TPP: Why the U.S. Withdrawal Could Be a Boon for China

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Penn's Jacques deLisle and Stanford's Richard Dasher discuss the ramifications of the U.S. withdrawal from the TPP.

With the U.S. earlier this week pulling out from the 12-nation Trans-Pacific Partnership (TPP), that trade agreement is all but dead.

Analysts say the U.S. move paves the way for China to forge its own deals with other countries and dominate the world’s major trading regions and routes, potentially putting American companies at a disadvantage. Immediately, China could pursue trade deals with the remaining TPP members in Southeast Asia and Latin America, many of which do not have large domestic markets and are heavily dependent on foreign trade. China is also pursuing the One Belt, One Road (OBOR) project to build land and sea trade routes spanning 60 countries primarily in Asia and Europe. Among the various other trade pacts China is pursuing is the Regional Comprehensive Economic Partnership (RCEP), covering the ASEAN region and six other Asia-Pacific countries.

In his executive order, Trump said he now wants to pursue bilateral trade negotiations with individual countries “to promote American industry, protect American workers, and raise American wages.”

Playing with Fire?

Trump’s strategy is similar to that of China, which has been negotiating trade deals with some of its weaker neighbors according to Jacques deLisle, a University of Pennsylvania law and political science professor, and director of the University’s Center for East Asian Studies. “The idea is the U.S. is a big player and has certain advantages in bilateral negotiations with smaller partners than a multilateral trade agreement would [offer],” he said. “That is probably somewhat epiphenomenal to a general attack on what he sees as trade deals that are disadvantageous to American workers. That is what Trump is playing to, but it is [in some ways] playing with fire.”

The bilateral deals that Trump wants to pursue will not be good for American businesses and they will not be able to keep up with global competition, according to Richard Dasher, director of Stanford University’s U.S.-Asia Technology Management Center.

He described the TPP as “an innovative trade deal that wasn’t just about the number of oranges and cherries and beefsteaks.” It incorporated the digital economy, where new companies and industries spring up “so fast that you couldn’t do an item by item negotiation, much less a country by country negotiation,” he explained.

“For the most technologically advanced country to be on the defensive on trade is striking.” Mauro Guillen

Dasher and deLisle discussed the pros and cons for the U.S. of withdrawing from the TPP on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Advantage China

“Quite frankly, the Chinese are celebrating” Trump’s move, said Wharton emeritus professor of management Marshall Meyer, a longstanding expert on China. “The TPP would have joined us with those countries favorable to us — we hope they are still favorable to us — along the Chinese trade routes.” The U.S. exit from the TPP clears the path for China to dominate and have much greater influence in the economies of not just Southeast Asia, but also ultimately East Africa and even parts of Europe, he added. “The strategic implication of this is that we are allowing China to execute its grand strategy to become the dominant power of the Eurasian continent.”

Meyer noted that the U.S. is also sending the wrong signals to TPP members. “It’s like a moral withdrawal, and almost like telling many countries in both Latin America and Southeast Asia, ‘We’re not interested in you anymore,’” he said. “As a consequence, it makes it easier for the Chinese government to increase its political and economic influence in the region.” The failure of the TPP to take off would hit several countries hard, such as Chile and Peru, which are dependent on foreign trade, deLisle noted in his SiriusXM interview.

China has for long relied on investment-driven growth and as a consequence, it is saddled with excess industrial capacity, particularly in basic industries like coal, steel and cement, and also infrastructure, said Meyer. The OBOR project is designed to help it export those excess capacities across Eurasia, he explained. The country has already committed $900 billion to the project, according to a report in the China Daily newspaper.

Even as the OBOR project promises big gains for China, many believe the country will bankrupt itself in trying to pursue it, given its large debt overhang, Meyer said. China’s borrowings hit 168.48 trillion yuan ($25.6 trillion) at the end of last year (2015), equivalent to 249% of economic output, according to a report in The Guardian.

In any event, while China’s dominance of world trade may be inevitable, the U.S. should not be a passive observer as that country advances, said Wharton management professor Mauro Guillen, who is also director of The Lauder Institute. “China is the biggest trading nation and has become the biggest trading partner for not just several East and Southeast Asian countries but also for several Latin American countries,” said Guillen. “Eventually, China will be the indisputable leader in world trade.”

But what Guillen finds “astounding” is the assumption that the U.S. stands to lose from the TPP. “For the most technologically advanced country to be on the defensive on trade is striking. For the most part, U.S. companies have nothing to fear because they are in many industries among the best in the world.”

Keeping China in Check

In fact, the TPP was designed to contain China, said Dasher, who was on a task force that studied the effects of the TPP on the digital economy. He pointed to one clause — ‘A national government may not require a foreign company to provide a source code to the national government or a state-owned enterprise’ — which he interpreted to be directed at China.

