22 October 2016
Under the Trans-Pacific Partnership agreement, members will have to meet high standards in the trade of goods and services. Photo: Xinhua
Under the Trans-Pacific Partnership agreement, members will have to meet high standards in the trade of goods and services. Photo: Xinhua

TPP offers opportunity for China to accelerate reforms

The United States, Japan and 10 other Pacific Rim nations reached a final agreement on the Trans-Pacific Partnership (TPP) on Oct. 5, 2015.

The signatories to the trade accord have a combined population of 800 million and account for 40 percent of the world’s total gross domestic product.

China, one of the most important trading partners in the Asia Pacific, is not yet a TPP member.

China might lose 2.2 percent of its GDP if it did not join the agreement, according to an article by Ma Jun, the chief economist of the People’s Bank of China’s research department.

Some believe the US-led trading bloc is aimed at isolating China. The view is one-sided. China also considered joining the TPP but has yet to accept all the terms of agreement.

India, another giant economy, has not joined the TPP, either. Is that a sign that the US wanted to isolate India?

The TPP is one of the most ambitious free trade agreements. It intends to boost mutual economic benefits and expand global trade.

All members have to accept high standards in order to join the TPP. That would mean high quality of goods and services, which in turn would bolster their competitiveness.

The Doha Round of negotiations of the World Trade Organization (WTO) has dragged on for more than 15 years. The key obstacles are services and agriculture.

That reflects the global multilateralism that has failed to lead the global trade system, which badly needs new energy.

In fact, a number of bilateral trade agreements and multilateral trade agreements have started to emerge as a result of the WTO failure. TPP and the proposed Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union are typical examples.

Undoubtedly, the US has a key role to play in pushing the TPP deal. “With the TPP, we can rewrite the rules of trade to benefit America’s middle class. Because if we don’t, competitors who don’t share our values, like China, will step in to fill that void,” according to a White House note by President Barack Obama.

The TPP sets new and high standards for global trade deals. It involves the free flow of personnel and capital, protection of intellectual property rights, labor and environmental protection, and restrictions on preferential policies for state-owned enterprises, which have never been covered by any past trade agreements.

In the meantime, China could launch its own trade agreement talks. For example, Beijing has been trying to push for a Regional Comprehensive Economic Partnership (RCEP) with India.

The idea emerged from the leaders’ summit of the Association of Southeast Asian Nations in 2011. The 10-member group invited six nations including China, Japan, South Korea, Australia, New Zealand and India to join the trade group.

The agreement intends to build a free trade pact among 16 nations through tariff reductions and elimination of non-tariff barriers.

However, I’m not very optimistic about the prospects of RCEP. Opening the services sector will be a key challenge.

Moreover, India might be conservative in opening its markets to China. The RCEP also lacks the massive US market.

Therefore, I believe China should join the TPP, which will be beneficial to the nation’s long-term interests.

China needs to meet various high standards in order to join the free-trade bloc. That could be a driving force for the nation’s internal reforms.

Before China’s entry into the WTO, some people voiced concerns about the impact of lower tariff and market opening on its economy.

As it turned out, the WTO membership forced domestic companies to beef up their competitiveness and helped accelerate China’s reform.

Many of China’s reforms have been held back by vested interest groups. Joining mutually beneficial external trade agreements could drive internal reforms.

In that sense, TPP could offer enormous opportunities for China.

This article appeared in the Hong Kong Economic Journal on Feb. 2.

Translation by Julie Zhu

[Chinese version 中文版]

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Professor, Department of Economics, HKUST Business School; former senior research economist and advisor, Federal Reserve Bank of Dallas

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