China vs. US in Proxy Trade Battle

An American-led trade liberalization model faces a tough sell in Asia.
An analysis by Parameswaran Ponnudurai
2013-02-05
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China's Vice President Xi Jinping speaks with U.S. President Barack Obama in the Oval Room of the White House, Feb. 14, 2012.
AFP

Which free trade agreement will dominate the Asia-Pacific in the next four years: the China-led Regional Comprehensive Economic Partnership (RCEP) or the U.S.-led Trans-Pacific Partnership (TPP)?

The RCEP was the obvious choice when the question was posed to delegates at a "Asia-Pacific Forecast 2013" conference hosted by the Washington-based Center for Strategic and International Studies (CSIS) last week.

The random poll result underscores the difficulties facing the United States in marketing its TPP model and the intense competition between the world's two largest economies to garner greater market share in the rapidly expanding Asian region.

The challenge for the U.S. to forge the TPP pact by its self-imposed October deadline is all the more important because of President Barack Obama's "pivot to Asia" strategy seen as a U.S. bid to clip China's growing military and economic influence in the region, prompting Chinese anxiety about U.S. containment.

The RCEP is an Association of Southeast Asian Nations (ASEAN)-led trade agreement linking the economies of 16 Asia-Pacific countries, with the notable absence of the United States.

They comprise all 10 ASEAN nations—Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam—and six other countries with which the group has free-trade agreements—China, India, Japan, South Korea, Australia, and New Zealand.

The TPP, on the other hand, consists of an initial group of 11 negotiating countries led by the United States but excluding China. Others are Brunei, Chile, Singapore, and New Zealand, Australia, Peru, Vietnam, Malaysia, Mexico, and Canada.

There is however an overlap in participation, with six of the 16 RCEP members also involved in the TPP. Three other RCEP participants—Indonesia, Philippines, and Thailand—have also expressed initial interest in participating in the TPP.

Head start

With the RCEP members expected to launch negotiations this year for the pact with a view to wrapping them up by 2015, the United States wants to have a head start with the planned October launch of the TPP.

But after 15 rounds of talks, analysts say skepticism over the TPP remains a major stumbling block, as reflected by the poll last week which showed 45.2 percent of of the 106 voting delegates supporting the RCEP compared to 24.5 percent backing the U.S.-led initiative.

"My guess is that some of this [skepticism] reflects the difficulties that the TPP is inevitably going through because it is so ambitious and the U.S. has not yet been able to put its political cards on the table," said Matthew Goodman, a former White House official overseeing U.S. policy development in key Asia-Pacific forums.

"On the other hand, trade negotiations sometimes look darkest before the dawn," he said, adding that the current U.S. Congress appears more receptive to trade deals than forging compromises on sensitive fiscal issues.

"It is tough slogging and it is not a foregone conclusion it is going to work," Goodman said.

"If it doesn't work, I think it would be very, very damaging to the pivot [to Asia]. So, it has to work and I think the Obama administration knows that and it will double their efforts to try to get this done."

Negotiators call the TPP “comprehensive and high-standard” as it will liberalize trade in nearly all goods and services and include commitments beyond those currently established in the World Trade Organization (WTO).

Critics of the TPP however argue that its high standards are a disincentive for developing countries who see the RCEP as an attractive alternative because it protects sensitive industries from exposure to enhanced competition and makes fewer demands for economic policy changes.

The TPP negotiating dynamic itself is complex: decisions on key market access issues such as dairy, sugar, and textiles and apparel may be dependent on the outcome of controversial rules negotiations such as intellectual property rights or state-owned enterprises, according to the latest report on the issue prepared by the Congressional Research Service, the think tank of the U.S. Congress for lawmakers.

Target

The 16th round of negotiations for the Pacific pact will be held in Singapore next month and three negotiating rounds are scheduled this year prior to the October 2013 Asia-Pacific Economic Cooperation (APEC) forum summit in Indonesia, the current target for reaching an agreement.

"For this deadline to be achieved, outstanding negotiating positions may need to be tabled soon in order for political decisions to be made," the Congressional Research Service said in a January report.

Washington is hoping that Japan, Asia’s second-largest economy after China, will join the TPP to give it a shot in the arm, but new Prime Minister Shinzo Abe in unlikely to make any decision ahead of July elections for parliament's upper house.

Some members of Abe's Liberal Democratic Party (LDP) fear any decision to embrace the TPP will upset the powerful farm lobby. Japan is already the world's biggest net importer of agricultural products, valued at U.S. $66 billion a year.

"A strong backlash ... is expected from some LDP members who are concerned the party will lose votes from agriculture-related sectors if Abe announces Japan's bid to join the talks," the Japan Times said last week.

But some analysts think the United States may have to show greater commitment to trade and be more realistic if if wants to attract particularly the Southeast Asian economies.

"We need to articulate much better the path for countries that are not ready to make it to the premium level agreement or we are opening up to a strategic loophole that can be exploited by our competitors, like Beijing," said Ernest Bower, senior adviser for Southeast Asian studies at CSIS.

Eligibility

While Washington considers ASEAN the fulcrum of America's Asia strategy, not all ASEAN members are eligible to join the TPP, he said.

Laos, Cambodia and Burma cannot participate in the TPP because they don't meet the basic criteria—membership in the APEC forum.

Bower said the U.S. also has to realize that it cannot push for a trade liberalization model that excludes China.

"It doesn't make any sense because China is the number one or two trading partner" of the Southeast Asian nations, he said.

"The TPP is important but we need to have a better look at our economic, trade policies and add some political 'oomph' to make Asia believe that we are going to sustain our focus in the region."

"It is clear to me that Beijing is willing to say, 'Look, the Americans are pivoting back but this is very security heavy. What are they doing for you in terms of economic engagement?'"

The economic stakes of the RCEP are also high as the 16-member group represent 40 percent of world trade.

The major players in the region view RCEP favorably as a "vehicle to achieve important goals," said Mireya Solís, an expert on Japan’s foreign economic policies at the Washington-based Brookings Institution.

For ASEAN, the RCEP is mostly about maintaining the organization’s centrality in the Asian regional integration process and for China, it is a "good counterpoint" to the American-led TPP, she said.

And for Japan, RCEP’s membership configuration dovetails exactly with its long-standing proposal for an "ASEAN+6" trade grouping, thereby endorsing a more expansive definition of the East Asian region, Solis said.

She also cited ASEAN's ambitious objective for the RCEP—a "comprehensive agreement" covering goods, services, investment, economic cooperation, intellectual property, competition, and dispute settlement."

"But there are many questions as to whether RCEP can deliver major results in economic integration," she said, citing for example the flexibility approach to trade negotiations which could compromise the overall quality of the RCEP if governments have an easy way out to shelter sensitive sectors.

"[T]he risk is that the agreement could only yield a low common denominator."