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Trading Beijing for a Trans-Atlantic Partnership?

Mar 01 , 2013

The past few weeks have seen a deterioration in Sino-US relations on multiple fronts. Several major policy changes from Washington will require prudent response from Chinese policymakers. Most notably, the United States appears to be pursuing a new trade paradigm that should raise concerns in Beijing. In the wake of allegations linking recent cyber-attacks on American networks to a unit of the People’s Liberation Army, chilly relations are jeopardizing constructive discourse between the United States and China on matters of bilateral trade.

According to the US Census Bureau, annual Sino-US trade surpassed $500 billion in 2012 – a significant increase over previous years. This figure, albeit unprecedented, conceals new fissures opening up between the two nations. The United States has erected trade barriers to curb the inflows of high tech products like solar cells and low tech goods like stainless steel sinks. US trade officials contend that some Chinese products are being sold at high dumping margins that warrant a protectionist stance. The new barriers have not been without effect, either. China’s solar export earnings fell a reported 40 percent between 2011 and 2012 after the US imposed tariffs of up to 249.96 percent on the industry. Experts predict that the United States will push more anti-subsidy investigations, protests regarding intellectual property theft and the blocking of foreign investment capital throughout 2013. But even as Washington snubs China, US policymakers are seeking new commitments to trade liberalization elsewhere.

As if to send a clear message that China is not America’s preeminent trading partner, President Obama announced his proposal for a US-EU free trade agreement during February’s State of the Union Address. The agreement would encompass almost 45 percent of the world’s GDP and over a third of global trade. Since existing tariffs are relatively low, negotiations would focus on increasing the volume of trade by setting common standards for products like automobiles and GMOs. 

While these measures will be difficult to implement, support for closer trade relations is stronger than ever on both sides of the Atlantic. The United States and the European Union have often been rivals when it comes to making trade policy, but reluctance from both parties to broker a partnership has softened. EU leaders’ enthusiasm stems primarily from a desire to shore up the region’s economy as the Euro Crisis continues. Washington is looking to promote job growth by boosting exports – the EU imports more than twice as much from the United States annually than China does.

In the meantime, the president is making headway in discussions regarding the Trans-Pacific Strategic Economic Partnership (TPP). At a meeting between President Obama and Japanese Prime Minister Shinzo Abe, the two leaders conferred on Japan’s participation in the agreement, which could be confirmed as early as March. As Japan would be by far the most important US trading partner to join TPP, securing Japanese ascension is one of Washington’s top priorities. Although previous administrations led by the Democratic Party of Japan and heavy resistance from the agricultural sector cast doubt on the future of the deal, a plurality of Mr. Abe’s ruling Liberal Democratic Party supports participation. With polls showing that a majority of the Japanese public now favors TPP, the LDP will likely throw their weight behind the agreement to rally support in advance of July’s House of Councillors election.

Popular support for TPP in Japan can be attributed to a number of issues, from the most obvious economic incentives to matters of national security. Some in the Japanese media have read the swell of public support as demonstrating favor of closer ties with the United States, as tensions run high from North Korea’s recent nuclear test and the mounting territorial dispute between Japan and China. Energy will also be a major factor in Japan’s decision; natural gas from the United States will be vital in maintaining Japanese industrial competitiveness as the future of the nation’s nuclear reactors is debated.

Should the US-EU FTA and TPP both succeed, the flow of global trade would be almost irrevocably altered. American exporters will see the scope of their markets rapidly expanding as decreasing tariffs and international industry standards facilitate the movement of goods and services across both the Atlantic and Pacific oceans. The prospect of developing nations being given preferential treatment and inroads to the US market is of even greater concern to China. Vietnam has already been successful in eroding much of China’s competitive advantage in the textile industry; its participation in TPP is expected to expedite that shift.

Beijing must position itself to take full advantage of the rising tide of trade liberalization. Talks regarding a trilateral FTA between China, South Korea and Japan are scheduled to begin in early April, and Chinese officials remain optimistic about the ASEAN-led Regional Comprehensive Economic Partnership (RCEP). The successful negotiation of these agreements is central to China’s economic future but the trilateral deal has already been dogged by diplomatic issues, the Diaoyu/Senkaku dispute in particular. It is essential that Beijing come to the negotiating table with an open mind, rather than allowing a diplomatic row with Japan to sour the deal. Demanding a pound of flesh from Tokyo during the discussion of terms will be self-defeating if the accord founders.

Given the timing of the United States’ new approach to global trade, it seems to be a measured response to recent developments in the Sino-US relationship. Trade friction remains a key concern between China and the United States, and cyber-attacks have risen to the fore as the most complex and divisive issue plaguing the bilateral relationship. President Obama’s segue from cyber-attack defense strategy review into his proposal of the Transatlantic FTA during the State of the Union Address spoke volumes; the juxtaposition of the two issues suggests that they are clearly related.

Although the president’s bold trade initiatives may appear retaliatory vis-à-vis China, they are ultimately good faith accords being negotiated with third-party nations, which leaves Beijing with little hope of hindering their progress. The United States should remain receptive to overtures of trade liberalization from the Chinese, since bilateral trade reform would almost certainly be of mutual benefit. It will be up to Beijing to make the first offer of favorable terms – Washington is already awash with tantalizing alternatives.

Colin Moreshead is a freelance writer living and working in Tokyo. His research focuses primarily on East Asian trade relations and exchange rate policy.

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