The US Is Out and China’s In
The Trans-Pacific Partnership
by Valentin Katasonov
Strategic Culture Foundation (February 09 2017)
In the last two years, the Trans-Pacific Partnership (“TPP”) project has been a hot-button issue in global politics. The Obama administration pushed for negotiations to finalize the TPP agreement between the US, Canada, Mexico, Peru, Chile, Japan, Malaysia, Brunei, Singapore, Vietnam, Australia, and New Zealand. These countries are responsible for forty percent of the global economy and a third of global trade. In February 2016, the TPP pact was officially signed in New Zealand.
But then the process of creating the partnership began to stall. Obama never managed to get Congress to quickly ratify the TPP. Donald Trump was part of the obstacle – as a presidential candidate a year ago, he was already loudly insisting that the TPP did not serve American interests and that he would withdraw from that partnership if elected. And on January 23, three days after Trump’s inauguration, the new US president signed an executive order to pull out of the TPP.
Japan has the most to lose from a US exit from TPP, as its cars and electronics might lose their competitive edge in the enormous US market. Only six countries (Mexico, Japan, Australia, Malaysia, New Zealand, and Singapore) have stated that they are ready to move forward with TPP, regardless of whether the US is involved. I think that in time the partnership’s circle of solid supporters will shrink even further.
But after Washington lost interest in the TPP, the remaining signatories came up with the idea of inviting China to join. Australia in particular hopes to make up for its losses from the US pullout by stepping up its economic relationship with China. But now it’s possible that everything will turn out differently, meaning that China can invite the remaining members of the TPP to join its own “club”, without the US. Beijing’s initiative has kicked off the furious process of creating a new international trade organization, namely: the Regional Comprehensive Economic Partnership (“RCEP”).
The core members of RCEP are the ten members of ASEAN (Brunei, Vietnam, Indonesia, Cambodia, Laos, Malaysia, Myanmar, Singapore, Thailand, and the Philippines), plus six countries with which ASEAN has already signed free-trade agreements (Australia, India, China, New Zealand, South Korea, and Japan). RCEP includes four economically developed states and twelve developing countries. RCEP could potentially be comparable to TPP: the members of the first partnership are responsible for approximately thirty percent of global GDP and approximately fifty percent of the earth’s population. Thirty percent of the countries in the world are currently involved in the RCEP negotiations over global exports. The leading exporters are China, Japan, and South Korea. The members of the new organization are also blessed with significant investment potential. In 2014, 29% of the world’s total foreign investment outlays went to the economies of the RCEP nations, and the outflow of investments was equal to 24%.
In 2014, trade within the group of countries we call RCEP totaled $4.4 trillion. By comparison, trade between the countries of the North American Free Trade Agreement (“Nafta”) – specifically the US, Canada, and Mexico – did not hit the $1 trillion mark until the beginning of this decade.
China is the undisputed leader within the group of RCEP countries, responsible for 28% of intra-group trade in 2014, followed by Japan (15%) and South Korea (11%). These three countries account for more than half of all trade within RCEP.
It is interesting to see the importance of a common market within that regional partnership for individual RCEP member countries. First let’s look at China. In 2014, 26% of China’s exports went to RCEP countries and 34% of China’s imports came from those same nations. This means that the RCEP market is extremely significant for China. And although it’s true that, for China, America is just as significant a trading partner as all of the RCEP countries put together, given Trump’s protectionist threats, China’s outlook for trade with the US could change dramatically. Therefore, Beijing is rushing to promote the RCEP project, which could at least partially offset China’s losses when it comes to the US.
The country leading the RCEP negotiations and boasting the second greatest trade potential is Japan. The RCEP market is even more significant for Tokyo than for Beijing. In 2014, 45% of Japan’s exports went to RCEP countries and 48% of its imports came from those same nations. Although Japan is the only country to have ratified the TPP agreement, it might prove to be second only to China as a driving force behind the partnership.
