China hangs tough on a problematic partnership

The Trans-Pacific Partnership is viewed in Beijing as an American-led agreement designed to benefit regional allies while containing China’s rise.

Barack Obama’s trip to Southeast Asia last week was notable for several reasons, including the re-elected president being the first sitting American leader to visit Cambodia and Myanmar. In particular, much attention was given to Obama’s speech, as he stood alongside Myanmar’s de facto opposition leader, Aung San Suu Kyi, raising expectations that genuine change is coming to one of the region’s pariahs.

Even so, the most significant part of Obama’s visit was generally missed, owing to the fact that ongoing negotiations for it are taking place behind closed doors. The Trans-Pacific Partnership rates only a cursory mention in most news articles. There is a long way to go before it becomes relevant, and it may never get there. But it is an agreement that could potentially unite or divide countries over American economic leadership in Asia – and there is no country watching these negotiations more intently or fretfully than China.

The TPP has humble roots, coming into force in in 2006 as a multilateral free-trade-agreement between four countries: Brunei, Chile, New Zealand and Singapore. When America became one of five countries (along with Australia, Malaysia, Peru and Vietnam) to enter negotiations to join the TPP, it created few ripples in the region. After all, Obama had been slow to push the already negotiated FTA with South Korea to his party in Congress, and his free-trade credentials were not strong. When the US announced its interest in the TPP, a common response from analysts was that the president simply wanted a token agreement to placate his critics – and the TPP was then perceived to be as token an agreement as it could get.

We now know that Washington’s plans for the TPP are serious and ambitious. American trade negotiators, led by the Office of the United States Trade Representative, have been hard at work behind the scenes shaping and selling the TPP to potential regional partners. Intrigue about the agreement is heightened by the fact that the Obama administration has been strangely secretive about its plans for the TPP.

But we do know something about it. Obama has focused on the TPP ever since the Doha round of World Trade Organisation negotiations stalled in 2008. Since joining and taking control for driving its development and expansion, the TPP would be the first significant multilateral trade agreement pursued and shaped by the Obama administration. If concluded, it would form a free trade zone covering Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, Mexico, and Canada with the United States. Japan, South Korea, Thailand and the Philippines have all expressed interest in joining, with Seoul the most enthusiastic of the four so far. The glaring omission – or elephant in the room – is the non-involvement of China, the largest trade partner of many TPP negotiation participants. But more on the China angle shortly.

Unlike many of the FTAs in the region, particularly China’s with ASEAN, Singapore and India, the TPP is designed to be a ‘high quality and comprehensive agreement’ with a depth and reach that extends beyond most FTAs between Asian countries. In particular, TPP negotiations extend beyond most trade matters to include agreements about reducing or eliminating tariffs on industrial goods and agriculture – the latter being an awkward sticking point for further Japanese involvement. Importantly, TPP negotiations also cover regulations for many service sectors, especially financial, liberalising rules and regulations on investment and government procurement, rules and standards on patents and copyrights, intellectual property, government procurement, and even labour and environmental standards.

The model for the Obama administration appears to be the North American Free Trade Agreement between the US, Canada and Mexico – a far more comprehensive agreement in reach and depth than the multitude of Asian FTAs. By persuading (or compelling) signatories to agree to the other qualitative standards such as those on intellectual property, labour and the environment, the Obama administration is also hoping to implement what it would consider a meaningful and ethical ‘rules-based’ approach to trade and multilateral economic activity. Critics would decry that these are simply ‘western’ standards that Asian economies cannot afford. But Washington’s response is that these are simply standards that TTP members and negotiators claim to already uphold, and the TTP is an agreement that would give legal effect to these often flouted commitments.

Beijing is not impressed for a number of reasons.

First, China would fail many of these the regulatory and legal standards, such as those on intellectual property. Its government procurement market is one of the most protected of any major economy, with a policy that indigenous state-owned-enterprises have first bite of the cherry. Despite WTO obligations to the contrary, foreign financial firms meet all manner of obstacles when trying to make it in the Chinese market. And low environmental and labour standards, although improving, are what makes manufacturing in China price competitive in comparison to countries such as Malaysia, let alone America. If the TPP actually comes into force, then export manufacturers targeting the huge American domestic consumption market could be forced to locate to compliant manufacturing centres in economies like Vietnam – a TPP negotiating member.

Second, and more broadly, the imposition of TPP rules and regulations as the accepted norms for regional trade would clearly leave China out in the cold, and possibly force Beijing to implement these standards domestically in order to apply for TPP membership eventually. Frequently accusing China of cheating (e.g., stealing intellectual property and ignoring international patents) and free-riding (e.g., demanding access to key sectors in advanced economies without opening up key sectors of the Chinese economy to foreign firms), forcing China to play by agreed trade and commercial rules is an implicit part of the American plan. In response, China would accuse America of using proposed TPP standards as a form of protectionism of its own higher cost domestic set-up by forcing trading partners to adhere to higher labour and environmental standards at the expense of lower cost economies such as China’s.

This has led many commentators in China to view the TPP as an American-led agreement that is designed to ‘contain’ China’s rise – not only to benefit America but its regional allies at China's expense. As many in Beijing would point out, the Obama administration’s growing interest in the TPP coincided with outgoing Secretary of State Hillary Clinton’s 2011 pledge to use ‘economic statecraft’ to enhance American leadership and influence abroad. Other Chinese commentators also claim that the TPP is simply an economic pillar of Obama’s ‘pivot’ back into Asia at China’s expense.

To be sure, America is attempting to reinforce and entrench what it calls a liberal, rules-based economic trading regime in Asia; and in doing so uphold rules that have served America and much of the region (including China) well over many decades. China’s lack of commitment to opening its domestic market, and to enforcing intellectual property and rule-of-law in its commercial practices and dealings, is causing American and regional concern; with good and legitimate reason. It will be difficult for Beijing to argue against these principles.

But the plan to impose additional environmental and labour standards in still developing economies – although desirable – will be strongly opposed by Beijing. After all, export manufacturing in China is dominated by foreign firms, and the globalisation of production chains with China as a central hub means that the American consumer has benefited from lower prices for well over one decade. China would criticise America for having its cake and eating it too.

At this stage, Chinese resentment against the TPP is simmering beneath the surface rather than overt. The reality is that the TPP is a long way away from where it wants to be. America already has meaningful free trade agreements with six of the ten proposed TPP countries – Australia, Singapore, Peru, Chile, Canada and Mexico – potentially making agreement easier to reach. But Japan and South Korea will have to buy in fully for the TPP to reach critical size and achieve critical mass in the region. In particular, long-standing Japanese reluctance to open its agricultural markets to foreign completion will not dissolve easily or soon. Besides, while there has been growing regional interest in the TPP, almost all Asian economies are hedging their futures and will not want to decisively enter into an American-led and shaped free-trade bloc if China has little chance of meeting the standards required for membership.

For the moment, an all-out trade war between the US and China is unlikely and even impossible given the economic interdependence of the two economies, and the globalisation of supply chains. But the competition to define the future rules of economic engagement and commercial behaviour is well underway, and American plans for the TPP are one important part of the battle in the war to do so.

Dr John Lee is the Michael Hintze Fellow and Adjunct Associate Professor at the Centre for International Security Studies, Sydney University. He is also a non-resident senior scholar at the Hudson Institute in Washington DC.

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