A Win-Win-Win Solution for the Trans-Pacific Partnership

Op-ed in Caixin Online

June 13, 2014

The security tensions between China and the United States are spilling over rapidly into economic ones. Some outreach from both sides is required, not just to try to keep things from unnecessarily escalating, but to maintain the mutual benefits of the economic relationship. A potential key to serving both goals would be to integrate China into the Trans-Pacific Partnership (TPP) negotiations.

The economic benefits are clear. According to Peterson Institute calculations, a TPP that included the current members negotiating plus China would increase national income by 4.7 percent over a decade for China, 1.6 percent over 10 years for the United States—and even 4.4 percent over the same period for Japan. It would be a win, win, win. And this underestimates the ongoing productivity benefits to China, if making the requisite high-standard trade commitments advances the proposed domestic reforms.

An economically reformed and open China serves both Chinese reform and American interests.

Furthermore, the interests of all the major countries involved are only served by having TPP proceed. On our estimates, were TPP to be concluded without China rapidly joining, trade diversion from China would be only a tenth as large as the potential gain (–0.5 percent of income over 10 years)—so there is no threat to China from TPP to trumpet, just an opportunity to miss. The gains for Japan from TPP would be nearly halved to 2.4 percent of GDP, and the gains for the United States would be cut by two-thirds to 0.5 percent of GDP—so they both gain by TPP either way, but gain far more with China. This fits with the basic logic of economic integration among large economies.

There are hesitations on both sides of the Pacific about having China be part of the TPP. Some in the United States wish the prospective trade pact to be a supplement to a broader alliance and therefore include the democracies on China's eastern coast without including China. Others who bear China no ill will fear that China's entry to the talks might give China the opportunity to intentionally slow them down or water down their content.

On China's side, those fears are shared, but an additional concern crops up. Some in China view the process of World Trade Organization and Permanent Normal Trade Relations accession of the 1990s as embarrassing. They do not want China to go cap-in-hand—they feel China should be involved in the setting of any new trade standards from the start.

Both of those groups are missing the point. TPP officially and in fact is an example of open regionalism. Anyone in the region who is ready to negotiate in good faith to a high standard agreement will be admitted. This is not a fake. As noted, it is in the interest of every country in the region to have China be part of this potentially high-quality agreement. It also makes the agreement that much more likely to be accepted and meaningful if it bridges the United States, China, and Japan.

More importantly, some Chinese observers' concern about repeating the accession experience, and some American observers' concern about utilizing trade as a means of exclusion, hurt their own countries' interests for mere imagery. Trade negotiations, like all international negotiations, are best conducted in a spirit of compromise and for that matter mutual discovery. Neither side should let egotism or the current suspicion interfere with the peaceful codevelopment that should occur. A TPP that takes China into account, and gets China on a path to a deeper Asian integration, would serve both US foreign policy and economic true interests.

Even if China cannot join TPP immediately because of other countries' legitimate concerns about state-owned enterprises, for example, or intellectual property rights, knowing it was en route to joining would give it significant voice in the talks and the standards being set. And over the coming years, having protections for Chinese developed intellectual property and restrictions on subsidized competition from state-owned enterprises in South East Asia will be in an increasingly wealthy China's own self-interest.

Therefore, a practical step would be for the United States to explicitly and publicly invite China to join the TPP talks at the upcoming Strategic and Economic Dialogue. As a preparation for that participation, China and the United States should agree on the proposal for an official observer status for Chinese trade negotiators in the current negotiations. There will of course be fears on both sides (but particularly in the United States) that such an observer from China would take confidential negotiating positions and possibly use them to interfere with the progress of TPP or pursue side bargains. I believe that by giving China an explicit and open observer status in TPP, the Chinese government would find it in its own self-interest to play fairly and respectfully with all the negotiating partners.

The underlying suspicions and actual disputes between China and the United States will not be solved by trade alone, let alone a future-oriented trade agreement. There is no automatic link between expanding trade relations and good relations and broader relations overall—if there was, the trillions of dollars of Chinese goods purchased by the United States over the last three decades would have assured mutual bliss. In the absence of outright conflict, however, deeper economic integration can act as a counterweight to escalating overreaction to and spillover of what should be manageable tensions. More importantly, an economically reformed and open China serves both Chinese reform and American interests. Let us move this forward.

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Adam S. Posen Senior Research Staff

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