Bring China Into TPP

April 11, 2014 Topic: EconomicsTrade Region: China

Bring China Into TPP

Beijing's participation in the landmark Asian trade talks would be good for America.

Negotiations to finalize the Trans-Pacific Partnership closed in Singapore in late February with no agreement. A main cause was Japan’s unwillingness to budge on any of its “sacred” farm products, though also involved was Washington’s insistence to retain import limits in several U.S. sectors. Nevertheless, Vice President Biden, just days after the Singapore talks ended, strongly reaffirmed his and the President’s commitment to complete the TPP, and the negotiators hope to reconvene in May.

The interruption presents an opportunity now to deal with an issue that has been in the background but won’t go away: China’s relationship with the TPP project. Beijing has long complained that Washington opposes its membership, and now is the time to neutralize that complaint. There are three reasons, beginning with changes in how Chinese leaders think about their place in the global economy. Second is a clear U.S. signal that the TPP door is open to Beijing. Third is that bringing China into the TPP will be good for America and for the region overall.

What needs to be dealt with first is China’s complaint that it has been “excluded” from the Trans-Pacific Partnership. That stems from Beijing’s view that the TPP is the economic side of Obama’s pivot to Asia, both of which it sees as part of a U.S. policy to “contain” China. Neither is true, and the TPP in particular owes its start to a 2002-03 plan by Singapore, New Zealand and Chile that had nothing to do with China. The goal of those three small but open economies was “a closer economic partnership.”

That idea then grew to include some others, initially Brunei, then Peru, Australia and Vietnam, and now includes a dozen nations. America’s involvement dates from 2008, as the George W. Bush presidency was ending. Susan Schwab, his Trade Representative, was concerned about the decline in the Pacific region’s imports from the United States, and saw the TPP as a way to assure continued U.S. exports there. The issue was trade, not China, and President Obama formalized America’s TPP involvement soon after taking office, in early 2009.

That’s when China began the drumbeat of its TPP exclusion, although America’s “pivot” to Asia came two years later. Nevertheless, some think tanks and Asia specialists, particularly some prominent Australians whose views have gained traction, continue to insist the TPP is part of an American policy to “contain” China. That stems from their view that the U.S. goal in the Pacific region is “primacy,” but that too is not true. What is true is that the long-standing U.S. aim has been to oppose any single nation’s dominance in the Asia-Pacific region. That principle dates from America’s Open Door policy at the beginning of the twentieth century, and it has continued through the present

Nevertheless, the belief that America seeks primacy in Asia took hold in China, and visitors have found that Chinese specialists cite precisely those Western arguments to support their view. The upshot has been China’s belief that the TPP is anti-China, which led to its coldness to the TPP, and its sponsorship of the “RCEP” (Regional Comprehensive Economic Partnership), an Asian trade group that specifically excludes the U.S.

China will not soon drop that RCEP plan, but more important is the about-face it has begun toward the TPP. Japan’s participation may have contributed to the wake-up, but in any case an early sign came last May, when China’s Commerce Ministry announced “a serious study of the TPP,” and in June new President Xi raised the issue with President Obama at their “Sunnylands” summit. It was, however, at China’s Third Plenum last November that the new direction became most evident. Party leaders called for basic reforms to better connect China with the global economy, and famously declared the “market will be decisive.” President Xi gave an important signal the new direction would be taken seriously when he kept in place the reformist Governor of the Bank of China, Zhou Xiaochuan, despite a mandatory age-based retirement. Zhou is well-known to American officials for his strong commitment to opening China’s economy, and Xi’s action assures that a powerful like-minded reformer stays at the Bank’s helm.

China’s TPP turnaround has three features: (1) China is no longer dismissive about the TPP; it is instead exploring how best to become involved; (2) China’s leaders recognize that the TPP will set the rules for the next phase in how the global economy develops, and believe Beijing cannot afford to be left out of that process; (3) as in the U.S., Chinese officials have lost patience with the WTO. When the WTO’s most recent meeting ended in December with little to show, the Commerce Minister broadly hinted “we’re also open-minded towards other negotiations.” A trade specialist at China’s WTO Studies Institute was more blunt: echoing Deng Xiaoping’s famous “black cat, white cat” remark, he said “We are trying everything we can, Plurilateral, bilateral, the WTO, as long as it works.”

There is even some urgency in the most recent Chinese commentary about TPP participation. In January a very prominent Peking University economist reported that “an increasing number of policy advisors are now urging the government to apply to join the TPP negotiations as early as possible.” And as if to illustrate the point, China’s former World Bank Senior Vice President, speaking in late February just days after the Singapore TPP talks failed to reach agreement, openly called for Beijing to participate in the TPP, and added that the U.S. should welcome the idea.

Recent American developments point in that direction, among them progress toward a China-U.S. Bilateral Investment Treaty. In July 2013, soon after China agreed to include several more investment sectors than before, those negotiations accelerated. By early 2014 the talks were in their eleventh round, and the U.S.-China Business Council urged their completion by the end of the year.

Another stems from growing American interest in a U.S.-Chinese free trade agreement, not as radical an idea as it may seem. When Japan joined the TPP negotiations, the Congressional Research Service wrote that in effect it would mean a U.S.-Japan FTA. The same applies to China. Indeed, a U.S.-Chinese FTA has been proposed by several prominent Americans with decades of direct China experience. Best known among them is Maurice Greenberg, the former AIG Chairman. In early 2012 he wrote that the two countries should open negotiations for an FTA, and in May 2013 the China-United States Exchange Foundation, whose steering committee includes leading Americans not known for unrealistic expectations, made a similar proposal.

Even more to the point are signs of a receptive White House view. Last November 20, immediately after China’s Third Plenum, President Obama’s national-security adviser addressed the TPP issue in a profoundly important speech on “America’s Future in Asia.” No doubt with the president’s approval, Susan Rice dealt at length with the economic, political and security aspects of all parts of the Asia-Pacific region, and what she said about the TPP bears repeating:

Our foremost economic goal in the region is concluding negotiations for the Trans-Pacific Partnership…We welcome any nation that is willing to live up to the high standards of this agreement to join and share in the benefits of the TPP, and that includes China [my emphasis].

No signal could be clearer, first because it authoritatively dismisses the notion that the Trans-Pacific Partnership aims to “contain” China; second because it recognizes that precisely as Beijing has embarked on fundamental reforms to better integrate with the global economy, China’s plans link closely with America’s TPP goals.

China in the TPP would be a large development. As with its WTO participation a decade ago, TPP membership would help move China to a more open economy, which is among the reasons China’s reformers urge early participation. Last year, when Robert Zoellick observed that with Japan in the TPP the group would represent almost 40 percent of global GDP, he concluded “Japan’s involvement is a very big deal.” China’s involvement would be an even bigger deal and just how big, especially for the U.S., is suggested in a study of a proposed China-U.S. Economic Partnership, soon to be published by the Peterson Institute. As a result of the bilateral FTA it projected, the study concluded that U.S. exports would grow by 13 percent, particularly in America’s service, agriculture and advanced-manufacturing sectors. Within a decade the gains to the U.S. would be $170 billion a year, nearly a full percentage point of GDP.

The TPP of course is much more than about trade. Well beyond issues of market access and tariffs, its more than two dozen chapters deal with state-owned enterprises, issues of government procurement, small and medium businesses, labor and the environment, intellectual property, and more. That range of issues tells two stories. The first is that the single most important thing to know about the Trans-Pacific Partnership is that it will set the rules of the global economy’s main actors in the years ahead. For the United States, which in the postwar years played the major rules-setting role for global trade, nothing is more important than that future rule-making role.