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Beware the Myth of Warring US-China Trade Pacts
Image Credit: Official White House Photo

Beware the Myth of Warring US-China Trade Pacts

 
 

With the annual Asia-Pacific Economic Cooperation (APEC) summit kicking off this week in Peru, the myth of Asia’s trade wars has again reared its ugly head.

This time around, the narrative circulated among some media outlets is that with the apparent demise of the U.S.-led Trans-Pacific Partnership (TPP) trade agreement with Donald Trump’s victory in the U.S. presidential elections, China may look to push one of its own agreements through – mistakenly read to be the Regional Comprehensive Economic Partnership (RCEP) or the Free Trade Agreement in the Asia-Pacific (FTAAP) – in what is perceived to be a zero-sum competition between Beijing and Washington.

Never mind that in spite of the flood of commentaries about what Trump means for Asia, his own advisers caution that we are unlikely to find out much in the way of specificity until well into 2017 (See: “What Will Donald Trump’s Asia Policy Look Like?”). Or that TPP’s demise is actually still far from assured, contrary to the countless obituaries that already been written (See: “How TPP Can Survive Trump”). We really need to set the record straight on trade pacts in the Asia-Pacific.

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Only a fool would deny that competition going on between the United States and China in the Asia-Pacific, including in the economic realm, is real. Early indicators suggest that we will certainly see another episode of an ongoing tussle about the pace and shape of regional economic integration at APEC this week, with China aiming to forge ahead quickly amid a languishing TPP and lingering uncertainty about the economic policy of a new Trump administration.

But to get a real sense of the mix of collaboration and competition going on in the region in the trade space in particular, we also need to get a few things straight about what these agreements are, how they relate to each other, and what is competitive about them and what is not.

Understanding TPP, RCEP, and FTAAP

RCEP

First, some basics are in order. RCEP, as seasoned Asian observers know, is not some new, Chinese-led agreement, but merely the harmonization of existing, overlapping FTAs between the ten members of ASEAN –Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam – and the six individual partners that already have a trade pact with the regional grouping – Australia, China, India, Japan, South Korea, and New Zealand. Negotiations were launched at the East Asia Summit in Phnom Penh back in November 2012, which is an ASEAN-led institution. Indeed, to the extent that RCEP is led by anyone, it is ASEAN, not China.

The United States is excluded from RCEP not because of some Chinese grand design, but simply because it does not have an FTA with ASEAN, which is largely due to the high standards that Washington would require that few Southeast Asian countries would be able to meet at this point. If the United States did want to join RCEP after it concludes an FTA with ASEAN at some point in the future, like any other ASEAN FTA partner there are no regulations prohibiting it from doing so.

As you can tell, though RCEP is large and inclusive, the great diversity among the members – from trailblazers like Singapore to laggards like India and Indonesia – means that the quality of the one consolidated deal will likely be modest, to put it politely. And indeed, that is what has been ensuing in the RCEP negotiations so far, which have been frustratingly slow and repeatedly delayed.

TPP

The TPP is also technically not a U.S.-led agreement, historically speaking. While the U.S. entry into the agreement, along with Japan’s, added significant heft to the TPP and garnered global attention and Washington since has been leading efforts to get it to the finish line, it actually started off as the rather unwieldy Trans-Pacific Strategic Economic Partnership (P-4 for short) agreement between Brunei, Chile, New Zealand and Singapore before Washington joined after some initial hesitation. The TPP now includes 12 members as its original signatories – the United States, Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile and Peru.

China is excluded from TPP not because of some U.S. grand design or containment plot, but because at this time, it, like other countries (including U.S. allies who had expressed interest in the pact like Thailand and the Philippines) does not meet its standards. In other words, while Washington is unable to join RCEP because its standards are too low, Beijing is unable to join the TPP because the standards are too high.

Furthermore, just like the United States, like any other ASEAN FTA partner, could join RCEP one day once it inks an FTA with ASEAN, China too, just like any other interested Asia-Pacific nation, could join the TPP once it meets the standards. Indeed, China, for all the initial huffing and puffing that ensued after the initial rollout of the TPP, has already been considering the possibility of doing so.

As a smaller, much more exclusive club, the TPP’s standards are quite high. Apart from the usual provisions in any traditional trade pact including RCEP, the TPP includes chapters that break new ground in fields like state-owned enterprises, the digital economy, and the environment. As I’ve explained, previously, that’s what U.S. policymakers mean when they say that the agreement is about writing the rules of 21st century trade. That’s also why many countries at this point are still far from meeting the standards that exist in TPP and the ratification progress has moved slowly.

FTAAP

Though the Free Trade Agreement of the Asia-Pacific (FTAAP) has been mislabeled a Chinese-led pact or a Chinese plot to keep America out of the region in recent years, in fact, it is neither. FTAAP, formally proposed within APEC back in 2006, was a vision for a long-term, comprehensive FTA that would eventually cover the entire Asia-Pacific. In light of the proliferation of bilateral and regional FTA’s, FTAAP would rationalize all this liberalization and mitigate the so-called “spaghetti bowl” effect. It is worth noting that at the time, the United States was in fact one of its strongest proponents.

FTAAP began as sort of an end goal or ideal for regional economic integration that would build on the various regional undertakings on the way, including RCEP, TPP and others. But in recent years, there have been more serious conversations within APEC about beginning to turn this vision into reality by taking concrete steps.

There’s some disagreement about the specifics, which I’ll get into later. But in sum, the vision of FTAAP itself, far from being led by anyone or exclusive to any one trade agreement, is about a comprehensive vision for overall regional economic integration.

