviation and railways, and form the political foundations of the nation's system of one-party rule.

Despite the party leadership's repeated pledges to reform the socialist sector, a crucial party blueprint for reform passed in late 2013 makes clear that state ownership must still play a "leading role" in the economy.

Analysts said the high standards set by the TPP would rewrite the rules of regional trade in a way that boosted the economies of the US and its allies in proportion to the economy of Washington's primary geopolitical rival, China.

Fitch Ratings said that the TPP's most significant consequence would be in setting the pact's rules and guidelines. "This will, in turn, set a powerful precedent for other global trade and investment protocols," Fitch said.

Obama is said to consider China's rise as the single most significant geopolitical challenge facing his nation since the end of the Cold War.

The Cold War featured a political and military rivalry between the US-led Western alliance and the former Soviet-led socialist block. But at that time the US-led industrialised world still dominated the global economy.

Three decades ago, Japan also challenged US industrial leadership, but, as a staunch ally, it had no interest in challenging Washington's sphere of influence in geopolitics.

However, some analysts believe China has a different agenda, while others suggest the US is in inexorable decline and that its global influence will inevitably diminish to the benefit of China.

Washington believes the US cannot risk China eclipsing its status as the premier global power.

Under Xi, China has ramped up its global influence through expanded trade, aid, investment and soft power.

Benjamin Herscovitch, a research manager at China Policy, a Beijing-based research and advisory company, said the TPP agreement was first and foremost a massive diplomatic victory for the US.

"The deal will obviously benefit the United States economically, but its real significance is the strategic signal it sends to Asia," he said. "In particular, it is a powerful demonstration of its commitment to leading the region and setting international norms."

US foreign policy is often themed around free trade, freedom and democracy. The TPP intends to advance such ideals - not as a demand but as an inevitable outcome of a free and open market.

The pact will strengthen US political and military leadership in the region, amid the escalating maritime disputes flaring up across the South China Sea and East China Sea between China and several of its neighbours, the perennial friction between China and Taiwan, and the growing tensions over North Korea's nuclear stockpile.

With the TPP, the US will be more inclined to intervene in a serious spat over territorial claims in the region if a situation threatens its growing trade interests. The pact has, in effect, helped to reassert US influence in the region and shore up the long-term foundations of American power.

The Nobel Prize-winning American economist Thomas Schelling noted that "trade is what most of international relations is about. For that reason trade policy is national security policy".

In this sense, the TPP is not only US trade policy, but is also America's national security policy. Furthermore, it is a product of the Sino-US rivalry for control of trade and finance - the foundation of today's global politics, as well as the global economy.