BEIJING: The 11 remaining members of the Trans-Pacific Partnership (TPP) decided in May to move forward with the trade deal without the United States. But a major issue is whether China should be invited to join the TPP.
Technically, the TPP is not very attractive to China. China has been the largest trading partner to seven of the TPP members including New Zealand, Australia, Japan, Vietnam, Malaysia, Chile and Peru. China has also been a top trading partner to the rest of the TPP members, including Brunei, Canada, Mexico and Singapore.
China has also already signed a free trade agreement with Chile (2006), New Zealand (2008), Peru (2009), ASEAN (2010) and Australia (2015). China has also been negotiating a free trade agreement with Japan and South Korea.
There is also significant overlap between the membership of the Regional Comprehensive Economic Partnership (RCEP) and the TPP-11, comprising the 11 remaining countries without the US. The TPP-11 has four members of ASEAN (Brunei, Malaysia, Singapore and Vietnam) but the RCEP includes all ten members of ASEAN. New Zealand, Australia and Japan are members of both the TPP-11 and the RCEP.
Strategically, the TPP represents a major opportunity for China. As the largest exporter and with the second largest economy in the world, China is very well-positioned to assume leadership for this regional trade deal.
OPPORTUNITY FOR THE TPP-11
Likewise, China’s potential candidacy as a member of the TPP also represents a major opportunity for the TPP-11.
With the US as a member, the TPP boasted a combined GDP of US$27.85 trillion (37.5 per cent of world GDP), a population of 817 million (11.1 per cent of world population) and total trade of US$9.58 trillion (24 per cent of world trade).
Without the US, however, the TPP-11 is left with a combined GDP of US$9.82 trillion (13.2 per cent of world GDP), a population of 496 million (6.8 per cent of world population) and total trade of US$5.54 trillion (13.9 per cent of world trade).
With China as a new member, the TPP could given a fresh boost as a regional trade deal with global significance. The TPP-11 plus China would have a combined GDP of US$20.98 trillion (28.3 per cent of world GDP), a population of 1.87 billion (25.5 per cent of world population) and trade of US$8.99 trillion (22.5 per cent of world trade).
Since Chinese leaders have been advocating for free trade and globalisation, it would be a good idea for the TPP-11 to use this opportunity to socialise China to the fundamental principles of free trade, intellectual property and environmental protection embodied in the TPP agreement.
RISKS AND OPPORTUNITIES FOR GLOBAL TRADE
If China joins the TPP-11 on China’s terms, there may be some risks involved. First, Chinese state-owned enterprises (SOEs), which have the backing of the state will be in direct competition with small- and medium-sized enterprises (SMEs) from the TPP-11 countries.
The TPP requires that SOEs do not receive subsidies for international business expansion. But China’s 150,000 SOEs form the bedrock of the Chinese economy, and most of China’s largest companies are SOEs. If China joins the TPP with the condition that Chinese SOEs are allowed to operate with no restrictions, SMEs from the other TPP countries would be drastically disadvantaged.
Second, although the TPP sets out goals to ensure worker protection and safeguard labour rights including allowing workers to form unions, TPP members would have to allow China to manage its labour issues through an organisation affiliated with the Chinese Communist Party. Although China’s labour laws allow freedom of association, the Chinese government requires all trade unions to be affiliated with the All-China Federation of Trade Unions, an agency of the Chinese Communist Party.
Third, with China’s entry as a new member without having undertaken reforms on intellectual property rights, the TPP’s Investor-State Dispute Settlement, a system under which an investment company can seek compensation from a host country if its intellectual property rights are violated, could be seriously compromised.
Fourth, with a China in which the government doubles as both a player and an arbiter in China’s market, the basic philosophy of free competition within the TPP could be undermined.
Fifth and most fundamentally, with a China in which the Chinese Communist Party continues to hold great power over all matters of policy from economic planning to social welfare management to foreign policy, the TPP-11 would face significant political risks, when there is a leadership change that is accompanied by significant policy reversals.
GOOD FOR CHINA AND FOR FREE TRADE
If China becomes a member of the TPP on TPP’s terms, however, the TPP would become a good example of free trade on a global scale. For one, the regional trade deal would provide consumers in its member states with higher quality goods and services at competitive prices, promote countries' comparative advantages at various stages of the production chain, and facilitate economic growth of these countries.
The TPP would also better protect intellectual property rights and the environment, and help minimise the side effects of hyper-growth for China.
Such outcomes would be in line with China’s long-term development strategy to establish itself as a global leader of free trade with comprehensive reforms implemented in a wide range of areas, including China's economy, political system, intellectual property regime and environmental protection. There are already voices in China calling for Chinese leaders to seize this rare opportunity of the US’ absence to start negotiations for China’s accession to the TPP.
Most significantly, with a reformed China at the helm that is willing and capable of assuming global leadership and providing global public goods, the world would hopefully avoid a “Kindleberger trap”, a scenario in which a lack of global leadership could lead to disastrous global consequences.
The critical issue is whether it is more likely that China would shape the world with its existing practices, or be transformed into a global leader of free trade with higher trade standards, if China joins the TPP.
Currently, several members of the TPP-11 such as Australia and New Zealand have already extended invitations for China to join the TPP.
It will be good if the TPP-11 takes the opportunity to engage China and in the process, shape a China that benefits the Chinese people, the larger TPP region and global trade.
Dr Bo Zhiyue, a leading authority on China’s politics, is founder and president of the Bo Zhiyue China Institute, a consulting firm providing services on China to heads of governments and CEOs of multinational corporations.