This means that the RCEP market would be even more significant for the other potential members of the partnership. Here is a list of countries that send over fifty percent of their exports to the RCEP market: Brunei (94%); Myanmar (93%); Laos (83%); Australia (76%); Malaysia (64%); Indonesia (62%); Singapore (59%); New Zealand (58%); the Philippines (57%); and Thailand (56%).
And this is a list of countries that are greatly dependent on the RCEP market for their imports: Laos (95%); Myanmar (94%); Cambodia (84%); Brunei (81%); Vietnam (74%); Indonesia (68%); Malaysia (61%); Thailand (58%); the Philippines (58%); New Zealand (57%); and Australia (55%).
The launch of the RCEP negotiations commenced on November 20 2012 at the ASEAN summit in Cambodia. As long as there was progress on the TPP project, the global media paid almost no attention to the RCEP project, believing that it was ill-considered and could not compete with the TPP. RCEP’s ratings have soared in the last month.
Just a few days before the US presidential election, the ministers of the RCEP member nations made an announcement at their meeting in Manila stressing the urgency of reaching a new agreement, due to the rise of protectionist sentiments around the world. There is a looming prospect that China will use Trump’s refusal to support TPP as a pretext to seize the initiative and create the biggest trade and economic association in the world.
Some of the countries that are currently taking part in the RCEP negotiations – or planning to do so – believe that they will be able to have their cake and eat it too, by being active in both partnerships. At the recent APEC summit, the Peruvian Minister of Foreign Commerce and Tourism, Eduardo Ferreyros Küppers even said, “China is our friend, the United States is our friend, and everyone else is our friend”.
Experts note that the RCEP project differs in some fundamental ways from the TPP project. For example, the first has an open membership policy (in contrast to the TPP, which has closed its doors to China and Russia). Second, the first partnership does not make undue requirements of its members. Specifically, unlike the TPP, there are no rigid rules or provisions that regulate environmental issues, the social setting of the workplace, government purchases, investment disputes, et cetera. RCEP is primarily a commercial partnership. Its conceptual foundation does not make provision for requirements that would significantly exceed the scope of any obligations under the WTO. The main idea behind the new partnership is to liberalize trade regimes, taking into account the particulars of each nation and the differences in the levels of development of the participating economies.
Due to these distinctions, RCEP may eventually expand from a regional to a global partnership.
Of course, there are serious obstacles on the path to signing the RCEP agreement. First of all, it is impossible to ignore the glaring differences in the economic development of the countries that are currently involved in the negotiations. On one hand, there are countries that are highly developed economically, including Australia, Brunei, New Zealand, South Korea, Singapore, and Japan. On the other hand are countries that are less economically developed. These differences make it difficult to reach a consensus over tariffs, access to the services market, customs procedures, and much more. In addition, some of the more developed countries (particularly Australia and New Zealand) tried at one time to include in the RCEP format issues pertaining to patent law, judicial rulings on investment disputes, and environmental and social standards (all of which are important elements of the TPP), but then, however agreed not to overload the negotiations at this stage and elected not to include these issues in the agreement.
Political in addition to economical obstacles may emerge. In particular, territorial disputes between the two biggest economic powers in RCEP – China and Japan – may result in Tokyo being jettisoned from the new partnership.
Although this new partnership is an open one, it is hard to imagine the United States signing up. As for the Russian Federation, it has not yet issued any statements in this regard.
China has unexpectedly emerged as the leader of the process of economic globalization. Speaking in Davos on January 17, Chinese President Xi Jinping made it clear to the participants in the International Economic Forum that Beijing is ready to seize the reins of globalization from Washington. On January 26, Chinese Premier Li Keqiang once again reaffirmed China’s commitment to the principles of multilateral trade liberalism.
China’s leaders well remember the words of Barack Obama, who stated last May 14 that the TPP’s basic premise “allows America – and not countries like China” to shape the rules of international trade. Now China has the opportunity to make a retaliatory move, by claiming that it has become the arbiter of international trade.
Beijing plans to complete the RCEP negotiations by the end of the year so that a multilateral agreement can be signed in early 2018.