“The real issue is that business is not bilateral anymore; the supply chains are multilateral.” –Richard Dasher

“When you see language that is that specifically the exact opposite of what China has been doing, you can tell that it was aimed at creating a large enough economic group that could stand up to the power that China is exercising worldwide right now,” said Dasher. The broad goal of the TPP was to create a stable business environment across its member countries, placing emphasis on processes to solve problems rather than stipulate specific requirements for each country, he explained.

The TPP included several positive features that would have helped American companies, according to deLisle. For one, it took “a significant step forward” to liberalize traditional trade, but more importantly, it also covered the services sector and the new digital economy, he said. Secondly, it tried to level the playing field in a way by creating stronger labor and human rights protections, he added. That had been a source of competitive disadvantage for U.S. firms, which had to adhere to those requirements, he explained.

To be sure, the TPP had its flaws, deLisle pointed out. He said it would have hurt lower-wage, lower-skilled workers in economies like the U.S. Another “valid criticism,” he added, may be that it tried to globalize “the extraordinarily high protection for intellectual property in the U.S.,” although he added that “you can make an argument either way.”

The TPP also suffered from two “process problems,” said deLisle. One was its opacity as domestic U.S. firms sought to understand it. He said it became a political target and was branded as a deal being put together “by global elites behind closed doors.” The second was the charge that former President Barack Obama for domestic political considerations wanted to sell it as a competition with China on who writes the rules of trade.

Unfriendly Environment

Dasher added that while the TPP covered electronic commerce, and would have opened up insurance and banking services, it would have been difficult to implement because of the complexities involving government agencies across a dozen countries.

More broadly, “free trade agreements are always tough and are now facing an increasingly bad environment,” said deLisle. “In the new political atmosphere, protectionism is not the dirty word that it was a little while ago.”

Bilateral deals also have flaws, especially “the basic inefficiency of doing the same trade deal multiple times,” said Dasher. “The real issue is that business is not bilateral anymore; the supply chains are multilateral.” He noted, for example, that half a dozen countries would be involved in putting together an iPhone.

“Bilateral deals are complicated,” said Guillen. “You do one deal first and then another one and then regret what you did in the first one because it interferes with what you want to accomplish in the second one.”

Next Move for the U.S.

According to Guillen, “It is important that the U.S. doesn’t disengage” from striking alternative trade deals. Especially, it cannot ignore that China’s neighbors like Japan, Vietnam, the Philippines and Indonesia, which are big economies and trading nations, he said. “Maybe TPP was not the best idea. But if it is not the TPP [the U.S. wants to pursue], then what is [its] plan? You need some mechanisms for engaging with the U.S. All these Asian countries account 50% of the world economy.”

Guillen noted that “the [Trump] administration doesn’t have a plan for bilateral agreements other than general statements.” He also noted that trade policy is the prerogative of Congress and not for the president to decide, and that the Republican Party is divided on trade policies. He hoped for some action on that front after the new secretaries of the treasury and commerce departments are sworn into office.

“Will we show up [in the South China Seas] with gunships, or are we going to show up with trade?” Marshall W. Meyer

According to deLisle, the right path for the U.S. is “to resurrect much of the TPP,” because “a good part of it was in America’s economic interest.” Immediately, the U.S. should do “damage control,” he added, because its trading partners “are now trying to figure out what to do.” However, he expected the Trump administration to follow a piecemeal approach to that.

Efforts are underway by some remaining TPP members to salvage the deal without the U.S., deLisle noted. However, that would require rewriting the original rules of the agreement, he said. Those rules require at least six of the original members representing 85% of the total GDP to participate, which isn’t possible without the U.S., he explained.

Dasher emphasized the need to educate people about global trade deals and their impact on the economy. “The ability to retain and grow U.S. jobs was the chief argument to pull out of the TPP,” he said. “It’s easy to see a job flow out of the country. It’s not easy to see the benefits of lower prices, lower inflation rates and a more stable platform for companies to do business and how that impacts everybody.”

Gunships or Trade?

Another aspect Meyer highlighted is that the U.S. has now limited its options in preventing China from gaining control of islands in the South China Sea. Both the U.S. and China have accused each other of maintaining a provocative military presence in that region, through which some $5 trillion worth of trade passes annually, as Knowledge@Wharton reported recently.

“I can’t reconcile the two — we pull out of TPP but we are going to prevent Chinese access to these islands and control of the sea lanes?” said Meyer. “It almost sounds as if [the critics of TPP] would prefer military confrontation to trade as a tool of U.S. policy. The question is how will we make this happen — will we show up there with gunships, or are we going to show up with trade?”

Photo: By Neil Ballantyne from Wellington, New Zealand — Stop TPPA rally,  https://commons.wikimedia.org/w/index.php?curid=36667370

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