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China and the Trans-Pacific Partnership

November 17, 2015

The Trans-Pacific Partnership (TPP), which passed on October 5th, 2015, marks a new era of cross-border trade liberalization in the Asia-Pacific region. Representing approximately 40% of the world’s economy, the TPP features the elimination of tariffs and other non-tariff barriers to international trade for its member states, including Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. TPP member countries will inevitably benefit from the free trade agreement, which will further facilitate their flow of goods, services and capital, while non-member countries in the region will be at a relative disadvantage. China, with the largest economy in the Asia-Pacific region, is somewhat of an anomaly; the conclusion of TPP will bring some negative impacts to China, but it also opens several opportunities.

The Development of the TPP

The Trans-Pacific Partnership is an expansion of the Trans-Pacific Strategic Economic Partnership Agreement (P4) signed by Brunei, Chile, New Zealand, and Singapore in 2005. Since 2008, additional countries began to negotiate towards a broader agreement, with the United States as one of the early participants. Due to disputes on issues such as agriculture, intellectual property, services and investments, it took seven years of negotiations for the TPP to reach its final stage. 

Ten of the Twelve TPP Heads of State pose at 2010 trade summit
Ten of the Twelve TPP Heads of State pose at 2010 trade summit. Source: Wikimedia.

TPP’s Impact on China

Although the TPP encompasses most countries of the Asia-Pacific, China, with the largest economy in the region, is not a member of the partnership. TPP certainly has mixed implications for China, both economically and strategically.

The TPP will hurt China’s economy to a certain extent, but its negative impact will not be significant in the long-run:

With the elimination of tariff and other non-tariff barriers among its member countries, the TPP will inevitably reduce China’s trade with TPP member countries and result in higher costs for such trade. In 2012, Li & Whalley conducted a simulation study on the possible effects of TPP on different countries.[1] The study measured changes in welfare, production, import and export, trade imbalance and revenue under different scenarios. The results indicated that TPP would benefit all member countries through its free trade arrangements, but hurt all non-member countries, including China. They also determined that if China joined the TPP, it would increase benefits for all TPP member countries, including itself.

TPP challenges China’s economic dominance in the Asia-Pacific region. Although China is currently the largest trade partner of the U.S., the TPP arrangements may divert trade and manufacturing from China to other TPP member countries such as Vietnam and Malaysia. [2] Moreover, some view the conclusion of TPP as a diplomatic victory for Japan and the U.S. to counterbalance China’s dominance in Asia.[3] Specifically, it increases the possibility and ability for the U.S. to write future rules for global economy[4] as part of President Obama’s “pivot” to the Asia-Pacific region.  

However, due to its historical ties and strategic location, the TPP will not significantly reduce China’s trade volume within the region. China’s geographical location in Asia is critical to its economic relations; it is much closer to Japan and many Southeast Asian countries than their TPP partners on the American Continent.  Throughout history, China has established stable trade routes and relations with Southeast Asian countries. Consequently, due to both convenient and approximation to the TTP member states, their trade volumes will not be significantly lowered as a result of the agreement.

China’s dominance in Asia will not be significantly compromised because of its other strategic initiatives in the broader Asia-Pacific. Although China did not participate in the negotiations of TPP, its dominance in Asia will not be significantly compromised due to its active role in other regional collaborative arrangements. In 2013, China proposed the “Belt and Road” initiative as a development strategy to connect China with Southeast Asian, African, and European countries through deeper cooperation and collective development.[5] To finance that initiative China proposed the establishment of Asian Infrastructure Investment Bank (AIIB) in 2014 dedicated to providing loans for infrastructure projects. Contrary to those who believe China is inevitably going to decline due to TPP, strategies like the “Belt and Road” and AIIB help the country to maintain its economic prowess in the region.

 TPP poses challenges to China’s role in the Asia-Pacific region, but these challenges also have positive implications:      

Facing the pressure of TPP, China will seek to improve its own competitiveness through rigorous domestic reforms. China’s economic growth has gradually slowed down in recent years, and the Chinese government has shifted its attention from growth to reform, especially in the state sector. Reformers in China will also use TPP as a motivating force to urge the government to accelerate market liberalization through opening markets for services and investment, protecting intellectual property rights, and cutting bureaucratic red tape.[6] TPP will motivate China’s economy to develop higher market standards, which would prepare it to be ready to potentially join the partnership late.

Furthermore, the TPP will act as an experiment of a regional free trade zone, and may have more members joining in the future; the current TPP only has 12 signatories, and it is open to absorbing additional participants as long as they comply with its rules and initiatives. If it works well, then it could expand its partnerships further. In fact, South Korea, the Philippines, Thailand and Taiwan have already indicated their interest in joining TPP.[7] Gradually, the TPP may develop into a global free trade arrangement that benefits all countries. However, the enlargement process will not be easy, as more disputes will arise with additional members joining.

Moreover, TPP will increase trade volume in the Asia-Pacific region. The trade may have spill-over effects, including an increase in innovative technology in the region as a result of increased trade flows, which is generally good for all the countries in that region. China and other non-TPP countries in that region will benefit from higher market standards, labor quality, improved infrastructure, and comprehensive intellectual rights protection.

China and the TPP: A Glimpse into the Future

In general, TPP will have negative impacts on China, but these effects are not too devastative. China is not part of TPP negotiations, but it continues to seek collaboration from neighboring Asian countries  through initiatives such as the AIIB and “Belt and Road.” This indicates that China also wants economic cooperation. Thus we cannot rule out the possibility that China would join the TPP in the future.


References:

  [1] Chunding Li and John Whalley, China and the TPP: A numerical simulation assessment of the effects involved. No. w18090. National Bureau of Economic Research, 2012, DOI: 10.3386/w18090. http://www.nber.org/papers/w18090

  [2] Peter K. Yu, “How China’s exclusion from the TPP could hurt its economic growth,” Fortune, October 19, 2015, http://fortune.com/2015/10/19/china-exclusion-tpp-economic-growth/

  [3] Michal Meidan, “The TPP and China: The Elephant That Wasn’t in the Room,” the Diplomat, October 15, 2015, http://thediplomat.com/2015/10/the-tpp-and-china-the-elephant-that-wasnt-in-the-room/

  [4]  Barry Naughton, Arthur R. Kroeber, Guy de Jonquiéres, and Graham Webster, “What Will the TPP Mean for China,” Foreign Policy, October 7, 2015, http://foreignpolicy.com/2015/10/07/china-tpp-trans-pacific-partnership-obama-us-trade-xi/

  [5] “One Belt, One Road,” Caixin, December 10, 2014, http://english.caixin.com/2014-12-10/100761304.htm

  [6] Michal Meidan, “The TPP and China: The Elephant That Wasn’t in the Room,” the Diplomat, October 15, 2015, http://thediplomat.com/2015/10/the-tpp-and-china-the-elephant-that-wasnt-in-the-room/

  [7] Joshua P. Meltzer, “Why China should join the Trans-Pacific Partnership,” Brookings, September 21, 2015, http://www.brookings.edu/blogs/order-from-chaos/posts/2015/09/21-us-china-economic-integration-tpp-meltzer 

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