The Trans-Pacific Partnership: Whither China?

Note: This is an excerpt of the forthcoming PIIE Policy Brief Understanding the Trans-Pacific Partnership by Jeffrey J. Schott, Barbara Kotschwar, and Julia Muir. The text of this post was also the basis for the author’s remarks at The Trans-Pacific Partnership and the Future of International Trade event (the webcast of which can be found at the Wilson Center website).

It is hard to conceive of a comprehensive Asia-Pacific trade arrangement that does not include China. China is currently not participating in the Trans-Pacific Partnership (TPP) negotiations but it is an ever-present concern of those countries that are crafting the trade pact or that seek to join the TPP talks.

TPP participants already have extensive trade and investment ties with China—China’s free trade agreements with TPP-9 members are set out in table 1, below—and expect those flows to increase markedly in the future. They also expect China to become involved in new trade talks with the TPP countries as they proceed toward the long-term Asia-Pacific Economic Cooperation (APEC) goal of free trade and investment in the Asia-Pacific region. China, in turn, has a vested interest in maintaining good access to TPP markets that, when countries that could well join the talks in the coming year (Mexico and Canada in 2012; Japan and South Korea possibly in 2013) are included, account for more than 40 percent of Chinese merchandise trade. It has committed to the long-term integration strategy endorsed by APEC leaders; indeed, its participation is essential to the long-term viability of such an initiative.

In the short run, however, China is likely to pursue and deepen its ties with Asian neighbors before engaging with the TPP countries. Such restraint is basically due to China’s political priorities as well as a lack of readiness and willingness to pursue a comprehensive trade accord.

By crafting a high-standard, 21st century trade accord that is far more comprehensive and legally binding than the trade arrangements forged among Asian countries, some observers have concluded that TPP participants actually intend to exclude China from their integration arrangement. They contend that the bar would be set too high in terms of transparency of domestic policies and the rigor of disciplines on government interventions in the marketplace. Others take this argument further and claim that the United States is trying to keep China out of the TPP and is trying to "contain China" in order to retard its economic and political influence in the region.

Charges that the United States seeks to “contain” or “surround” China by securing a comprehensive trade accord with China’s neighbors seem to ring true to those accustomed to hearing US officials berate unfair Chinese trade practices. US trade officials clearly prefer to talk about US trade enforcement actions against China—and will emphasize trade litigation even more now that the new International Trade Enforcement Center is up and running—rather than including China in “free trade” talks in the Asia-Pacific region.

We see little evidence to support the notion that China is being excluded as part of a broader containment strategy. But the continued talk of such a strategy requires a brief rebuttal.

The containment thesis falls flat for several reasons. First, and most obviously, a trade agreement simply cannot “contain” a large country, either economically or politically. Second, US officials need a cooperative China to confront the myriad problems facing the world economy and the security challenges posed by new and aspiring nuclear nations in Asia. Both countries need to work together and therefore must manage the inevitable frictions that arise as the breadth and scope of their commercial relations expand. Third, no one else in Asia wants to contain China either. The trade and investment integration in the Asia-Pacific region achieved over the past few decades benefits all the TPP participants, even as it poses competitiveness challenges for their manufacturing industries. The proper response is to use trade arrangements, in conjunction with domestic economic reforms, to boost productivity of local industry and thereby be better positioned to compete against Chinese firms at home and abroad.

In any event, China is not ready to implement and enforce the types of obligations under construction in the TPP negotiations and thus the issue of blocking its entry to the talks is moot…for now. But the gap between China and the prospective TPP accord is not unbridgeable due to the extensive reforms undertaken pursuant to China’s World Trade Organization (WTO) accession and its participation in numerous preferential trading arrangements.

China’s accession to the WTO required significant reforms; as a result, its border barriers are less restrictive than most developing countries. But China is not ready to undertake TPP requirements with regard to the transparency of government policies that affect trade and investment; its opaque and often discriminatory domestic policies and regulations, its distortive production subsidies, and its management of its exchange rate are clear barriers to TPP entry.

Second, China has concluded trade pacts with four of the nine TPP participants (Chile, New Zealand, Peru, and Singapore), has a broader deal with the Association of Southeast Asian Nations (ASEAN) members, and has negotiations in progress with Australia. To be sure, these free trade agreements (FTAs) are of varying quality in terms of the scope of coverage and depth of reforms, though the recent pact with New Zealand broadened coverage in services and included disciplines on a range of domestic policies. Going forward, the FTA negotiations with South Korea, which started in May 2012, should also propel Chinese reforms, even though the deal is unlikely to be as comprehensive as the Korean FTAs with the United States and the European Union. But this parallel initiative, as well as possible trilateral talks with Japan and South Korea, should help prepare China for more substantial ties with TPP signatories in the medium term. Whether China ultimately opts to join the TPP as the pathway to APEC’s long-sought Free Trade Area of the Asia Pacific (FTAAP) is still an open question. We suspect that China and the United States, each for its own political reasons and economic objectives, might pursue a hybrid approach that bridges elements of the TPP and intra-Asian approaches to trade integration. Such an arrangement could establish the FTAAP as an umbrella for the hard and soft integration pacts in the region, and link together the two economic powers without diluting the vitality of the TPP on trade and investment among its signatories.

In sum, China has made progress regarding convergence with prospective TPP norms. However, it still would need to implement significant trade and domestic policy reforms to be able to comply with the comprehensive set of obligations expected to be adopted by TPP signatories. It will not be ready to do so before the initial TPP accord is signed and implemented. But the expectation of most TPP participants is that, over the next decade or so, China will join the TPP partners in some broader Asia-Pacific trade regime that hastens the achievement of the APEC goal of an FTAAP.