What Will the TPP Mean for China?

On Oct. 5, the United States, Japan and ten other countries concluded negotiations on the Trans-Pacific Partnership (TPP) — the largest regional trade accord in history, and one that does not include China. If approved, the agreement will set new terms for the nearly $28 trillion in trade and business investment between the parties to the deal. In this ChinaFile conversation, experts discuss how the TPP may affect China and the future of U.S.-China relations.

Barry Naughton, the So Kwanlok Chair of Chinese International Affairs at the Graduate School of International Relations and Pacific Studies at the University of California, San Diego:

The TPP is a big deal, in all senses of the word. It is the most important trade deal negotiated in over 20 years, and it also represents a new effort to agree on a range of “behind the border” regulatory issues that go well beyond traditional trade issues. It is huge and complex and, inevitably, almost everybody can find something in it to dislike.

What does TPP mean for China? Until about three years ago, China routinely denounced the TPP, holding that it was part of an effort to contain China. However, China has more recently dropped its blanket opposition, and taken a more nuanced “wait and see” attitude. On a number of occasions, Chinese spokesmen have indicated that although they were not ready to meet the demanding requirements of a potential TPP agreement today, they might be ready and willing to join in a few years. Nevertheless, the actual conclusion of a TPP agreement — assuming it is in fact ratified by the main parties — will confront China with a series of new challenges and opportunities.

First, the TPP shows the United States and Japan exercising leadership, stepping out ahead of the global community in their willingness to negotiate a new set of rules and obligations. This dynamism presents challenges to China. It creates the possibility that the future rules for the global economy will be written under predominant U.S. influence, in the same way that the current rules have been. That makes China extremely uncomfortable, and it also pressures China to come up with alternatives that will be attractive to its neighbors while also serving its own interests.

Second, the TPP shifts economic balances and alliances within Asia. The TPP greatly increases the likelihood that Japanese Prime Minister Shinzo Abe will carry through on Japanese economic reforms, therefore making economic revival there more likely. The TPP will pull Vietnam (especially) and other signatories economically closer to the United States, and thus reduce Chinese economic preponderance. Given that South Korea is likely to quickly join in any completed TPP agreement, these shifts can have a long-run economic impact on China.

Third, TPP increases the pressures within China for more decisive economic reforms. China launched the Shanghai Free Trade Zone (FTZ) two years ago, partly in order to pilot measures of external liberalization that would be useful in a new round of reform. The possibility that TPP would be agreed to was a consideration, and part of the impetus for the Shanghai FTZ. However, the FTZ has so far under-performed expectations. Now, the new trade agreement will present officials with a clear benchmark of global best practice. The TPP will give advocates of economic reform within China a new argument to support more substantial opening measures after a bad year.

The TPP challenges China to up its game in economic opening, regulation, and economic diplomacy. If China chooses, TPP can be the catalyst for a new round of global engagement that China sorely needs.

Arthur R. Kroeber, managing director of GaveKal Dragonomics and editor of China Economic Quarterly:

For the most part I concur with Barry about the scale and importance of the TPP, and the challenges it poses for China both economically and strategically. I’m not sure I agree, though, that it will do much to “reduce Chinese economic preponderance” in the region. That preponderance is driven by China’s sheer size, its continued growth — which though slower than in the past is still faster than that of most other Asian economies — and its increasing centrality in global supply chains. Moreover, China has its own strategy for increasing its influence, through the (AIIB) projects under the “Belt and Road” umbrella, which will be funded by Chinese policy banks and the Chinese-led Asian Infrastructure Investment Bank. The impact of the Belt and Road initiative will likely be felt more immediately and concretely than the effect of the TPP, many of whose features will phase in slowly over several years.

The TPP illustrates a dilemma for U.S. policy in the Asia-Pacific. On one side, Washington seeks to counterbalance China’s rising power by strengthening its military relationships with its regional allies, tilting in favor of southeast Asian countries in their maritime disputes with China, discouraging its friends from participating in Chinese initiatives such as the AIIB, and pursuing a massive trade agreement that leaves out the region’s and the world’s biggest trading nation. On the other side, American leaders reiterate that they have no desire to contain China (rightly seeing such a strategy would fail), and argue that deeper engagement, rather than confrontation, is the right way forward in U.S.-China relations.

This stance is borderline incoherent, and it’s understandable why many Chinese see it as duplicitous. Washington’s words are all about constructive engagement, but its deeds mostly smack of containment. At the root is a deep ambivalence about whether or not the United States should accept China as an equal. If it does, then it must also accept that China will build a sphere of influence and regional arrangements that exclude the United States. If it does not, then it must accept that in fact if not in name it is pursuing a strategy of containment. Such a strategy heightens the risk of armed conflict.

For the moment, China and the United States still mostly conduct their relations on a basis of economic pragmatism rather than strategic rivalry. But the ground is rapidly shifting. The completion of the TPP sharpens the question of how the United States and China will share power in the Asia-Pacific, but provides no answer.