TPP is a psychological instrument used by the US

November 10, 2015, 8:34 am

On the surface the Trans-Pacific Partnership Agreement is about trade and investment. But seen closely, it is a smart move by the United States to set the bar higher for China in global trade and investment.

The TPP has thus become an economic instrument to help implement Washington’s “rebalancing to Asia” strategy, which brims with geo-political implications. Through the TPP, the US expects to regain control of rule making for global trade because it is wary of the growing influence of developing countries represented by China in such institutions as the G20, World Trade Organization and the Asia-Pacific Economic Cooperation. Fortunately, the TPP is only one of more than 260 free trade agreements in existence; it can’t be everything at the same time.

An FTA among some economies leads to “trade creation” and “trade transfer”, but only “trade transfer” is detrimental to outsiders, for the economies reduce or eliminate trade barriers among themselves. So how much trade transfer will occur within TPP? Not much, because 80 percent of TPP members’ exports to the US are already duty free while a higher percentage of China’s manufactured goods enjoy the provision. Hence, by and large, the TPP tax change will mostly affect agricultural produce from the US, Japan, Canada and Australia.

Also, TPP members such as Australia, New Zealand, Peru and Chile have signed bilateral trade agreements with China, and the China-ASEAN FTA covers other TPP members – Vietnam, Singapore, Brunei and Malaysia. All of this greatly reduces the TPP’s negative impact on China.

Another fact: Apart from the North American Free Trade Agreement, the US’ trade with other TPP members adds up to a little more than $400 billion a year while its trade with China exceeds $600 billion, which accounts for 10 percent of its trade as compared with 4.2 percent for Japan.

Therefore, the TPP is more of a psychological instrument used by the US to “cry wolf” and in all likelihood it will have little impact on China’s foreign trade next year. The TPP will mainly affect China’s medium-and long-term domestic economic policy reforms. As a regional FTA, the TPP puts more emphasis on “within border” policies and rules associated with trade, such as labor standards, environmental protection, IPR protection and State-owned enterprises, than “on border” trade barriers.

Many of the rules the TPP covers are part of China’s ongoing reform. As such, they may be difficult to achieve in the short term but not in the medium to long run.

Also, TPP members include advanced and less-advanced economies and many of them face the same challenges that China does. Take SOEs for instance. Forty percent of Vietnam’s GDP is contributed by its SOEs; the percentage for Singapore and Malaysia is similar. If they can cope with TPP rules on SOEs, China should not have major problems either.

Moreover, many TPP rules represent the current trends in global trade and eventually will be accepted by the world. These new standards may pose a challenge to China’s efforts to upgrade its industries, but eventually they could be opportunities for the country to pursue further economic reforms. So, there is no reason for China not to play its due role in making global rules for free trade and investment.

China will not be able to join TPP because the US and Japan are opposed to it, although Washington and Beijing both say they have an open mind on China’s membership. China should, therefore, act rationally and take steps to meet the challenge posed by the TPP.

This article first appeared in the website China-US Focus.

The views expressed in this article are the author's own and do not necessarily reflect the publisher's editorial policy.