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US and China will both lose from collapse of TPP

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  © Kyodo

It is a strange world in which U.S. President-elect Donald Trump confirms his intention to quit the Trans-Pacific Partnership trade agreement on his first day in office, just after Chinese President Xi Jinping calls for a new Asia-Pacific trade deal. Yet, as Trump's campaign rhetoric starts to become reality, the adverse consequences for Asian countries, especially China, will become increasingly clear.

Trade has always been at the center of the dominance that the U.S. and China seek in the Asia-Pacific region. U.S. President Barack Obama's "pivot to Asia" incorporated military and security arrangements and assurances, but the TPP was at the heart of the strategy. Xi is pursuing China's regional hegemony by building a structure around initiatives such as the Asian Infrastructure Investment Bank, the "One Belt, One Road" strategy, and more recently, its own  trade agreements.

In spite of high level U.S. and China contacts that recognize mutual dependency, the rivalry between the two countries is now being fuelled by new anti-trade and "America First" themes in U.S. policy that threaten to give it additional edge. Trump's threats to label China a currency manipulator and levy a 45% tariff on Chinese exports to the U.S. are a case in point. The broad goal is to reduce the U.S. trade deficit with China, which amounted to a record $366 billion last year, equivalent to about 69% of the total U.S. trade deficit of $530 billion. The specific goal, he says, is to protect American jobs.

Charging China with currency manipulation is likely, but it is also a relatively meaningless exercise other than to trigger negotiations, which could result in tariffs if unsuccessful. Instead of such high general tariffs, moreover, we might expect specific tariffs or duties of, say, 5% to 10% on high profile and sensitive Chinese exports, such as steel and automobile parts, as well as greater restrictions on Chinese foreign direct investment in the U.S.

China would probably retaliate. Global Times, a Chinese government newspaper, pointed out recently that U.S. tariffs could prompt China to spurn Boeing aircraft, U.S. automobiles and iPhones, and impose retaliatory trade restrictions against soybean and maize imports from the U.S.

Poor cousin

These bilateral issues will sour an already fractious trade environment in Asia. Abandonment of the TPP will deliver a trade blow to the U.S. and its allies in South and East Asia, notably to Japan, which will also question America's security assurances. China is already moving to fill the vacuum as negotations over its proposed Regional Comprehensive Economic Partnership trade pact, which excludes the U.S., near completion.

Yet the RCEP is a poor cousin to the TPP. It will lower goods tariffs and duties but its focus is on traditional goods. Some participants, such as India, are not totally convinced about the merits of freer trade. China's newly proposed Asia-Pacific Free Trade Agreement, announced by Xi at an Asian summit in Peru, would be more ambitious and geographically broader. But it is hard to see circumstances in which Washington would want to participate. Without the U.S., real progress may prove limited.

It is frequently argued that America's loss in abandoning the TPP will be China's gain, but there is more to this than meets the eye. Even though China was not included in the TPP, the pact would have been an important winner. China benefits strongly from broad and liberal trading arrangements, as is shown by its substantial economic gains before and after joining the World Trade Organization in 2001. This proved to be an important catalyst in the 1990s and 2000s for sustained and complex reforms to state enterprises and the promotion of private sector development and competition.

The TPP, designed to generate increased trade, inward investment, and improved operating conditions for local businesses, might also have served to strengthen the resolve of more reform-minded Chinese officials to carry on with and deepen market reforms that have now largely stalled. The pursuit of TPP outside China might well have spurred more open and competitive non-financial services industries, crucial to China's search for a new economic growth model.

It is quite likely that China's foreign policy hardliners and international hawks will feel emboldened by U.S. withdrawal from engagement with Asia. Xi, moreover, needs to look strong and in charge of China's most important external relationship ahead of the Chinese Communist Party's crucial 19th Congress in 2017.

Yet this does not necessarily make China stronger in an economic or soft power sense, for it conflates the incompatible interests of those looking to extend regional power with those urging economic reform on a seemingly reluctant leadership.

In this struggle, the latter will lose out. And both China and the U.S. will come to rue the consequences of Trump's trade rhetoric.

George Magnus is an economist and author of publications including "Uprising: Will Emerging Markets Shape or Shake the World Economy?"

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