Within days of his inauguration last month, US President Donald Trump made good on his campaign pledge to pull the US out of the Trans-Pacific Partnership (TPP). Signing the executive order that withdrew the US from the 12-member trade deal at the heart of his predecessor’s Asia-Pacific economic policy, Trump promised “we’re going to stop the ridiculous trade deals”.
Clearly the new president has no faith in the view, espoused by mainstream economists, that tariff-free trade benefits everyone. Instead he believes, as he declared in his inauguration speech, that “protection will lead to great prosperity and strength”.
The contrast between Trump’s words and those of Xi Jinping (習近平) could hardly be greater. Speaking days earlier in Davos, the Chinese president told his audience of business bosses: “we must remain committed to developing global free trade... pursuing protectionism is like locking oneself in a dark room.”
The stark difference between the attitudes of the US and Chinese leaders prompted a spate of weighty opinion pieces in the media. Almost without exception the authors argued that by slamming the door on free trade, the US is offering China the opportunity to forge its own multilateral regional trade deal – and so to assume the economic and strategic leadership of Asia.
They haven’t thought things through.
The TPP was a flawed deal. And it was flawed largely because it was driven by geopolitical rather than economic objectives. In striking a trade deal that encompassed the Asia-Pacific’s biggest economies with the exception of China, Washington hoped to tie those countries more firmly into its economic orbit. By doing so it sought either to marginalise China, or – should Beijing subsequently seek to join – to compel Beijing to adopt onerous US conditions.
The incentive for Asian countries to sign up was the promise of open access to the US consumer market, the largest and most lucrative in the world. This was a big inducement. Consider the example of pickup trucks, middle America’s favourite mode of transport. If a manufacturer in Japan or Korea, or even an Australian maker of “utes”, wants to sell its trucks to American consumers, it must pay a 25 per cent “chicken tax” on vehicles it imports into the US.
Originally imposed in retaliation for European tariffs on US exports of frozen poultry, the chicken tax is the reason you see plenty of Ford and Chevy pickups on US roads, but none of Toyota’s Japanese-made Hilux model ubiquitous elsewhere in the world.
While a choice of more and cheaper pickups – and other goods – under TPP might sound appealing, critics argued that the benefits to ordinary Americans would be hollow. If the trade deal encouraged companies to manufacture abroad and import into the US, Americans would, in effect, be exchanging factory work at US$25 an hour for retail jobs paying a minimum wage of US$8 or less. That might be great news for corporate shareholders, but not so much for Joe and Jane Average.
Academics will debate the economic validity of this view for decades. But in political terms the argument is settled. With both Donald Trump and would-be Democrat contender Bernie Sanders campaigning on powerful protectionist platforms, even Hillary Clinton was forced into an inelegant U-turn that saw her promise to tear up the TPP deal that she herself had helped to negotiate as secretary of state.
So, popular protectionist sentiments killed US participation in the TPP. And because access to the US market was the whole reason for other countries to take part in the deal, the TPP is now dead in the water, somewhere in the middle of the Pacific.
But that does not mean China will step into America’s shoes as the driving force at the centre of an alternative regional free-trade deal. To do so, it would have to open up its domestic market to other participants, much as the US was proposing to do under the TPP. And fully opening its market is something that China has showed little enthusiasm for in recent years.
Sure, Beijing did cut a number of import taxes last year. But according to the World Trade Organisation, China still levies an average tariff on imports of 10 per cent. That’s in addition to a value-added tax on most imports of 17 per cent. By way of comparison, the US charges an average import tariff of 3.5 per cent, and no value-added tax.
What’s more, China charges especially high tariffs in labour-intensive sectors where it would otherwise face stiff competition from producers elsewhere in emerging Asia. For example, it levies a 13.7 per cent tariff on shoe imports and 16.1 per cent on clothing.
Despite Xi Jinping’s professed passion for free trade, and despite the strategic advantages he sees in locking neighbouring countries into China’s own economic ambit, Xi’s government has shown little willingness to scrap these tariffs and open China’s own domestic market to full foreign competition. That’s not surprising. But unless China does so, other Asian countries will have little incentive to sign up to a Beijing-sponsored free-trade area. The TPP may have crashed, but Chinese leadership of a new regional trading bloc is a very long way from taking flight. ■
Tom Holland is a former SCMP staffer who has been writing about Asian affairs for more than 20 years