Over the weekend we reported that as Obama was speaking at the APEC summit in Peru, hoping to salvage his global trade legacy, the TPP, China’s President Xi Jinping officially called for the launch of the Free Trade Area of Asia-Pacific for “institutional guarantee of open economy”, a move many had expected would take place as China was eager to fill in the void left by the US in any trans-Pacific trade treaty.
As we previously reported, in his speech in LIma, Xi Jinping sought to position himself as a leader in global commerce, vowing to support trade. The attendees signaled “deepening economic integration and opposing trade protectionism,” the Foreign Ministry spokesman said on Tuesday.
Then, overnight, China got a present when Trump announced in a brief video statement that his first executive order upon becoming president would be to remove the US from the TPP. That’s all Beijing needed to hear and this morning China said it hoped to conclude an Asia-wide trade pact as soon as possible, in what the WSJ dubbed was “a sign of Beijing’s intent to broaden its regional influence amid the apparent collapse of the U.S.-backed Trans-Pacific Partnership.”
A Chinese Foreign Ministry spokesman said on Tuesday that Asian leaders are pressing ahead with talks for the 10-nation Regional Comprehensive Economic Partnership that China has backed as an alternative to the U.S.-led deal, and “hope that such negotiations can achieve early results.”
As a result, the shift in regional support has been abrupt: Singapore’s Prime Minister Lee Hsien Loong, a TPP booster, is now calling on Asian Pacific nations to boost trade by backing the China-led pact and other initiatives. “There are still other pathways to free trade in the Asia-Pacific,” Mr. Lee said this past weekend.
Other also promptly shifted their focus from a US to a China-led trade agreement: both Vietnam and Malaysia, TPP members, said they were shifting their focus to the China-backed group, according to their respective trade ministers, with Malaysia’s, Datuk Seri Mustapa Mohamed, citing an “uncertain international economic situation.”
Most viewed the apparent shift as a victory for China… especially China “TPP has been a containment strategy by the Obama administration,” said Zou Zhengfang, an economics professor at Renmin University. “This is a good opportunity for China to be more powerful on the global stage starting with economics, and to gain a larger voice.”
What is notable is the eagerness – and ease – by most TPP member states (except Japan) to shift their allegiences from Washington to D.C. What is also notable is just how critical free trade is to most Asian countries, whose economies are heavily export-oriented, as opposed to rising calls for protectionism in much less trade-dependent (and much more debt-reliant) America and Europe. It also signals, as the WSJ writes, the unraveling of Mr. Obama’s vision to make the TPP accord an economic anchor for U.S. strategic engagement in a region being transformed by China’s growing economic might and expansionist aims.
In short, China wins by materially expanding its sphere of influence through a “free-trade” agreement, whose terms it will define from day one. Indeed, the TPP would cut or reduce some 18,000 tariffs for a group of Pacific Rim nations in the Americas, Asia and Oceania—an area accounting for 40% of the global economy. The China-led pact is less ambitious in reducing tariffs; it will likely be far more ambitious on setting terms that benefit its own companies that engage in trade. As for China’s counterparts? Since China is the dominant power, they have to accept the terms or be “nudged” out of the Regional Comprehensive Economic Partnership, and into the cold, protectionist world outside.
However, while most Pacific Rim countries welcome their new global trade overlord, one fervent supporter of a US-led trade pact still refuses to admit that TPP is dead, and that it will have no choice but to bow down to Beijing: Japan.
“The TPP would be meaningless without the United States,” Abe said, shortly before Trump crushed his hopes with his statement yesterday.
The WSJ adds that a spokeswoman for Japan’s Foreign Ministry said Japan still held hope the deal will be revived in some form and that Prime Minister Shinzo Abe planned to continue to try to change Mr. Trump’s thinking on its merits.
As for Trump’s plans to remake U.S. trade relationships once he takes office remains unclear. Withdrawing from the TPP may be the opening shot in a broader effort to redo other deals he has criticized as well, such as the North American Free Trade Agreement.
“We still don’t know how far the Trump administration is going,” said Derek Scissors, a resident scholar at the American Enterprise Institute who focuses on China. ‘What matters is if this becomes a pattern of just disrupting trade relationships, without getting to something positive.”
Judging by the S&P which is trading at 2,200, either the answer is obvious, or the market has been completely removed from actual economic fundamentals for years (hint: the latter).