Caixin
Oct 30, 2013 05:25 PM

Closer Look: How Agreements Like the TPP Press China to Reform


(Beijing) – When Singapore, New Zealand and Chile launched the Pacific Three Closer Economic Partnership in 2003, few could have predicted the agreement would grow into the greatest force on the economic and political landscape of the region.

The changes began in 2008 when the United States joined the negotiations and proposed launching the Trans-Pacific Partnership (TPP) based on the group formed in 2003, which by then had come to include Brunei. Washington pushed for the group to be even bigger so it would include Australia, Peru and Vietnam. Ever since, the United States has led the push for the partnership.

In the Asia-Pacific Economic Cooperation (APEC) summit in October, U.S. Secretary of State John Kerry said that TPP negotiations are set to end this year. For China, the TPP is a challenge at its very doorstep that it must address.

What the TPP Implies

The TPP stands out from many other trade talks. "Whereas previous trade agreements were about opening up borders, (the TPP) is moving inside them," says Zhang Yunling, director of the International Studies Division at the Chinese Academy of Social Sciences.

In other words, not only will the TPP be concerned about issues such as tariffs and quotas typically at the center of free trade agreements, but it also sets very high requirements for whole supply chains. The areas it addresses include labor conditions, governmental procurement, state-owned enterprises, intellectual property and environmental protection.

It is more like an "upgraded" trade agreement and it will affect the core of a country's business model.

Since the 12 TPP member countries have different levels of economic development and intertwined interests, issues such as intellectual property and state-owned enterprises are bound to arouse considerable disagreement.

Moreover, the demands of new members will exacerbate already complex negotiations. For instance, Singapore, Peru and Chile asked Japan to eliminate tariffs on agricultural products in August. Japan has not formally responded to the request, but for a country with tariffs on imported rice as high as 700 percent, concession would be very difficult to make.

Nevertheless, observers are relatively optimistic that an agreement on the TPP will be reached. Chen Fengying, director of the World Economy Department at the China Institute of Contemporary International Relations, notes that while the Obama administration is hampered by the United States' domestic political polarization, it sees the agreement as one major way it can at least achieve something internationally.

The Costs of Competition

It was precisely at the moment of Washington's "pivot to Asia" and at the end of Beijing's charm offensive in the region that the United States began to push hard for the TPP. Where U.S.-Soviet competition was focused on military matters, Sino-U.S. relations involve economics.

Matthew Goodman, a former White House official in charge of Asian affairs and a research fellow at the Center for Strategic & International Studies, said in a recent article that right from the beginning the core of the "U.S rebalancing to Asia-Pacific" has been the economy.

Goodman said that the United States must achieve tangible and visible economic results and promote more export-led economic growth and employment through its new focus on the East, otherwise its public will no longer support the government's enhanced military presence in the region.

Chen said Washington hopes to develop the rules used in the Asia-Pacific region through the TPP, just as it has long steered rules through the World Trade Organization (WTO). The United States never imagined that emerging countries, in particular China, would rise so quickly with the help of multinational trade arrangements such as the WTO.

Meanwhile, the United States itself suffered from the 2008 outbreak of the Global Financial Crisis and the subsequent recession. Advanced economies are turning inward and prioritizing domestic economic development, and "giving up multilateral trade to form regional trade alliances instead," Zhang said. 

As a result, via the TPP, the United States has begun to raise emerging economies' costs for competing, he said.

Mind the Gap

Over the years, China's attitude toward the TPP has changed from strong criticism to cautious support.

In May, the Ministry of Commerce said China will conduct a serious study and analyze the pros and cons of joining the TPP.

For China, the domestic and international situations have changed. Wang Yong, director of the Center for International Political Economy at Peking University, said the most crucial factors that have changed China's attitude are its slowing economy and the fact that it requires external forces to propel domestic reforms.

The current government in China is more open and willing to work within international arrangements than its predecessors, Chen said. For instance, its use of a "negative list," which would in theory open more areas to foreign investment,   in the new Shanghai Free Trade Zone is a demonstration of internationalization.

Many now say that the TPP is an opportunity to force China to reform, just as joining the WTO in 2001 was. However, even if China intends to join, the gap between TPP requirements and China's economic realities is too large to be ignored. In Zhang's view, China would need so much time to adjust itself that joining the TPP anytime soon would be difficult.

Wang said China would have to make major concessions, including crucial changes to state-owned enterprises, to join the TPP.

The Changing Landscape

Nineteen rounds of TPP talks have taken place. Since participation in the agreement has to start with bilateral consultations and agreement on issues that have already been settled, China has very little room to bargain.

"China might as well wait until it has a relatively stronger competitive basis so the cost is smaller while its bargaining chip is bigger," he said.

Meanwhile, Wang estimated that due to the high standards the TPP required, China is unlikely to join before the current negotiations are done. If it joins afterward as a latecomer, not as an original negotiating member, "the deals will be different and will have a greater impact on the Chinese economy and trade."

Thus, Zhang said China is promoting the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement with the 16 Association of Southeast Asian Nation members. This is because the RCEP is mainly composed of developing countries and is more focused on development.

"The optimal condition is that the RCEP sets the developing standards while the TPP sets the competition standard," he said.

However, Wang said he is worried that the low standards of the RCEP mean it will have a limited impact on the Chinese economy. He is also concerned it will be unable to offset the external shock to China's trade once the TPP is launched.

 Moreover, there is no deadline for concluding the RCEP. "It's a collective negotiation, with no major economy leading the talks," he said.

Facing a rapidly changing trade landscape, China needs to speed up its domestic reforms, Wang said. The TPP, a free trade agreement involving Japan and the European Union, and the Transatlantic Trade and Investment Partnership between the United States and Europe will have a profound impact on international trade.

"The need for domestic reform in China is so pressing that the country is risking a loss of growth momentum," Wang said.

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