Even Without TPP, China's Trade Future with Asia is Bright
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Even Without TPP, China's Trade Future with Asia is Bright

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There hasn’t been much to cheer about in global trade these last few years. The Doha Round of multilateral trade negotiations has been comatose, if not dead. So a recent initiative to deepen trade relations among the countries bordering the Pacific, the Trans-Pacific Partnership (TPP), has been greeted with much applause and welcome relief as a step in the right direction. But while the TPP should be recognized and applauded for what it will be—an agreement providing increased rules-based certainty in trading relations among TPP members—it does not include China, the world’s second-largest economy and largest exporter and manufacturer. For Southeast Asia, that is important.

China’s size, location, and dynamism exert an inexorable gravitational pull that has made it Southeast Asia’s largest trading partner. And the TPP will probably not change the fact that, as the last twenty years have shown, markets and geography are the principal factors behind Southeast Asia’s economic integration with China. After all, trade and investment agreements can only facilitate market forces, not fight them. In the end, markets and geography will point Asia toward integrating first and only then will it be in a position to converge with the TPP.

East Asian trade integration began well before the recent proliferation of FTAs. Markets and geography drove Asia’s trade integration; policies arrived later to support it. The bulk on, a reflection of the rising importance of regional production networks in which different stages of the production process are undertaken in different countries. This allows firms to specialize, achieve scale economies, and locate where conditions suit them best.

At the same time, geographical proximity helps keep transport and communication costs low. It is no accident that trade with China has grown much faster for mainland—not maritime—Southeast Asia because of the former’s geographical proximity. Similarly, despite the absence of a bilateral FTA, India’s trade with China has grown rapidly—so much so that China has now become India’s second-largest trading partner.

The TPP will certainly not derail Asia’s intra-regional trade integration for a number of reasons. For one thing, Asia is likely to be the fastest-growing region in the world for the foreseeable future and to increasingly provide the bulk of incremental global demand. This means intra-Asian trade will continue to outpace trade with the rest of the world.

Countries in the region have also recently emphasized investments in transport infrastructure connecting Southeast Asian economies with each other and with China. That will further reduce the economic distance between Asian economies, especially in mainland Southeast Asia.

Then there are rising real wages and land prices in China and the appreciating real exchange rate of the renminbi. These trends will drive labor-intensive Chinese firms to eventually relocate in labor-abundant Southeast Asian economies, further contributing to integration through trade and investment flows.

And finally, given China’s external current account surplus, pressure is building for Chinese firms to increase outward foreign direct investment. Much of that investment is likely to be directed to neighboring Southeast Asian countries.

This deepening integration of trade and financial flows will undoubtedly need further policy support. But the answer is not more FTAs. Arguably, the “noodle bowl” of FTAs in the region has become more of a hindrance than a help. Administering myriad bilateral and multilateral rules and regulations adds to administration costs, hinders the efficient transit of goods across borders, and possibly even promotes corruption. Moreover, when constrained by FTAs, governments have resorted to behind-the-border policies to protect industries.

For Asia, then, the answer lies not only in fashioning a comprehensive regional trading arrangement that eliminates the need for multiple bilateral and multilateral FTAs but also in ensuring that such an arrangement lowers behind-the-border trade barriers. This will help shape and facilitate the vitality of markets and the power of geography in a vibrant and rapidly growing regional economy. And it will provide the platform for gradual convergence with the parallel evolution of the TPP.

Vikram Nehru is a senior associate in the Asia Program and Bakrie Chair in Southeast Asian Studies at the Carnegie Endowment.The author is grateful to Navtej Dhaliwal for research assistance. This article was originally published by the Carnegie Endowment for International Peace

 

Comments
14
April 6, 2013 at 00:43

john your country had been forgot how to made trade agreement now you use Tomahawk

JohnX
September 11, 2012 at 18:42

If you don't know, then read the trade agreements that China has with other nations.
 
That will teach you how.
 
Some Chinese are rather smart and manage to make agreements in thier benefit only.

Dan
August 18, 2012 at 00:26

Just ask yourself , Vic.  China with virtually  no domestic consumer market for its own products in the rainy days, no high-tech capaciity to move upwards , is still lagging at the lowest level of the value chain( labor-& resource- imtensive economy) whereas its export sector is faltering due to the EU debt crisis & the US'slowing economy, plus rampant bad debts, inflation & all kinds of bubbles, rising labor cost & internal instability etc.  where would Chinese economy be going , Vic?

vic
August 17, 2012 at 14:11

@Dan
If the mountain does not come to Mohammed, Mohammed goes to the mountain.  Question –  Is the TPP the mountain or Mohammed?

