Cai Penghong

Senior Fellow, SIIS

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by Cai Penghong

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Dec 19, 2011

An important outcome of the 2011 APEC Summit is U.S. President Obama’s announcement of “broad outlines” for the Trans-Pacific Partnership (TPP) framework. At almost the same time, Japanese Prime Minister Yoshihiko Noda announced that Japan would join the TPP and two other APEC economies, Canada and Mexico, made the same decision. The developments caught by surprise media had which anticipated the TPP to be finalized in 2012 and stirred Asia-Pacific geopolitical waters. The partnership had seemingly been given a strong boost.

However China’s reaction to these developments was foremost in the thinking of regional countries. Some observers have urged China to take steps to apply for entry into TPP negotiations but others remain cautious. President Hu Jintao did not mention China joining the TPP but supported it as one of the pathfinders of Asia Pacific integration in his speech to APEC leaders. China’s attitude and reluctance could be interpreted as the result of some misgivings. I would like to briefly touch on the TPP’s development and then analyze why China is worried about it.

The rapid development of the TPP over the past two years has deeply affected the evolution of the Asia Pacific region’s economic and trade structure. Having emerged early this century and gained strength in 2006, the TPP became a significant vehicle for regional economic integration when the Obama Administration decided to join negotiations in 2009.  Talks formally started in March 2010 with seven active countries and an observer, but after nine rounds the full contingent has increased to nine. They are Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, the United States and Vietnam. These partners envisage TPP as a “high quality, 21st century” benchmark for current and future free trade agreements with ambition to expand the body to be a new trade institution, not only including all members of APEC but also dominating the regional trade structure.

Although the TPP could be regarded as a normal FTA because it covers almost all traditional trade issues such as agriculture, industrial goods, intellectual property, technical barriers to trade and others, the prominent features are so called cross-cutting issues. These could include, for example, the issue of regulatory coherence which the U.S. proposed to “make regulatory systems of TPP countries more compatible so U.S. companies can operate more seamlessly in TPP markets.”

China pays close attention to the TPP. A rough assessment of China’s access to the TPP demonstrates not only opportunities but also challenges. Access will benefit China in some fields. We all know that the “world factory in Asia” is actually China. Its business people operate in markets around the Asia Pacific and products made in China have been welcome. Its exports include textiles and clothes, shoes, toys, processed foods like instant noodles and, in recent years, computers and electronic products, and transportation equipment. Obviously, industries such as manufacturing and electronics have benefited. We have an expectation that a new FTA arrangement, such as the TPP, will further spur Chinese exports and also generate more imports. We understand a great deal of work needs to be done before that goal is achieved. Bilateral, sub-regional, regional and inter-regional arrangements ongoing and in discussion will work in our common interests.

At the top of China’s concerns is that the TPP seems to be a tool of provocation. Beijing felt the chill when Secretary of State Hillary Clinton proclaimed that the TPP is a valuable agreement. After this year’s violent political upheavals in the Middle East and some European countries, China is on alert about maintaining social stability to promote economic reform and openness. It is among the fastest growing and most innovative countries in the world and for both activities to continue China needs to protect its core interests, including social stability, and ensure there are no barriers to development. So the TPP’s new proposals on the internet and free data movement will be a serious concern.

Also, proposed financial services and regulations are unclear. In the original P4 Agreement, there is no detail built into the financial service articles. The U.S. has been interested in this field to gain access to service markets in the Asia Pacific. I believe this service should be open but there has not been enough information released after nine rounds of TPP negotiations. China has just shifted into a new stage of domestic reform and could not consider adopting unspecified conditions, particularly when global finances remain unstable.
The rates of tariff reduction will be another challenge. This is not an issue for the original P4 countries. China has fulfilled its commitments to the WTO in this area and implemented tariff reductions to 9.8%. It should have made efforts to further reduce the rate but it is unrealistic to completely open its doors in the short term and cut tariffs as low as the TPP requires. It needs time to adjust to its new domestic environment before acceding to TPP levels.

Also, domestic debates continue over the market activity of state-owned enterprises. Outside influences can be effective some times in China’s rigid economic system. When it joined APEC in the early 1990s, “outward processing trade” meant just transferring to China from APEC members. But now we have a different situation in that China is supplying huge shares of intermediate inputs into the production sectors of its fellow APEC members. WTO access has been a strong stimulus on China. Ten years have passed but it seems China needs a renewed external stimulus, mainly because state-owned enterprises have not only dominated resources but also controlled markets. A period of adjustment is therefore needed.

Most importantly, China wonders about the U.S.’s real intentions. As some American research has found, the initial TPP stages could provide less benefit for the U.S. than East Asia markets can supply. The Obama administration could not count on the TPP, for example, to double export growth. From a Chinese perspective, therefore, the U.S.'s focus on the TPP could be interpreted as part of its regional repositioning strategy which covers diplomatic and military forward deployments. If it comes true, the TPP would become a part of the U.S. strategy to get back into Asia. Such consequences should be evaluated before China applies for TPP access and be connected with TPP negotiation transparency issues. It is unbelievable that TPP negotiations are conducted so secretly that non-members can’t interpret the potential outcomes. The TPP is on track toward a regional integration process but APEC members know nothing. On these and other factors China, therefore, has to be concerned.

 

Cai Penghong is senior research fellow of Shanghai Insititutes for International Studies.