Expert Commentary

A Gift to China

Jeffrey Schott
Senior Fellow, Peterson Institute for International Economics

Just three days after his inauguration, President Donald Trump signed an executive order that confirmed his intent to abandon American participation in the Trans-Pacific Partnership. Barring an about-face from Washington, the TPP as negotiated may now be dead. However, the deal includes 11 other Asia-Pacific economies, including Japan and Canada, which may be interested in forging ahead with a revised TPP agreement that does not include the United States. As the remaining signatories prepare to meet in Vina del Mar, Chile, The Cipher Brief’s Fritz Lodge spoke with Jeffrey Schott, Senior Fellow at the Peterson Institute for International Economics.

The Cipher Brief: How has President Trump’s decision not to pursue ratification of the Trans-Pacific Partnership affected the other members, and where do you see free trade in the Asia-Pacific region standing now?

Jeffrey Schott: I just returned from Asia, where this was a point of discussion both in the Asia-Pacific Economic Cooperation meetings and in China, so this is a very timely.

The decision to pull the United States out of the TPP means that the deal, as signed, is basically dead. The TPP cannot enter into force as it was negotiated without the participation of the United States. However, that doesn’t mean that the other 11 countries don’t still value the TPP. They still feel the agreement is in their interests.

The limited concessions opening the U.S. market to other TPP members were only part of the deal’s benefits. Another large objective of these countries was to bolster their own domestic economic reform to become more efficient, productive, and competitive in global markets. Thus, several of the countries have continued to pursue and finalize their own ratification of the agreement, even after the U.S. was clearly going to leave, as if the TPP were going to go into force. Japan and New Zealand are two such countries.

That’s the first point I have. The second point is that all 11 of the other TPP countries would like the U.S. to reconsider and participate in a new Asia-Pacific economic integration arrangement. Whether that arrangement is exactly like TPP or somewhat revised would, I think, be open to negotiation. In the past, countries were not willing to consider reopening the agreement because they felt that doing so would unravel the very delicate balance of concessions that had been reached before the agreement was signed. Now, the situation is completely different because the agreement has unraveled.

Third, all of the TPP countries are interested in deepening their economic relations with the major trading powers in the Asia-Pacific region. For most of them, China is their biggest trading partner. So, in the absence of the U.S., many TPP countries have sought to either open new bilateral talks with China or update and augment the agreements they already have with China. One example of that is Canada, which is now in an extensive consultative phase at home in preparation to launch new free trade negotiations with China later this year.

Fourth point. The Pacific alliance countries – that’s Chile, Colombia, Peru, and Mexico – are having their annual meeting in Chile this month, and Chile has taken the initiative as chair of the that alliance to invite all the TPP countries – plus China and South Korea – to participate in a brainstorming discussion on where to go from here on Asia-Pacific trade talks. All those countries are committed to pursuing an Asia-Pacific free trade deal. Their leaders have made that commitment at APEC, and the TPP was meant to be one of the pathways toward this broader Asia-Pacific deal. Indeed, the TPP always envisaged the inclusion of other countries, including China, once they were ready to undertake and enforce the comprehensive trade and investment obligations under it. Those objectives are still very prominent in the minds of the TPP countries, so this session in Chile on March 14-15 will at least keep the pot simmering while the Trump Administration stays on the sidelines. The good news on that front is that the Trump Administration has committed to sending a representative to those meetings for the discussions. The U.S. Trade Representative probably won’t be confirmed by then but at least the U.S. chair will not be empty. 

TCB: This retreat from TPP is often characterized as a gift to China, that was one of the main arguments against leaving the TPP. Would you say that’s true?

JS: No, it’s not a gift to China. It’s a gift to China on a silver platter.

TCB: Can you walk through the mechanics of how that works? Many think of this as an opportunity for the Chinese-led Regional Comprehensive Economic Partnership to take TPP’s place but I’m not sure this is the correct way to characterize that dynamic. How do you see China filling the void left by TPP?

JS: You’re right and most commentators are wrong. RCEP is complementary to the TPP, but those countries who want to pursue economic reform in RCEP also participated in the TPP. Seven of the 16 RCEP countries are also signatories of the TPP.

