How Big a Deal is TPP to China?

TPP

Trade patterns have changed dramatically in the last two decades. As the intensity of economic growth has shifted from the West to the East, and the emerging economies have accounted for a majority of global growth, regional trade agreements have proliferated worldwide, especially in Asia. One of the world biggest-ever free trade deals, the Trans-Pacific Partnership (TPP), led by the U.S., stretching across the Pacific, and connecting Asia with the West, involves 12 nations, which account for 40 percent of global GDP, 30 percent of of global trade and 25 percent of global imports, but conspicuously excludes one country: China. Initially, China denounced TPP as a major effort by the U.S. to contain China. However, recently China has started to express an interest in learning more about TPP and take a nuanced “wait and see” attitude. Since then, the debate has shifted to whether China should join TPP or not.

The exclusion from TPP does confront China with unavoidable costs and new challenges. According to economic modeling by Petri and Plummer, income losses to China from its absence from the TPP would be $46 billions by 2025, while the income gains to China if it joined TPP would be over $800 billions by 2025. Besides, the economists Li and Whalley also conducted numerical simulation to explore the potential effects of TPP, incorporating the trade costs in the general equilibrium model. The simulation results concluded that TPP agreement will hurt non-member countries, including China, by negatively impacting their production output, welfare level, trade, import and revenue. Such costs are mainly due to the diversion of trade and manufacturing from China to TPP members. Other than that, the lack of TPP membership would prevent China from enjoying new tariffs reduction and preferential market access.

Aside from the cause of economic costs to China, TPP also emphasizes the leadership role of U.S. in negotiating a new set of rules and obligations in Asia. It is likely to shift the economic balances and alliances within Asia, reduce Chinese economic predominance and limit China’s international expansion. So it seems that joining TPP is definitely a big deal to China.

For the most part, I agree with the scale and the importance of TPP and the challenges it poses to China both economically and strategically. However, several more views need to be taken into consideration when discussing to what extent China should care about joining TPP.

Firstly, China’s economic predominance in Asia is driven by its sheer size, continued growth, which is slower in recent years, but is still relatively faster than that of most Asian economies, and its increasing centrality in global supply chain. In other words, its prevailing status is hard to be shaken. Secondly, China has been deeply involved with most of the TPP members, either through bilateral or through regional free-trade agreements. Moreover, China has actively sought alternative paths to increase its influence, through projects under the “one belt one road” policy, or through its RCEP initiative, a parallel trade agreement that comprises 10 ASEAN countries plus China, South Korea, Japan, India, Australia and New Zealand. Thirdly, China has challenges within its own economy, which include massive urban migration, widespread unemployment, and huge wealth gap. And under current pressure of economic slowdown, China may not be ready for new and higher trade standards set out by TPP. For example, the TPP’s government procurement standards may drastically alter the structure and operation of Chinese State owned enterprises; the ecommerce standards could impair China’s censorship and information control policy. TPP may set as a new benchmark or force for the spur of China’s economic reform, but currently such reform may not happen over night. Last but not the least, TPP itself seems not as impressive as a trade-liberalizing agreement, since 6 members of TPP already have free trade agreement with U.S., which means that their improvement will be limited. Further more, inferring from the ACTA, negotiated between U.S. and the EU, which was adopted in April 2011 but still yet to enter into force till now, it is hard to predict when TPP will actually be ratified. In sum, so far, TPP’s impact on China is negligible, as is predicted by U.S. Department of Agriculture that the decrease in China’s GDP will only be 2%.

In the short-run, due to the current moderate impacts of TPP, China’s unshakeable economic preponderance in Asia, and the domestic challenges in China, China is likely to seek its favored free-trade accords other than TPP, and initially take a wait-and-see attitude to it. After all, it is still early to assess the implications for China. The Congress may hand Obama a defeat. And how big a deal TPP is depends on the actual implementation as well as the content of the deal.

Reference

What China will have to do to join the Trans-Pacific trade club

http://www.brookings.edu/blogs/order-from-chaos/posts/2015/09/21-us-china-economic-integration-tpp-meltzer

What Will the TPP Mean for China?

http://www.theglobeandmail.com/opinion/the-tpp-playing-the-china-card-on-trade/article26793029/

How China’s exclusion from the TPP could hurt its economic growth

http://www.pbs.org/newshour/making-sense/column-why-the-trans-pacific-partnership-isnt-a-bum-deal/

http://www.nber.org/papers/w18090.pdf

http://www.thedialogue.org/wp-content/uploads/2015/07/CLA-TPP-Report-final-web.pdf

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One Response to How Big a Deal is TPP to China?

  1. mrohtste says:

    Great article on the TPP and China. It is clear that there are large losses to China if it does not join the TPP to the size of $46 billion, but there are even larger potential gains of $800 billion by 2025. These numbers are slightly surprising as one would expect the losses to at least rival the gains by more than about 5.75 percent of the gains. This is not to say that the size of the losses will not be harmful as $46 billion lost from the Chinese economy is not only detrimental to China’s wellbeing, but it also hurts its future growth prospects due to the dramatic decrease in income and therefore a dramatic decrease in potential investments. Looking at just these two numbers of the gains and the losses, there appears to be no decision that China should join the TPP due to just the sheer amount of benefits. However, this article does an excellent job demonstrating that there is more to the TPP for China than just the economic benefits, there are also qualitative issues particularly the politics involved. This includes the argument that China needs to address its internal difficulties before it is able to join the TPP which has high trading standards that would interfere with its State Owned Enterprises along with its censorship policies, both of which are important to China. Also, it is hard to quantify these qualitative effects and therefore it is difficult to include all of the costs and benefits of the TPP.
    This article also did a nice job describing the change in China’s stance towards the TPP. China’s current stance of wait and see on the TPP appears to make sense for China as it does not rule out its future participation in this trade agreement. However, it also saves China from the costly negotiations that have been ongoing for years. Additionally, there is current uncertainty of whether or not this agreement will pass due to high opposition to the TPP particularly in the United States as is demonstrated by the political platforms of many of the American presidential candidates. The main downside to China’s wait and see strategy is that it will not have much if any input into the terms of the TPP if it decides to join later on.

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