Geopolitical implications outweigh economic concerns
In the middle of the week-long Chinese National Day holiday, ministers of the 12 Trans-Pacific Partnership (TPP) signatory countries announced the conclusion of their negotiations on the TPP agreement.
The TPP was originally initiated in 2005 by four smaller Asia-Pacific countries: Brunei, Chile, New Zealand and Singapore. The initiative did not attract much attention until 2008, when the US joined this agreement.
The consequent expansion to include another seven members altered the agreement’s original trajectory and dimensions. China is currently excluded from the pact, which will have important economic and geopolitical implications for China.
Once the pact comes into effect, taxes and tariffs on most goods and services produced within the trade zone formed by the agreement would drop and ultimately fall to zero. Therefore, the biggest impact on China would be a possible decline in Chinese exports, as Chinese exports to TPP countries such as Japan and the US could be substituted with similar competitive products made in other TPP countries like Malaysia and Vietnam. Such potentially negative effects are largely hypothetical, however, and are marginal for two reasons.
First, China and four of the TPP countries – Malaysia, Brunei, Singapore and Vietnam – are already party to the China-ASEAN Free Trade Agreement (CAFTA), while China also has bilateral FTAs with another four TPP countries – Australia, Chile, New Zealand and Peru. Furthermore, if we consider the bilateral investment treaty between China and the US and the ongoing FTA negotiations among China, South Korea and Japan, the potential export loss for China will most likely be insignificant.
Second, Chinese exports are competitive in the international market not just due to their low cost, but also because of their high quality and sophistication (e.g. in equipment manufacturing and high-speed rail) and because of China’s mature local infrastructure and skilled labor force. Many TPP countries such as Vietnam still lag behind in these areas. Therefore, China may experience exports losses in traditional and lower-end manufacturing industries but not in others.
A recent simulation study by Ma Jun, the Chinese central bank’s chief economist, shows that if China were to not join the TPP, China would lose 2.2 percent of its total GDP, while the annual opportunity cost could be as low as 0.5 percent of GDP over four years.
Despite the exaggeration of the TPP’s economic impacts on China, its geopolitical effects could be more serious. The TPP has been seen as being designed to counter the increasing power and influence of China, as is evident in the so-called high standards of some clauses in the TPP agreement (e.g. those governing SOEs and intellectual property), which have arguably been created to keep China out of the TPP. Meanwhile, in 2012 the US announced its strategy of rebalancing toward the Asia-Pacific region. In this context, the TPP can be seen as a trade-related measure to echo this political decision.
Regardless of whether China likes it or not, the TPP is already here. If it goes into effect, China could be affected both economically and geopolitically. Nevertheless, so far the Chinese government has welcomed the TPP agreement to the extent that it contributes to further economic integration in the Asia-Pacific region and meets existing international rules established through organizations like the WTO.
In contrast to official opinions on the TPP, vast discussions of this issue in online chat rooms in recent days have shown that the public in China has more mixed views on the agreement’s potential impacts. For example, one blogger argued that the US is building a cold-war type trade curtain to contain China’s growth. Such an opinion is emotional and exaggerated, but it does reflect some public anxiety about the TPP.
The author is a research fellow at Chongyang Institute for Financial Studies, Renmin University of China. firstname.lastname@example.org