Essentially, what you have in RCEP is not a China-led negotiation but one led by the ASEAN [Association of Southeast Asian Nations] countries. That group of 10 countries has free trade agreements with the other six participants in RCEP, and the objective was to try to harmonize the agreements that ASEAN had negotiated with its regional partners, and to use the process to help push deeper integration among the 10 countries of ASEAN, which have been seeking to create an ASEAN economic community. But this process has been slow, and the RCEP negotiations have yielded very limited impetus to broader regional economic reforms. Part of this is because the RCEP countries are even more diverse than the TPP countries – containing rich and poor countries alike. India is also a party to the RCEP negotiations and has been a substantial foot dragger on any efforts at significant trade reform. Finally, the progress on important areas of RCEP has been affected or impeded by both economic and political frictions between the northeast Asian countries, particularly China and Japan.

The Chinese always hoped that they could use some of their own bilateral free trade agreements as a model for what RCEP could achieve. But when they negotiated with South Korea, they ended up with a “Swiss cheese” agreement, one where the holes are bigger than the cheese – by holes I mean exceptions to the reform commitments. The limitations of this Korean deal should be a clear signal that RCEP was not going to be able to produce a very economically meaningful agreement for the 16 countries as a whole. It just lays the foundation for a better agreement in the future. That is far less than what the TPP did in terms of economic reform.

TCB: If you were Chinese President Xi Jinping, what would you do from here, and is this an opportunity for China to shape a remnant of the TPP into something more amenable to Beijing?

JS: For the last three years, China has not been critical of the TPP. Much of it is very complementary to the kind of economic reforms they want to pursue at home, including disciplines on state-owned enterprises. But there are certain aspects of the TPP, which are red lines for the Chinese government. These include stipulations regarding the free flow of information, free association of labor, and a few other areas. The TPP was not an agreement that the Chinese would have been able to join any time soon.

Now, however, the Chinese can continue very pragmatically. On RCEP, they can continue negotiations because that’s helpful for their neighbors. They don’t expect much of an economic payoff from RCEP but if they keep the talks going and upgrade the agreement a bit it will at least give some minor return.

But the other thing the Chinese can do is deepen their trade talks and ties with TPP countries. That’s going to have an impact on the position of those countries in terms of future Chinese participation in a broader Asia-Pacific economic integration arrangement. That is where the U.S. not being at the table is a big mistake, because we are now unable to shape those priorities.

TCB: Speaking about U.S. trade policy writ large, is the concept of negotiating a number of new bilateral agreements with these countries a viable replacement for larger free trade areas like the TPP?

JS: I think they will have to try, and then they will see how limited it is. The Trump Administration is not going to achieve its major objectives with bilateral agreements, in terms of significantly affecting the trade balance one way or the other or developing new rules. I think there will more likely be transaction-based deals that generate more headlines than sales, and don’t create many jobs relative to the labor market in the U.S. We have a labor market of over 150 million people and Trump was able to make headlines by saving 700 jobs at Carrier. Fine, that’s very good for that community but, in terms of dealing with the overall problems in the United States labor market, you would have to do thousands and thousands of those deals to make any impact.

TCB: Strategically, how do you see Trump’s withdrawal from TPP affecting the U.S. position in the Asia-Pacific?

JS: It certainly has had the immediate effect of undermining the credibility and reliability of the U.S. as a trading partner. The TPP wasn’t just a deal that the United States was in, it was a deal that the U.S. led and basically crafted to meet its own specifications. It’s a deal that the U.S. insisted the other countries accept in very strong and difficult negotiations. The other countries agreed to a U.S. deal at the end of the day, and then the U.S. didn’t agree to the U.S. deal.

Typically, there was always the question of Congress tweaking and adding new terms to the deal, but now other countries have to worry about U.S. negotiators backing out of the deal altogether. It’s one thing to have uncertainty about what your bottom line is, but it’s another to have uncertainty about whether you want to be in the room at all.

TCB: Last thoughts?

JS: The security situation is the most important new factor. The test firing of North Korean ballistic missiles last month emphasizes the dangers in the region, and the fact that a stable political and security environment can’t be taken for granted. We have some of our most important strategic allies working with us, and we have to make sure that we send the appropriate signal that we are a steadfast and reliable partner.

The Author is Jeffrey Schott

Jeffrey J. Schott joined the Peterson Institute for International Economics in 1983 and is a senior fellow working on international trade policy and economic sanctions. During his tenure at the Institute, Schott was also a visiting lecturer at Princeton University (1994) and an adjunct professor at Georgetown University (1986-88). He was a senior associate at the Carnegie Endowment for International Peace (1982-83) and an official of the U.S. Treasury Department (1974-82) in international... Read More

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