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A Transpacific Window of Opportunity

Jan 08, 2019

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2018 was not a good year for globalization. The Trump administration continued to chip away at multilateralism and launched a trade war with China. Economic policy became increasingly driven by mistrust and zero-sum thinking. Fault lines emerged that could fragment the global economy for years to come.

Despite these dark clouds, the year ended with new promise for free trade. On December 30, a sweeping new high-standard trade accord came into effect that will cover 500 million people and some $10 trillion of global GDP. The 11-member CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) starts with Australia, Canada, Japan, Mexico, New Zealand, Singapore, and Vietnam. They will be joined by Brunei, Chile, Malaysia, and Peru once they ratify the deal.

This all seemed unlikely two years ago. On his first day in office, President Trump abandoned the pact’s previous incarnation, the US-led TPP, calling it a "ridiculous" deal that "deserved to die." Yet the resurrected CPTPP now stands as the most promising vehicle for free trade in the region, if not the world.

Ironically given its origins as the centerpiece of Obama's pivot to Asia, the CPTPP now may offer a way to boost China’s connection with its members instead of isolating Beijing after Trump abandoned it. Joining the high-standard CPTPP would also give China external impetus for the next phase of reform and opening – just as WTO entry did two decades ago. 

Considering the changing situation at home and abroad, we see rationale for China joining this new trade agreement. This opportunity to “kill two birds with one stone" may not last long.

Expanding the trade circle

Economic and demographic trends suggest that joining CPTPP would give China access to one of the world’s most dynamic regional markets in years to come. It also offers a free trade bridge to the Americas. Conversely, China faces losses due to trade diversion if it stays on the sidelines.

CPTPP is structured as a living agreement and its potential benefits will grow as new members join. Likely candidates include Indonesia, Korea, the Philippines, Thailand, and  Taiwan. The Peterson Institute for International Economics estimates that this expansion to a CPTPP-16 would raise income benefits for members to $489 billion. There is a chance the trade pact may spread even further; Tokyo has already invited the UK to join, and the new Japan-EU FTA could provide a basis for future European participation.

In addition to direct economic benefits, joining the expanded trade circle would signal China’s strong commitment to opening up and hedge against risks of de-globalization and anti-free trade sentiment caused by American unilateralism. In this vein, CPTPP could support “Belt and Road” efforts to coordinate the “hardware” of economic integration with a narrower focus on the “software” of standards and institutions.

With CPTPP now setting a precedent for future agreements, China can boost its influence over the evolution of trade norms by joining at an earlier date. The US is already missing out in this regard. Several TPP clauses Washington insisted on have already been suspended after its departure, including problematic rules on patent drugs and investor-state relations. 

A catalyst for reform

China’s WTO accession in 2001 played a valuable role in reform and opening. As well as access to export markets and foreign capital, it also gave an external lever to galvanize action and drive reforms.

Seventeen years later, China is a transformed country. GDP has increased 11-fold and its people have seen a dramatic rise in living standards. Yet the work of reform is far from being complete.

Just as WTO entry served as a catalyst for change in the 1990s, today, joining the CPTPP can help China meet its goals for the next chapter of reform and opening. CPTPP core tenets are well aligned with China’s development needs. For example, its emphasis on services matches the expanding role of tertiary industries in China’s economy, contributing close to 60% of growth in 2017.

Similarly, CPTPP principles for state-owned enterprises (SOEs) align well with China’s aims to develop the private sector and reform SOEs. This is evident in the concept of “competitive neutrality” gaining currency in Chinese policymaking circles.

As a new-generation trade agreement for the information age, CPTPP establishes a comprehensive framework for intellectual property protection. This fits with China’s innovation-oriented development and would support further progress in this field. Today, a growing number of Chinese firms derive global competitiveness from technology and expertise, such as Huawei, Tencent, and Alibaba. The CPTPP umbrella would support their continued global development, particularly given the growing headwinds faced overseas.

Overall, joining the CPTPP would help to ensure a level playing field for both Chinese private and state-owned companies at home and abroad.

A  window of opportunity

The launch of CPTPP coincides with warming Sino-Japanese ties, and Australia and Chile have already shown openness to China joining. Without the US, the pact lacks a huge consumer market that China can offer, strengthening Beijing’s position. Indeed, China is already the largest trading partner of eight out of eleven members, and existing FTAs with ASEAN, Australia and New Zealand lay some groundwork for integration.

However, these advantageous conditions may not last long. The US is working towards FTAs with Japan and Europe that may include the “poison pill” clause applied to the new US-Mexico-Canada Agreement. This outcome could effectively preclude US FTA partners from signing accords with China.

Talking of links to other agreements, some wonder how the CPTPP will mean for the Regional Comprehensive Economic Partnership (RCEP) which is under negotiation.

The two agreements are not mutually exclusive - seven countries are part of both. In fact, they could form complementary tracks to regional integration: the rigorous CPTPP for more advanced economies, and the less-demanding RCEP for developing Asian countries. Under this vision, China’s involvement in both agreements could help bridge the two projects at some point in the future, under the Free Trade Area of the Asia-Pacific (FTAAP) or some other mechanism.

If politics shifts and one day Washington decides to return to the CPTPP, the shared membership of China and the US will serve as an anchor for bilateral ties. If the US pursues another path, the CPTPP will remain a useful tool for China. 

See the wind, set the helm

China recently celebrated forty years of reform and opening. This period has seen remarkable progress but also twists and turns along the way. As President Xi said in his speech to commemorate the milestone, there is no textbook of golden rules to follow for reform and development.

Today, we are faced with mounting forces that threaten globalization. Many believe that events has been set in motion that will fracture the global economy.

The rebirth of the CPTPP may offer a different path forward, one that could be advantageous for the future of free trade. In charting a future course, we should be open to opportunity and pragmatic in taking advantage of the situation.

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