China and the future of Asia Pacific trade

Author: Peter Drysdale, Editor, East Asia Forum

The backbone of stability and amity in Asia and the Pacific is an open economic system, which has encouraged deep trade and investment interdependence within the region, and the United States security umbrella that provides reassurance to US allies and partners as well as those, like China, outside the alliance framework against a resurgence of military or political adventurism. Despite the rise of Asia and the dramatic change in the structure of regional economic and political power, both elements remain important, though even some realists would concede that economic interdependence nowadays provides more day-by-day ballast in regional affairs than the threat of deploying American power.

A crucial element in the equation that guarantees regional stability today is the huge economic, political and security relationship between the United States and China. The US-China bilateral relationship is not only of strategic importance to Asia; among all the world’s big bilateral relationships, it is perhaps currently the relationship of most strategic importance to the global system. That doesn’t mean, of course, that the famously described G2 can run the world: the G20 was put in place, and welcomed by China in the event, to provide a better context for managing that job. But it does mean that if the US-China bilateral relationship goes seriously wrong, there will be troubles all around the region and around the world. Hugh White’s controversial analysis of the impact of the rise of China on regional stability collaterally, more than anything else, has served to focus strategic attention on that.

In Chinese perceptions, the grand strategic bargain at the core of the stability in the China-US relationship is China’s willingness to concede hegemonic space to the United States. Simply put, China allows the Americans the lead in running the world in return for US willingness not to interfere in China’s getting on with its own economic, social and political development within the framework of a set of significantly US-determined international rules. This provides a stable equilibrium in Sino-American dealings, however dynamic and subject to pressure and change.

A key element of dynamism, of course, relates to what part China should play together with the United States and other powers and on what principles they should be ordered. The G20 was established in significant part to assume collective leadership in that on the economic front. Will American-flavoured rules always suit? Although the United States encourages China to become a ‘responsible stakeholder’ and join in the rule-making game, in the final analysis what space will it be conceded to do that, or even to catch up with established US-inspired rules and norms without opprobrium?

Nowhere is this tussle of intentions and strategies playing out more clearly, and with more problematic consequences, than in the current attempts to put in place a new set of trade and economic rules — that go beyond the established global WTO trade rules — across Asia and the Pacific.

The locus of this tussle is an economic and geopolitical contest between the Trans-Pacific Partnership (TPP), ordered around the United States and its agenda for economic engagement with Asia but excluding China, and the Regional Comprehensive Economic Partnership (RCEP), ordered around the ASEAN+ trade arrangements and China’s interest in regional integration but excluding the United States. How these arrangements evolve over time will greatly shape the structure of the Asia Pacific economy in the years ahead, and also the politics of the relationship between the United States and China. Some see the TPP as a US attempt to derail China’s accommodation into the regional and global trading system by establishing a set of rules that will effectively preclude China from joining the arrangement for many years to come. Others see the TPP and RCEP as a competition for a template for trade rules in the vacuum that the WTO has left. That is a priority issue for consideration by global leaders in the G20.

Whether these mega trade deals can be achieved on the schedules that have been announced or whether they will in the end fulfil the ambitions that have been claimed for them is yet to be seen. The Trade Promotion Authority necessary to deliver US conclusion of the TPP is only now being brought to the US Congress, occasioning yet another delay in another deadline for progress in the negotiations.

In a thought-provoking essay this week, Yiping Huang suggests that the emergence of two competing visions of the regional trading order was largely a result of misunderstanding and mistrust on both sides. When the US joined the TPP and decided to scale it up into a ’21st-century model of globalisation in 2008, many Americans judged that China was too far away from the expected high standards, and that its participation in the negotiations could only spoil the party. Similarly, many Chinese experts advised the Chinese government that the TPP was an American design to deliberately isolate China economically, and that China should go its own way in liberalising trade and investment. Some scholars in both countries interpreted RCEP as part of China’s overall strategy to defeat the TPP’. In fact RCEP was an ASEAN initiative that saw it as the best way forward for ASEAN+6 economies unable to sign on to the US-driven TPP. The TPP created the impetus for China and Japan to compromise on the exact membership of regional cooperation.

‘Such economic cold war mentality could be very damaging to both countries and the world’, Huang argues. China is at the centre of Asia’s trade growth, including the opportunities that have arisen through the development of global supply chains. US regional engagement without China being included would seem like engagement with the hole rather than the doughnut.

Huang concludes that China should activate the strategic bilateral relationship with the United States to seek membership of the TPP. And that the US and China should start work on bringing RCEP and the TPP together. ‘The TPP is only one area’, Huang says, ‘where China and the US can work together closely to develop a new major-power relationship. The two countries are already negotiating a bilateral investment treaty, successful conclusion of which could pave way for China’s TPP accession. The two governments may also want to consider the possibility of establishing a bilateral free trade agreement’.

The mood surrounding the TPP has certainly changed in Beijing since the commitment to reforms contemplated at the Third Plenum last year. And Huang is clearly right that it is in China’s and the region’s interests for China to clearly signal its intentions on wishing to be included in the TPP game. The present negotiation could still fall over for countries like Vietnam and Malaysia who, like China, also have difficulties with provisions that will have substantial impacts on state-owned-enterprises, but if it is done, in some form or other, it is unlikely that China could join the initial agreement. And thereafter the negotiation of entry — because of the way the arrangement is being structured — would put China in the invidious position of having to take key aspects of its national reform agenda to US Congress for approval as a condition of entry. That would not be helpful in any way to the management of China-US political affairs.

This leaves making a success of RCEP still the main game in Beijing, not only for what it can deliver to the region itself but also as an effective lever in keeping the TPP open. Not that China is in any position to do a bilateral deal with the United States on the RCEP-TPP nexus, of course, though it is in a position, through commitment to a substantial new round of liberalisation, reform and development cooperation, to give definite momentum toward getting RCEP up and running in the next two years.

Peter Drysdale is Editor of the East Asia Forum.

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