The Trans-Pacific Partnership (TPP) agreement, once it’s finalized (likely later this year), will have big impacts on trade and investment patterns in the Asia-Pacific region. Supply chains will adjust to take advantage of preferential access to TPP markets, and production and manufacturing will be reformed to meet TPP standards on the environment, labor, and food safety.
China is not a party to the TPP, and this will have its costs. China needs to develop a pathway for joining the TPP, or develop its own vision for a comprehensive high standard trade agreement for the Asia-Pacific region that the United States can also embrace. The upcoming meeting between President Barack Obama and President Xi Jinping presents an important opportunity to make progress on this agenda.
Diverging international trade architecture for Asia?
The TPP is a 12-nation free trade agreement (FTA) that the United States is leading along with Japan, Canada, Mexico, Chile, Peru, Australia, New Zealand, Singapore, Brunei, Vietnam, and Malaysia. The TPP countries represent 40 percent of global gross domestic product, 30 percent of global exports, and 25 percent of imports. Once completed, the TPP will be an open platform that other countries in the Asia-Pacific Economic Cooperation forum (APEC) can join and the United States intends for the TPP to fulfill the APEC Bogor goal of becoming a FTA of the Asia-Pacific (FTAAP) region. South Korea, the Philippines, Thailand, and Taiwan have already indicated their interest in joining the TPP once it is concluded.
China initially saw the TPP as being about containment. This was in part due to China’s concerns with the United States’ rebalancing toward Asia, of which the TPP is the economic leg. Following the meeting of Obama and Xi at Sunnylands in June 2013, China expressed interest in learning more about the TPP. Since then, the debate has shifted to whether China should join.
In parallel to the TPP negotiations, China is party to the Regional Comprehensive Economic Partnership negotiations (RCEP), which involve ASEAN plus China, Japan, Korea, New Zealand, Australia, and India. These negotiations notably do not include the United States. This Asian-centric FTA has been touted as a possible alternative regional trade bloc to the TPP. However, it is increasingly clear that RCEP will not achieve a level of ambition or comprehensiveness to provide a real alternative to the TPP.
The costs and benefits of the TPP
The challenge for China, should it wish to join the TPP, is undertaking the reforms that the agreement would require. For instance, joining TPP will require opening markets in areas such as services and investment and agreeing to new rules in sensitive areas such as the role of state-owned enterprises and access to the Internet. That said, many of the reforms that becoming a TPP party would require are consistent with the internal reforms that China has already identified as being necessary, including reform of its financial sector, strengthening the role of services in the Chinese economy, and encouraging innovation.
Should China join the TPP (along with South Korea, Indonesia, the Philippines, and Thailand)…gains for the United States would increase five-fold to nearly $330 billion.
Conversely, China’s absence from the TPP would not be cost-free. According to economic modelling by Petri and Plummer, income losses to China from the TPP will be over $46 billion by 2025. However, should China join the TPP (along with South Korea, Indonesia, the Philippines, and Thailand), income gains for China could be over $800 billion by 2025, and the gains for the United States would increase five-fold to nearly $330 billion.
Such economics creates a solid basis for the United States and China to find ways to further integrate their economies.
Growing U.S.-China economic cooperation
A first and intermediate step towards greater economic integration should be concluding the U.S.-China bilateral investment treaty (BIT) negotiations. This would demonstrate a commitment and capacity by China to undertaking some of the reforms that TPP would require. This is because the BIT will address issues also present in the TPP, including requirements for significant new market access, intellectual property protection, and rule of law reform. The Obama-Xi meeting this week provides an opportunity to take stock of progress.
At the same time, China should develop its own vision of how to further integrate its economy with the Asia-Pacific region and beyond. A vision that excludes the United States—or is inconsistent with the emerging TPP framework for international trade and investment—will founder. APEC is currently studying an FTAAP, and this might be one opportunity; a bilateral China-U.S. FTA is another. The United States and China should also consider whether a revived multilateral negotiation at the World Trade Organization is a way forward.