Trump’s Withdrawal From TPP Opens Opportunity For China

THE TRUMP ADMINISTRATION’S withdrawal from the Trans-Pacific Partnership (TPP) free trade agreement opens up space for China to assume leadership of the development of trade and investment within the region.

Its own Regional Comprehensive Economic Partnership (RCEP) goes from being a poor second choice to virtually the only game in town. It limitation is that it encompasses Northeast and Southeast Asia along with Australasia, but not the Americas, the carrot that the TPP offered.

However, without the participation of the United States, the TTP is left floundering, for all the talk from quarters such as Australia that something can be salvaged. That would take several years at the very least.

RCEP would be substantial, accounting for about one-third of global GDP and one-half of the world’s population. It would incorporate all the Asian countries that had signed up for TPP plus TTP waiverers, such as Indonesia, and excluded, such India (not forgetting China itself, of course).

RCEP is considerably less liberalising of trade than TTP, however. The scope for exemptions on awkward sticking points is also greater, which may make reaching an eventually agreement easier, though.

Critically different from the TPP, labour, environmental issues are excluded form the RCEP negotiations, as is the role of state-owned enterprises.

RCEP’s primary focus is the trade in manufactures, although trade in services and investments will be discussed as one at India’s insistence. India is competitive in trade in services though less so in manufacturing and especially light manufacturing. It does not want trade in manufactures to be given priority over trade in services and investment, where its companies are competitive.

Intellectual property rights are also a point of contention. Tokyo and Seoul want high levels of IP protection, particularly for their pharmaceutical sectors, and akin to those proposed by the TPP, whereas poorer countries in the region want access to cheap medicines.

Beijing, however, may have both a short and a long game to play. The high standards proposed under TPP for intellectual property protections and the liberalisation of trade in services may well eventually suit Beijing as it gets more success in rebalancing its economy as a more services-oriented and innovate one.

To that end, it may well be prepared to keep the TPP negotiations lingering on should they be of future use. In the meantime, though, Beijing will seize the initiative that Washington has let drop.

Beijing, Tokyo and Seoul Chat Chummily About An FTA

Despite the diplomatic tensions over disputed islands in the East China Sea, trilateral talks between China, Japan and South Korea on setting up a Northeast Asia free-trade agreement (FTA) are continuing. The second round of working talks among officials from the three countries was held this week in Qingdao. The goal remains to start the formal negotiations on the agreement by the end of this year.

As is always the case with free trade agreements there are plenty of potential pitfalls ahead as domestic vested interests rear their heads. One example is Japan’s farmers who have stalled a mooted bilateral deal between Tokyo and Seoul for almost a decade. But Tokyo won’t want to be cut out if Seoul and Beijing  complete their proposed bilateral deal. Nor will Beijing want to do anything to drive Tokyo towards the Washington-led TransPacific Partnership.

The three countries are already closely tied by trade and investment as well as physical proximity. No matter how rough the diplomatic waters between the three get, all have an interest in plainer sailing on trade.

China And The U.S. Play Free Trade Chess

Free trade agreements (FTAs) are easier said than done. U.S. President Barack Obama acknowledged as much when announcing an outline agreement to expand the TransPacific Partnership from four to nine as a basis for a regional FTA. There is much detail to be negotiated. It will take years, not months. Many devils must be confronted.

For one, Obama’s domestic opponents are not going to hand him a political and economic victory with a general election barely a year away. Even in the highly unlikely event a final TTP agreement could be reached quickly, a Republican-dominated House of Representatives could block a vote for Congressional approval before the election. Nor are Republicans likely to allow an agreement containing what Obama called ‘high standards’, code for among others environmental and labor protections and local sustainability rights that are an anathema to many of Obama’s opponents.

All those are the quick and dirty domestic political battles. Japan’s decision to join promises a hundred years war. Japan’s new prime minister, Yoshihiko Noda, has risked splitting his party in doing so. He will now need to turn the country’s three most powerful and insular domestic political constituencies, farmers, doctors and the construction industry. Doing so would mean a deep structural change to Japan’s political system. That may be long overdue, but it will not be quick in coming. That alone should not imbue supporters of the expanded TTP FTA with great confidence. Nor should the rapid turnover of recent Japanese prime ministers. Noda is the sixth in five years.

It is already two years since the U.S. applied to join the four-member TTP and started to orchestrate its expansion to nine, including bringing in its two most important treaty partners in the region, South Korea and Japan, as well as regional allies such as Thailand. There have already been nine rounds of TTP expansion negotiations. These are painstaking processes.

The Obama administration’s move was part a a bigger game of FTA chess that it is playing with China for influence in the region. Washington is playing the APEC side of the board while Beijing is playing the ASEAN side. (The side story for those choices is that the Asia-Pacific Economic Community is a group of economies, so can include Taiwan, whereas the Association of South-East Asian Nations comprises countries, so does not. Taipei has expressed interest in joining the TTP FTA, and while Washington has been scrupulously silent on the point, the absence of any outright rejection is being taken in Beijing as unacceptable tacit support.)

Beijing, meanwhile, has been doing what it can to slow up the TTP expansion, and pushing a series of bilateral trade agreement with ASEAN nations and the concepts of regional trade pacts between ASEAN plus three (itself, South Korea and Japan) and ASEAN plus six (adding Australia, New Zealand and India). The U.S. is notable by its absence. Hence Washington’s attempts to involve all the same countries, with the one obvious exception, to much the same purpose but under the aegis of APEC.

This is not necessarily disliked by most Asian countries as it allows them to keep both regional superpowers from being too dominant as they jockey for supremacy. The most extreme example of this is that both China and the U.S. are trying to create trilateral free trade agreements with South Korea and Japan. Two tracks. Double the trouble. And any end game still a long way off.