China-U.S. Regional Economic Rivalry: The Global Game Accelerates

2012-11-24 by Richard Weitz

The economic dimension of the U.S. Asia Pivot took another step forward when the United States and some of its economic partners recently decided to try to reach a comprehensive regional trade agreement by next October’s Asia-Pacific Economic Cooperation (APEC) summit.

U.S. President Barack Obama hosted talks on the Trans-Pacific Partnership (TPP) initiative at recent meetings of the East Asia Summit and the Association of Southeast Asian Nations (ASEAN) in Cambodia.

If successful, this U.S.-led initiative would preempt two rival Chinese-led plans to establish free trade agreements (FTA) that would exclude the United States.

The most ambitious of these two Chinese initiatives would create a new trade arrangement in 2015 at the earliest.

Formal negotiations for a TPP Agreement began in March 2010 among eight countries–Australia, Brunei, Chile, New Zealand, Singapore, Peru, Vietnam, and the United States. The parties have since been holding several rounds of talks each year.

US and China in competition and cooperation. In part it is a co-opetition game. Credit Image: Bigstock 

At the March 2010 session in Melbourne, Australia’s Trade Minister Simon Crean said that his “government will be seeking a high standard, comprehensive agreement that complements the WTO Doha Round.” He welcomed U.S. participation as “an important signal of the Obama administration’s commitment to the region and an encouraging sign of broader US engagement on trade policy issues.”  With the WTO rounds now stagnating, countries are seeing the TPP and its competitors as the main possible mechanisms for reaching region-wide multilateral trade agreements.

During its first two years in office, the Obama administration did not vigorously pursue a comprehensive economic agenda for Asia, but since 2011, the administration has launch a sustained high-profile campaign to complete long-stalled bilateral free trade arrangements and reinvigorate the TPP initiative, which informally originated before Obama became president.

The TPP is the administration’s main multilateral economics initiative for the Asia Pacific region and the model for future U.S.-supported free trade agreements in Asia and elsewhere.

The Obama administration’s economic vision for East Asia, embodied in the TPP, contrasts and in practice competes with that of China. The two countries are seeking to reduce the inefficient “noodle bowl” of bilateral and minilateral free trade agreements in the Asia-Pacific region, but their prescriptions are different.

Beijing is actively lobbying countries to enter competing FTAs that exclude the United States. China, which is the main trading partner for almost all other Asian states, is currently supporting two complementary initiatives.

The first is a trade and investment deal between China, Japan and South Korea.

Although it would involve only a few countries, these states represent about 20 percent of global GDP. A more serious problem is that relations between Japan and the other two countries have deteriorated in recent months due to their territorial disputes.

The second Beijing-supported plan would establish a Regional Comprehensive Economic Partnership (RCEP) among 16 countries–the 10 ASEAN members (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam) and six regional partners (China, Japan, South Korea, India, Australia and New Zealand).

Altogether, these states have more than three billion people, about half of the world’s population, and account for about 30 percent of international trade by value and 30 percent of the world’s yearly gross domestic product (GDP). They have set the target for completing their negotiations, which will begin next year, by 2015.

These two Beijing-backed FTAs offer easily implemented multilateral trade partnership based on a lowest common denominator formula in which countries remove only some trade barriers, resulting in rapid if narrow gains. Chinese analysts argue that the TPP is divisive since only some ASEAN states want to join.

If only some ASEAN countries become TPP members, then ASEAN-wide unity would suffer. In the view of Lu Jianren, an expert on ASEAN studies at the Chinese Academy of Social Sciences,” The TPP is no good to the ASEAN integration, and the RCEP can be a counterbalance to it.”

U.S. officials argue that the TPP would yield superior economic benefits.

The TPP requires a greater degree of commitment among its members regarding binding rules and standards, but offers the potential for much deeper gains through progress on mutual investment, government procurement, intellectual property protection, transparent competition policies, e-commerce rules, green growth, labor rights, and government procurement as well as trade barriers.

TPP addresses more issues than in existing FTAs or the World Trade Organization (WTO) accession agreements. President Obama has called the TPP a “high-standard trade agreement” that could potentially be a model for the entire region.”  The administration sees the TPP as a “gold standard” for future FTAs due to its comprehensive and demanding standards and because it “takes into account some of the industries of the future and the questions raised by those industries.”

Rivalry is ongoing; the race will not go to the faint hearted. Credit Image: Bigstock 

At the most recent 14th round of talks, eleven countries participated: Australia, Canada, New Zealand, Singapore, Brunei, Chile, Peru, Vietnam, Malaysia, Mexico and the United States. The eleven current participants account for some 30 percent of global GDP. In recent days, the governments of Japan and Thailand have said they would explore joining the TPP.

To counter Chinese warnings that the TPP risks undermining ASEAN unity, U.S. officials have also launched a more recent initiative, the U.S.-ASEAN Expanded Economic Engagement, to make it easier for ASEAN members to cooperate and ideally join the TPP. It engagement program would seek to harmonize customs, foreign investment and business conduct rules by offering a formal ASEAN-U.S. Strategic Partnership, annual an ASEAN-US Leaders’ Summit, a ASEAN-US Business Summit, an ASEAN-US Center in Washington, and support the ASEAN Connectivity Action Plan, which would develop physical and institutional mechanisms and processes.

The Obama administration has not formally excluded China from joining the TPP, but Beijing would need to revalue its currency, end subsidies to state-owned companies, provide better protection of foreign trademarks, and take other improbable steps.

As President Obama explained last year during his visit to Australia, “We haven’t excluded China from the TPP. What we have said is the future of this region depends on robust trade and commerce, and the only way we’re going to grow that trade is if we have a high-standards trade agreement where everybody is playing by the same rules; where if one set of markets is open then there’s reciprocity among the other trading partners; where there are certain rules that we abide by in terms of intellectual property rights protection or how we deal with government procurement — in addition to the traditional areas like tariffs…. It will require China to rethink some of its approaches to trade, just as every other country that’s been involved in the consultations for the TPP have had to think through, all right, what kinds of adjustments are we willing to make?”

Even if China does not join the TPP, the hope is that its companies would have to adhere to the TPP’s rules and norms if they want to have business dealings with TPP members.

In addition to China, Taiwan, Indonesia, India, the Philippines, Russia, and South Korea have not participated in the negotiations. Even some of those countries that are participating in the TPP talks have objected to some provisions, such as how to treat government-controlled enterprises, settle disputes involving foreign investors, and how governments can protect emerging economic sectors such as information technology and pharmaceuticals that might not develop without some means of limiting foreign competition.

Given these complex technical, economic, and divisive political issues, the October 2013 timetable for signing a TPP agreement appears overly optimistic. But the rival Beijing-backed projects must also overcome major differences among their proposed members in terms of their resources, completive advantages, and stages of development.

A more serious problem is that, though the TPP initiative has come to symbolize renewed U.S. economic leadership in East Asia, its economic impact will remain modest unless Canada, Japan, Mexico, and South Korea and other powerful national economic besides the United States join it.

 

 

"If everyone is thinking alike, someone isn’t thinking."

—General George Patton Jr.

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