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China's trade push relies on willingness to open markets

To realize its RCEP dream, Beijing must let imports soar

This is China's moment. With the shelving of the Trans-Pacific Partnership, the country can shape Asia's trade relations for years, if not decades, to come. Promising to withdraw from the TPP, President-elect Donald Trump has relegated the U.S. to the sidelines, leaving the Regional Comprehensive Economic Partnership, a free trade agreement initiated by Association of Southeast Asian Nations but now led by China, as the only game in town. Negotiators are reportedly making progress in concluding the RCEP, which excludes the U.S. but comprises all major Asian economies, plus Australia and New Zealand.

It is hard to overstate the significance of the TPP's apparent demise. Since World War II, the U.S. has driven global trade agreements, setting the rules in the process and coaxing more wary nations into accepting lower trade barriers. This has benefited many, especially emerging Asia, which built its growth miracle largely on soaring exports to the West. By scuttling the TPP, the U.S. is now at risk of surrendering trade leadership to China, diminishing not only its economic influence, but its political clout in the region.

The TPP was intended to be less comprehensive in terms of its membership, at least initially. Only a few Asian countries joined, including Japan, Singapore, Vietnam, Malaysia and Brunei, with China pointedly excluded. But the agreement set the bar high for trade liberalization by venturing into areas such as environmental and labor rights protection, while circumscribing the influence of state-owned enterprises and strengthening intellectual property rights. Inevitably, many of these issues proved controversial, even if designed to address the more disruptive consequences of unfettered globalization and thereby render the process more sustainable.

RCEP is a lot less ambitious, aiming primarily at pruning trade barriers for goods. The negotiations also address broader issues such as intellectual property, competition, and capacity building to enhance the ability of less developed economies to benefit from liberalization. It should be seen as a first step toward further integration, and it is open for non-Asian members, such as Australia and New Zealand -- which are already included -- and Peru, a TPP participant which is exploring the possibility of membership.

The U.S., however, is not involved and thus has no say in the rules and norms governing a free trade area that will ultimately comprise nearly half of the world's population and some 30% of global gross domestic product. This represents a momentous shift in global economic relations.

China's new flexibility?

But to make the RCEP a success and capitalize on America's abandonment of TPP, China will need to make significant concessions to its trading partners. Chinese officials would be well advised to study the way the current global trading system evolved under U.S. leadership.

Over recent decades, the U.S. has run persistent trade deficits as it opened its markets to imports, thus enticing others to follow its lead in reducing barriers to trade. China, by contrast, still runs sizeable trade surpluses, leaving many of its trading partners worried that reducing barriers further could expose them to a flood of imports without compensatory access to the vast Chinese market.

Take India. Already struggling to create jobs for millions of new workers who join the labor force every year, 40% of the country's trade deficit is accounted for by China. No wonder that India's negotiators are treading cautiously in opening their market further to Chinese competitors. Trade theory holds that India might still benefit, but that is little consolation to politicians seeking re-election. Nor does this postulate prove necessarily true given the domestic obstacles that prevent Indian entrepreneurs from competing effectively.

On the surface, many other economies, like South Korea, actually run surpluses with China. But look closely, and it becomes apparent that much of this is accounted for by re-exports elsewhere. For example, South Korean electronics manufacturers ship components to Chinese factories for final assembly and the finished products are exported onward to markets in the West. The underlying trade balance, based on local consumption, although harder to estimate, is often likely to favor China.

But such openness would require a fundamental shift in economic thinking in Asia. With the U.S. having for decades played the role of importer of last resort, mercantilist tendencies linger in Asia. If China is to take over the reins, it must accept, at least initially, an asymmetric outcome in RCEP negotiations, convincing its partners that they stand to gain from reducing trade barriers.

That does not mean China would not benefit. Economic leadership confers many advantages, although not always immediately visible, such as closer investment and political relationships that otherwise would be far harder to attain. If China is to seize the moment, it will need to step up to the plate.

Frederic Neumann is co-head of Asia Economics Research at HSBC.

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