China and TPP: Interesting Times in the Year of the Monkey
By Dafydd Williams, Senior Director, Advisory Services
After years of negotiation, the Trans-Pacific Partnership (TPP), a massive new trade agreement, was signed in February this year by 12 nations. If it is ratified — a big “if” — it will bring important economic benefits to member nations, which include the US, Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile and Peru — but not China.
At first glance, it may seem surprising that the world’s second-largest economy isn’t participating. But if you take a deeper look at the pact and its requirements, the reasons become clear. They also shed light on China’s ambitions and the other initiatives it is pursuing to support them, even as the future of the TPP itself becomes increasingly cloudy.
A Western Agreement
With its emphasis on intellectual property rights, insistence on an open internet, and high standards for e-commerce and government procurement, the TPP has a decidedly Western orientation. In fact, some even consider it to be an instrument designed to contain China. In a recent Washington Post opinion piece supporting the TPP, President Barack Obama wrote that when it comes to the rules governing international commerce, “the United States, not countries like China, should write them.”
China does not want to play by US rules. To meet the trade agreement’s procurement standards, it would have to change the structure and operations of its many powerful state-owned enterprises. The country also censors the internet and controls e-commerce.
Though China stands to lose $35 billion a year by not joining the TPP, it is not complaining about the rules or begging for an exemption. Instead, it is pursuing an ambitious agenda of its own.
In January, just ahead of the TPP signing ceremony, China launched a new international development bank, the Asian Infrastructure Investment Bank (AIIB). Widely seen as a rival to the US-led World Bank and the International Monetary Fund (IMF), the bank is expected to lend out $10 billion to $15 billion a year to start. Despite being seen as a snub to the West (though China denies that intention), the bank has added the UK, Germany, France, and Italy to its list of 57 members, which also include Russia, the UAE, and Saudi Arabia — but not the US.
The US is concerned that the Chinese-led bank’s structure will fail to protect the environment, safeguard human rights and prohibit corruption.
China has a history of making bad loans and is currently carrying a trillion dollars of losses, threatening its economy. The IMF — which last year accepted China’s renmimbi as a world currency, cementing the country’s standing as an economic power — recently issued a warning on risks arising from the country’s debt burden, saying its problems could spill over into the world economy.
One Belt, One Road
China is also leading support for other trade agreements, including the Free Trade Area of Asia Pacific (FTAAP) and the Regional Comprehensive Economic Partnership (RCEP), an inter-Asian agreement. Each of these deals is larger than the TPP.
But China’s most ambitious project is the One Belt, One Road initiative (formerly the Silk Road project), launched in 2013.
The “Belt” part of the project is a network of roads, railroad lines, and oil and gas pipelines that will span over 60 countries, stretching from central China through Central Asia, ultimately reaching Moscow, Rotterdam and Venice.
The “Road” is a series of seaports planned for Asia, East Africa and the northern Mediterranean.
Who will fund this massive project?
The AIIB is expected to contribute “a considerable share” of its $100 billion in lending, with $900 billion more coming from the China Development Bank. In total, China has said it would spend $1 trillion of government money on the project, though how it will accomplish that, given its current debt level, is not known.
But the work is starting. Chinese companies are building a high-speed rail network in the Greek port of Piraeus that is expected to extend to Germany. China is also building a nuclear reactor in Pakistan, with plans for a highway and a coal mine in the area. And members of the AIIB recently held their first meeting, in Beijing, where they discussed financing other One Belt One Road projects.
South China Sea
Separate from the One Road initiative, China has been staking a claim in the South China Sea, through which one-third of global trade flows. Ownership of the tiny islands that dot the sea’s 1.4- million-square-mile surface has long been disputed, with Taiwan, the Philippines, Malaysia, Indonesia and Vietnam, as well as China, claiming territory and building artificial islands.
But China has gone to the greatest lengths, installing airstrips for fighter and surveillance jets on islands it created and causing tension with the US. In addition to establishing bases, China may also be interested in the 11 billion barrels of oil and natural gas the area is thought to contain.
Brexit and the TPP
As China pushes forward with its expansion projects, US support for the TPP may be dwindling in the post-Brexit political climate. Though the UK is not in the TPP, its decision to separate from the European Union exemplifies a growing protectionist trend that is also gaining momentum in the US.
President Obama, though a strong supporter of the TPP, is a lame duck. Hillary Clinton, though she promoted the deal as Secretary of State, said she opposed it last October, just before the first Democratic primary debate. On the left, former presidential candidate and Vermont senator Bernie Sanders recently said the TPP "threatens our democracy." On the right, Donald Trump, who promises to appeal NAFTA if elected, has called the TPP “a continuing rape of our country.” The Teamsters union, which launched a “Stop the TPP” campaign in 2013, remains adamantly opposed.
Without US ratification, the TPP has no chance of becoming a reality. However, as the Brexit vote showed, the winds of politics blow swiftly, and there may be surprises ahead for both China and the US as they navigate the ever-changing landscape of international trade. Whatever the outcome — and to butcher an ancient saying — we are living in interesting and fast-moving economic times.