TPP deal presents a positive challenge for China

BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/42

In early October, the US, Japan, and ten other Pacific Rim nations finalised the Trans-Pacific Partnership (TPP) trade agreement. It is the first broad-based multilateral deal aimed at liberalising trade since the mid-1990s expansions (NAFTA and WTO). It covers trade aspects from agriculture to services and increases competition through reduced tariff levels and numerous other measures. TPP member countries account for nearly 40 % of global GDP, so the arrangement will play a major role in setting the ground rules of international trade – even if ratification of the agreement by member countries turns out to be a difficult, protracted process.

China did not participate in the US-led TPP-negotiations. Instead, it has tried to push for a more modest Pacific Rim free-trade zone and bilateral arrangements. It remains unlikely that China will sign on to the TPP agreement any time soon as it is unwilling to commit to TPP terms such as those affecting state-owned enterprises, right of workers to organise, protection of intellectual property and Internet censorship. Even without participating, the TPP agreement affects China in many ways, because companies must make their investment decisions in light of opportunities created by the new free-trade zone. A free-trade agreement will increase trade and production in the Pacific Rim area, which should thus benefit China and other non-signatory countries. On the other hand, TPP channels trade and production investment to the free-trade zone members, weakening China’s position as a destination for industrial investment and its role in international production chains.

Many observers have characterised the goals of TPP countries and China as conflicting and speculated how China might respond with its own projects (e.g. Silk Road and AIIB) to meet the challenges of the new free-trade area. From another perspective, however, it is clear that TPP brings new norms to global trade that China, too, should adopt. TPP membership would comport well with China’s long-term opening-up policy, which led to China’s last major trade advance with its WTO accession in 2001.

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