Pacific Money

China and the TPP, Part II

A further look at why the “Trojan horse” option might appeal to China when it comes to the TPP and TiSA.

Yesterday, Pacific Money wrote about China’s “Trojan Horse” option for the Trans-Pacific Partnership. Today, we follow up with a little bit more analysis of how these trade deals look from China’s point of view.

In the previous post, this blog highlighted that some feel China may be pursuing a kind of “spoiler” strategy with regards to its apparent recent interest in joining the Trade in Services Agreement (TiSA) and even possibly the TPP negotiations. We noted that China had recently almost single-handedly ruined the WTO’s Information Technology Agreement (ITA) negotiations by trying to get an unreasonably large number of products excluded for the benefit of its domestic industries. Hence, some are assuming that China may be planning a similar strategy with regard to the TiSA or TPP agreements.

For the countries currently engaged in these two proposed frameworks, China’s joining and subsequent spoiling of the negotiations (note that here “spoiling” could mean either watering down the conditions or tying up negotiations for years, even indefinitely) would be an extreme negative, frustrated as they are with the failure of WTO-sponsored agreements to make any significant progress in recent years. The TPP and TiSA, to some extent, represent a “if you can’t persuade ‘em, then ignore ‘em” strategy for the negotiating members, a trade “coalition of the willing,” if you will.

For China though, things look quite different, and indeed attempting to derail or alter these negotiations is perfectly natural and understandable. For example, if China were to find itself excluded from a successful and extensive TPP or TiSA, then it would be negatively affected.  There will almost certainly be benefits for any player if they were to base production or service facilities within a member economy (thus being able to sell more competitively within other member economies tariff-free or at reduced rates). Already suffering from diminishing competitiveness, China is keen to avoid any further hits to its trade position.

So China does not want to be excluded, but on the other hand, being included in an extensive agreement with tough requirements would be bad for Beijing, too. China is still far behind more advanced economies in the quality, extent and abilities of its nascent services sector. Equally, many of its companies depend on government support or benefit from facilities that would be hit hard by current TPP conditions.

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Hence China faces somewhat of a dilemma. If the TPP or TiSA go ahead successfully without China, then it will lose out. On the other hand, if China joins the TPP or the TiSA as they are currently being framed, then it will again suffer (as would have been the case if the ITA negotiations had gone ahead). In an ideal world then, China would like to see both sets of negotiations either fail or become bogged down, WTO-style, for a decade or more. Failing that, if they were watered down to the extent that they were not significant, China could happily join or not without concern.  

These failures may occur naturally, without China running interference from the inside. After all, the TPP is wide-ranging and already contains some potentially difficult sticking points (South Korea, Japan and the United States find it hard to agree on agriculture and automobiles, for example). The TiSA is probably less contentious, but it does contain a structurally and geographically diverse set of economies: the EU, the U.S., Israel, Australia, Canada, Chile, Taiwan, Colombia, Costa Rica, Hong Kong, Israel, Japan, Liechtenstein, Mexico, New Zealand, Norway, Pakistan, Panama, Paraguay, Peru, Republic of Korea, Switzerland and Turkey.

Of course China has not yet actually entered into the TPP or TiSA negotiations, and may be prevented from joining the latter even if it were to try and do so. So for now, we simply look at the logic of why China might pursue such a course of action in the future. From Beijing’s point of view, something needs to be done, and whether it acts from the outside or the inside is less important than this fact.