Dan
August 17, 2012 at 03:19

Vic,
Remember figures never lie. This is fact  not fiction .  Even  small countries like Vietnam, S.American or African countries have run  trade deficits when doing business with China. China's questionable way of flooding/dumping these domestic markets with  artificially cheap goods has helped kill off their domestic production & local jobs. China is currently notorious with its ne-colonialist policy in Africa & with its unfair trade practices (undervalued currency, export subsidies, import restriction,  domestic consumption repression etc.) with other key trading partners with no intention to play by the rules of the game. Some export-driven countries in Asia such as Japan, SKorea, Taiwan may have trade surplus with China thanks to their indirect exports to the US & EU markets via China (assembling/processing chains) as a middleman . But with the promotion   of true trade liberalization of TPP in Asia-Pacific, China will have to choose between '  joining the Agreement & playing by the rules to move up the value chain ' &  'being isolated & put aside as global outcast economically & diplomatically'. China's economic future will be largely dependent on its right choice

vic
August 16, 2012 at 07:34

@Dan
You forgot to mention that the whole of SE Asia runs a trade surplus in the China trade.  What is fair or unfair in trade?  For every buyer there is a seller; supply satisfies demand.  One must differentiate between news and propaganda by referring to basic economic principles as your filter.

vic
August 15, 2012 at 15:07

There is an old saying.  You need to have two metal coins inside your pocket to have the jingling noise.  It takes at least two to have a dispute.  As to who dominates, well it is, que sera, sera.  Meanwhile, trade continues to grow for the benefit of consumers.

vic
August 15, 2012 at 14:55

@JohnX
For every buyer, there is a seller, and vice-versa.  How do you skew trade?  You sound like one of those American public officials trying to gather attention by making senseless statements.

vic
August 15, 2012 at 14:49

One can see how 'desperate' the American government is.  It is Don Quixote charging against a windmill. The TPP is designed by America to exclude China from Pacific trade.  It is the Asian century, but Hillary prefers the phrase, Pacific century, in order to include USA.  But to exclude China from America's concept of Pacific century is really quixotic.

Dan
August 15, 2012 at 10:22

You'd better spare some time to laugh yourself.  China currently is in a severe  economic cirsis: exports faltering, real estate bubbles, bad debts, manufacturing overcapacity & a tiny consumer market unable to save the day, a middle income trap without enough high-tech skills to break through , environmental pollution, social inequality & unrest etc. All of these will faclitate China's coming down very soon. China's unfair trade practices have caused too much trouble for all of its trade partners from the US, EU, India, Brazil to countries in S.America &  Africa. All of these countries have run trade deficits with China ( VN:- $13.5 billions in 2011; the US: -$299 billions in 2011;  India : -$ 27 biliions in 2011; EU: -€ 156 billions in 2011; SAfrica;-$ 2.7 billions in 2011 etc.).China mostly imports raw materials from these countries & exports  unusually cheap manufactured goods to them!  This is surely not the fair trade  way in the  international   trading business.

JohnX
August 15, 2012 at 04:08

What is it with Chinese commentators?
 
They can't even discuss a trade issue without sticking a finger in anothers eye.
 
If China wants to focus on a fair 50% deal in that "we produce this and sell it to you and vice versa, then fine".
 
But if they want to skew trade deals to a 80/20% situation whereas they recieve a greater benefit in trade, such as we will only trade with you if we get this.
 
For example a trade deal similar to the one between China and Iran which is more favourable to China than Iran.
 
Though the TPP was not created by the USA and so those who came up with the idea need to still discuss with the USA, what needs to be fair. Its time for China to stay out until one can of worms has been sealed before the smaller participants of the TPP sort out how China can play a role.
 
Its not a reason to be a problem or not a problem. All trade that benefits each partner equally is fair, one that doesn't isn't. Its not complicated.

vninsider
August 15, 2012 at 03:02

The U.S.'s TPP has uterly failed from its design infancy on the paper. Non-starter. What is obviously ridiculous to almost ordinary people is TPP aims to exclude China. The knee-jerk reactions from the U.S. in its China's containment strategy justs shows its arrogance and lack of deep understanding of how the human forces interact and exist.
For example, Vietnam is a welcome member of TPP? Hm, Vietnam knows too well it will not comply with any IP rights because its people and companies clearly cannot afford US$200 for a Microsoft desktop operating system. They can easily buy the OS for $1 CD on the street market!  The same can be talked about ASEAN nations or elsewhere.
TPP theme park will silently fade away over the next few years, leaving China's dominance over Asia's economies with a last laugh on TPP's memories!

jracforr
August 15, 2012 at 02:16

Why would China undermine it's own prospects in South East Asia by engaging in needless maritime disputes with it's neighbors. The UN Law of The Sea Convention can address these issues without the hostility  and potential conflict that will arise, if done in an agressive manner. China need to learn from the mistakes of Imperial Japan , instead of repeating them. The world needs a stable, productive Asia , not another " Cold War ". China will obviously be a dominant power in the coming century, but to start that new era as an imperial  lion is as short sighted as it gets.If the supposed riches of the South China Sea is shared by neighbouring territories, how would that undermine China. Would they rather have poverty striken nations sending millions of illegal immigrants to China in the future, as is the case in the USA. China's potential need not be undermined by a few insignificant Islands in the Pacific it's like a giant fighting a kid for a piece of candy, to prove he is a giant it suggests  emotianal insecurity not confidence, we all can do better than.

vic
August 14, 2012 at 05:36

As Chinese wages head upwards, firms with labor intensive operations are already shifting operations from China to other "chopstick" countries.  The main recipient of the transfer is Vietnam.  Taiwan traders and operators often prefer "chopstick-using people" because of their manual dexterity.  While not a chopstick country Philippines is down the totem pole because of its pechant for industrial disputes created by self-serving labor activists.  The Philippine government must get its act together to attract badly needed employers, and must realize that its style of democracy is not exemplary.
The American-sponsored TPP is noted for its exclusion of China.  As Asian trade is predicated on Asian trade vitality, it is not dependent on any American-inspired trade scheme.  American FTAs carry a heavy price for developing economies – intellectual property rights, in the form of patents, carried to the extreme (e.g. ask India to define generic drug).

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