Alaco

22.02.2017 | Trump leaves Asia door open for China to dominate trade

Beijing’s backing for regional agreement puts US influence at risk.

Click here to read the Alaco article in the FT's Beyondbrics.

As expected, one of President Donald Trump’s first moves was effectively to scrap the proposed Trans-Pacific Partnership, a regional free trade pact of 12 Asia-Pacific nations promoted by former president Barack Obama. Mr Trump has long been an opponent of the TPP since it conflicts with his own protectionist agenda. He has pledged to examine every trade deal the US has signed and renegotiate them if he thinks he can get a better deal for American workers. But as he sets about pursuing his goals, he risks leaving the door open for China to dominate trade in Asia.

The TPP, from which Mr Trump withdrew in January, was seen as the centrepiece of the Obama administration’s pivot to Asia, which aimed to strengthen America’s ties with the region. Negotiations had been under way since 2008, with the partnership not only including provisions for reductions in tariffs but also a number of trading commitments, most notably labour and environmental protections.

However, Mr Obama never had the full support of Congress, despite the fact that the final proposal for the trade agreement was signed in February 2016 by all 12 member countries. In August last year the US Senate delayed voting until the next president was in place, with both presidential candidates at that stage also against the deal. China, meanwhile, has taken full advantage. Since 2012, it has been negotiating a trade agreement to rival the TPP: the Regional Comprehensive Economic Partnership, comprising all 10 Asean states with six other proximate states with which the Southeast Asian trade bloc has existing free trade arrangements — Australia, China, Japan, India, New Zealand and South Korea. The would-be member states have a combined population of 3.4bn people and 30 per cent of global GDP.

Even though talks to ratify the RCEP have stalled twice in the past two years, the negotiations are widely expected to be finalised before the end of 2017. There are, however, certain obstacles still to overcome. For example, not all the non-Asean members have free-trade agreements among themselves, with the deal between India and China a particular sticking point. But unlike the TPP, the RCEP does not have any labour or environmental protection provisions, which not only makes it more attractive for some Asean members but also reduces the complexity of negotiations.

Furthermore, the RCEP represents a vital opportunity for the pact’s smaller nations, as they will be able more easily to access the larger participants’ consumer markets and attract investors. China is an increasingly important trading partner for US allies such as New Zealand and Australia. Both countries attempted to revive Mr Obama’s trading initiative following Mr Trump’s decision to withdraw, but the so-called TPP-minus one (the US) deal looks set to be abandoned altogether, as the TPP — in its current form — requires ratification by at least six countries representing no less than 85 per cent of the total GDP of the 12 members before it can take effect.

Since economic growth in New Zealand and Australia is over-reliant on exports of agricultural produce and metals respectively, both countries are keen to develop their manufacturing base but need larger consumer markets that free-trade agreements under the RCEP would provide. Mr Trump has earmarked both countries as ones with which he will seek such deals, although there is some uncertainty over when or if they will come about. Meanwhile, with the RCEP expected to be concluded this year, China is cementing its position as the primary trading partner for both New Zealand and Australia. Related article Trump strategy threatens US competitiveness, says trade tsar Froman warns over tariffs on companies that produce goods overseas for US market In the case of the Asean members, China is increasingly viewed as their most important trading partner.

With infrastructure shortcomings limiting their growth, China has financed several energy, transport and telecommunications projects in member nations since 2015. However, according to Asean’s 2016 Investment Report, America remains a larger source of foreign direct investment than China, a legacy of US foreign policy under Mr Obama. But this trend appears to be changing. Between 2014 and 2015 the foreign direct investment flow into Asean from the US declined by 17 per cent to $12.2bn, while China’s investment in the bloc has grown by the same percentage figure to $8.2bn.

Within Asean, Beijing has recently placed a particular emphasis on concluding deals with the Philippines, Malaysia, Vietnam and Brunei to reinforce its declared sovereignty over the South China Sea. China, which in July saw its claims to the region dismissed at the Permanent Court of Arbitration in The Hague, has attempted to win over other claimants by offering trade partnerships and investment deals. Most recently, in November, Chinese president Xi Jinping and Rodrigo Duterte, his Philippine counterpart, signed such a flurry of deals estimated to be worth $13.5bn. This was just one batch of several that Mr Xi has penned during the past 18 months.

While Mr Trump has been a vocal opponent of China’s ambitions in the South China Sea, through which about $5tn of trade passes every year, his options now appear limited. While the four Asean states with claims to the contested waters are unlikely to co-operate too closely with China, Beijing has become their main trading partner and foreign investor. A more robust military policy in the region risks a dangerous escalation in tensions. And launching a trade war with China could leave the US worse off. American consumers may be hit by more expensive imports while its manufacturers could be affected by China’s near monopoly on the production of rare earth minerals used in many high-tech products.

As Mr Trump seeks to negotiate bilateral deals for the benefit of American workers as part of his protectionist approach to international commerce, China’s growing economic influence in the South China Sea and efforts to finalise RCEP negotiations could leave it gaining the upper hand in an increasingly important trading region.

(This is the text of an article that first appeared in the FT’s Beyondbrics)