TPP: Setting rules and dropping a marker for Chinese reform

Today I join a ChinaFile conversation on the implications of the Trans-Pacific Partnership for China, launched by UCSD’s Barry Naughton and Arthur Kroeber of GaveKal Dragonomics, along with Guy de Jonquières. My contribution is here, but the entire discussion is worth a read.

The Trans-Pacific Partnership (TPP) is not, contrary to some recent commentary and contrary to Chinese suspicions that Barry Naughton is right to point out have mostly subsided, a “No China Club.” Though it is hard to discuss the detailed implications for China without seeing the actual text, we can consider what the agreement announced Monday represents for China’s position in trade negotiations.

First, though I have been critical of President Barack Obama’s rhetoric backing the TPP because “we can’t let countries like China write the rules of the global economy,” it’s worth considering the likelihood that Obama means what he says. If the TPP is enacted with what U.S. negotiators consider “high-standard” rules, it lays down a marker for China to move toward if it wishes to benefit from the trade grouping. This is absolutely compatible with Obama’s statement that “the United States welcomes the rise of a China that is peaceful, stable, prosperous, and a responsible player in global affairs” and his support for “China play[ing] a greater role in upholding the rules-based system that underpins the global economy.”

Second, China would have had to undergo substantial reforms in the state-owned sector, labor standards, and other areas—reforms that go well beyond China’s own Third Plenum reforms that many analysts see as lagging. In essence, China wasn’t ready for TPP negotiations even if it wanted to join. Only once the full agreement emerges can we assess the likelihood of China ever joining the TPP, but if the Chinese leadership is successful in pursuing its own reform agenda, it will be in a much better position to enter talks to join the TPP.

Third, there remain paths for convergence in trade that do not require China to join the TPP. If China and the United States conclude an ambitious bilateral investment treaty (BIT), experienced trade negotiators have said the BIT could play a role similar to WTO accession in providing an international carrot for internal Chinese reforms. Then there is China’s support for a Free Trade Area of the Asia-Pacific (FTAAP), originally supported by the United States but recently deemphasized (perhaps until the TPP is safely enacted). A FTAAP would include all APEC economies, which means every member of the TPP plus several others. Critically, the FTAAP would at this point not include India, whose inclusion would pose further, perhaps insurmountable, challenges on issues such as food subsidies. (The China-led Regional Comprehensive Economic Partnership (RCEP) does include India, and for that reason reaching a deal would be challenging and convergence between RCEP and TPP is unlikely.) If TPP goes into force, work could turn toward the BIT and, later, the FTAAP—allowing China to enter an agreement with the TPP economies without having to agree to provisions that might be deal-breakers.

Finally, we should not get ahead of events in assessing implications for China. The U.S. Congress could still hand Obama and the TPP negotiators a defeat (or a long delay). The economic and political implications for China hinge as much on implementation as on the content of the deal.

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