Complementary or Competitive Visions?

Now that there is a basic understanding of what these proposed agreements are, we can consider the extent to which they are complementary or competitive.

A good starting point is to view both agreements relative to each other in terms of FTA standards, with the TPP being the ceiling, and RCEP being more of the floor. Though this is undoubtedly an exaggeration, it does give a more accurate, holistic view of how Asian policymakers view these various arrangements, instead of boilerplate “positive-sum” or “zero-sum” discussions or comparisons that are not rooted in reality.

Following that floor-ceiling depiction, some countries like India, which is not even a member of APEC, are, frankly speaking, still close to the floor, viewing even RCEP as being a difficult task to accomplish, let alone the TPP. Others, like Singapore, are already at the ceiling, with the city-state having both an FTA with the United States and being part of both RCEP and TPP, while others, like Vietnam, also a member of both agreements but without an FTA with the United States are reaching for it and making significant progress in doing so.

Complementarity

Given this depiction, we can say a couple of things about how complementary or competitive things are in the Asian trade space with respect to these agreements. On the complementarity side, at the most basic level, countries that are members of both RCEP and TPP – for now, Brunei, Japan, Malaysia, Singapore and Vietnam – can enjoy benefits of both, with their firms entitled to TPP tariff preferences when it comes to the United States and RCEP preferences when it relates to China or India.

Second, given that these overlapping countries – some of them quite influential – are in both agreements (and this list may yet grow even bigger) there might be opportunities for narrowing the gaps between them substance-wise. The idea would be for certain forward-leaning overlapping countries to raise the standards of RCEP to set a higher bar, moving it closer to the ceiling and further off the floor. That will help facilitate all countries eventually moving to the desired ceiling.

Third, complementarity can be furthered through overall agreements rather than specific overlapping members. To take just one example, it is no coincidence that the rise of the TPP had initially sparked greater urgency among some countries to finalize RCEP negotiations: no country wants to be left behind when it comes to regional economic integration.

Fourth and lastly, as mentioned earlier, there is still the possibility that both RCEP and the TPP, along with other trading arrangements, will eventually be part of an overarching comprehensive FTAAP in the long run.

Competition

But it’s not all moonlight and roses. There are competitive aspects to these trading arrangements too.

Not all of that competition is about the United States and China, and some of this can actually be quite healthy. To take just one example, one of the reasons why other Southeast Asian countries have been mulling the TPP and other alternatives is that they are worried about the diversionary impacts once the pact kicks in, with their neighbors getting benefits that they do not and becoming more economically competitive than they are. That can have a catalyzing effect not just on regional economic integration, but also on the domestic economic reforms in the countries themselves that are needed for them to be more competitive in the global economy.

But there is also some U.S.-China competition here that is quite real, and it is rooted in some basic geoeconomic realities. As a developed economy that requires high standards in free trade agreements, the United States has struggled to find a way to be a bigger part of Asia’s ongoing regional economic integration in recent years the way China has. Though the United States has concluded individual FTAs with more developed Asia-Pacific nations like Australia, Singapore and South Korea, unlike Beijing, Washington is not able to sign an FTA with ASEAN as a bloc because the majority of these Southeast Asian states would not, as of now, meet its standards.

In response, U.S. policymakers have tried to fashion arrangements that would help the countries who fall below these high standards to eventually get there, thereby encouraging what might be termed a race to the top and also widening the future opportunities for American engagement. We have seen a number of these over the years, from the short-lived Expanded Economic Engagement (E3) initiative that sought to form the building blocks for an eventual U.S.-ASEAN FTA, to the U.S.-ASEAN Connect Initiative which has some aspects that are in this spirit too. The TPP is also another means to accomplish this goal of catalyzing a race to the top, or, as U.S. policymakers would put it, writing the rules of 21st century trade.

For China, though the TPP might be something it could aspire to join one day, for now the agreement’s completion would mean both its exclusion, since it is far from the standards required, as well as Washington’s greater inclusion in shaping the region’s economic rules in a direction favorable to U.S. interests. Hence, though China could adopt a wait-and-see approach to joining the TPP once it is eventually completed, it does not necessarily have an incentive to see the TPP concluded now or at all, especially when the agreement is viewed from a zero-sum lens of competition with the United States.

It was little surprise, then, that we saw China call for the speeding up of FTAAP during its chairmanship of APEC back in 2014. For Beijing, as the TPP has been languishing, speeding up agreements that it is part of that exclude Washington, like RCEP, and quickening the pace of overall regional economic integration, would potentially deny Washington a much-needed entry point into this process and cement the image of China as the main vehicle for it. That has in turn fed fears in the United States and elsewhere about Beijing making strides towards regional hegemony, thereby distorting RCEP and FTAAP into Chinese-led initiatives, which they are not.

The China-chaired APEC 2014 ended with countries broaching the idea of a study on FTAAP as part of the so-called Beijing Roadmap to the FTAAP. Reports ahead of this year’s APEC meeting in Peru suggested that countries will be seeking to advance this even further, even as the prospects for TPP look quite dim. China has been happy to feed this narrative, as it makes it look more like a champion of free trade than the United States, whose president-elect has harbored fiercely protectionist sentiments for decades.

This competition shows few signs of ebbing anytime soon. But though we need to be aware of it, we also ought to keep things in perspective given the complementarities that also exist as well as the positive-sum vision of regional economic integration that many other countries have. Bear that in mind the next time you read the simplistic narratives in the media about Asia’s warring trade pacts, or U.S.-China economic rivalry. Reality, as it often is, is much more complex.

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