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Sunday, October 24, 2021

China throws a wrench into a transpacific trade pact

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China’s request to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (cptpp) landed on the desk of Damien O’Connor, trade minister of New Zealand, on September 16th. The location was a fitting nod to the deal’s history. In 1999 a meeting between the trade ministers of two small export powerhouses, New Zealand and Singapore, kicked off what became one of the world’s largest free-trade areas. The timing was significant, too. China’s application came just a day after the announcement that America and Britain would assist Australia in building a fleet of nuclear-propelled submarines.

While the United States is still the dominant military power in Asia, China’s economic heft is now unparalleled. The latter’s attempt to join the 11-member trading alliance, however far-fetched it seems, raises the cptpp’s geopolitical significance beyond what was ever imagined more than two decades ago. It also underscores the folly of an inward-looking America abandoning the pact’s forerunner, the Trans-Pacific Partnership (tpp), in January 2017. The cptpp, a slight modification of that original agreement, took effect in late 2018. It is one of the most advanced trade deals in the world.

When New Zealand and Singapore first mooted a trading alliance out of frustration with the slow speed of World Trade Organisation (wto) negotiations, China was not yet even a member of the global trading body and its economic heft was piddling relative to today. Its share of global merchandise exports was 3.4%. Last year, that figure ran to 14.7%, making China the only country in the world which accounts for a double-digit share.

When America was still actively part of building the tpp alliance, it was portrayed—and sold to Americans—as a tool to keep China from exercising influence over trading rules. It is still difficult to imagine China’s application being successful in the near term. The cptpp is a detailed agreement requiring deep economic integration, and new members must be admitted by unanimous approval. “China is surprisingly close to meeting cptpp conditions in many areas. But where there are gaps, they’re huge,” according to Jeff Schott of the Peterson Institute for International Economics (piie), a think-tank in Washington, dc. He reckons the country has made huge strides in recent years on intellectual-property and investment rights. But the dominance of state-owned enterprises (soes), weak labour rights and concerns about data privacy leave a lot of ground to catch up.

The treatment of soes is a perpetual bugbear of many of China’s trading partners. To gain membership of the cptpp, Vietnam in particular had to agree to restrictions on support for its own state-run firms and increased transparency on their operations and structure, which China would be expected to mirror. Data governance is a case where China is, if anything, moving in the opposite direction to the one which would be needed for membership. The cptpp countries have committed themselves to promoting the cross-border transfer of information. In contrast, China has become the global exemplar of data localisation: a data-protection law passed last month will make it harder for foreign companies to transfer data out of the country.

The existing members of the pact are also unlikely to accept admission on a promise of changes to come. The relationship between China and many of its big trading partners and neighbours has soured in recent years, making membership a much harder diplomatic sell than joining the wto, which it did in 2001. Back then, says Kazuhito Yamashita, a former Japanese trade negotiator who was involved in the accession talks, the optimists argued that China should be allowed to join the wto and that problems could be rectified afterwards through enforcement. The opposing view was that it would be very difficult to change things in a communist economy. “That was right.”

But even if its chances of joining the cptpp soon are slim, there may be other reasons for China to announce its intention. Most countries did not aspire for membership in order to become part of an anti-China bloc. Indeed, some might even look eagerly on the potential economic gains of having China on board. When negotiations for America to join began in 2008, the United States was a larger trading partner than China for several of the countries that are now members of the agreement—New Zealand, Peru and Chile, for instance. Today, among cptpp members only Canada and Mexico trade more with America than with China. A piie paper published in 2019 estimated global income gains from the cptpp as it stands run to $147bn a year. If China were included, that would rise to $632bn. The benefits to many of the members would run to more than 1% of their real income.

But for other governments, relations with China have deteriorated to the extent that its admission borders on the inconceivable. “Countering China’s political, economic, and cyber influence is the animating motivation at the heart of many Australian and Japanese policies. The strategic calculus about China is solidifying in both countries,” says Nigel Cory, a trade expert at the Information Technology and Innovation Foundation in Washington, dc, and a former Australian diplomat.

Driving a wedge between countries looking at the application primarily as an economic boon and those looking at it mainly as a political threat may prove diplomatically useful for China’s rulers. “This is being driven by a desire to throw a spanner into the works, to have some fun,” says Charles Finny, a former New Zealand diplomat who launched the country’s trade negotiations with China in 2004.

China is already the largest member of the Regional Comprehensive Economic Partnership, a larger but shallower trade deal agreed last year. It contains fewer conditions for membership, but unlike the cptpp includes every big South-East Asian economy, as well as South Korea. Membership of both, if it were to happen, would make the country an increasingly formidable leader of commercial diplomacy in Asia.

From outside the cptpp, America has no direct bearing on the outcome of the application discussions. The country has influence, of course, and particularly with its immediate neighbours. Its free-trade deal with Mexico and Canada requires any of the three to consult with the others before commencing negotiations with a country that none currently has a trade deal with. Its submarine deal with Australia may also strengthen the latter’s resolve to promote America’s interests in the region, even economic ones.

Most bets are that China’s bid to join the agreement will fail. And yet not long ago few would have wagered that China would show more interest in membership than America. If the application means little else, it remains a stark illustration of just how quickly America’s commercial influence in Asia has waned.

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