Transpacific Partnership Agreement

Why is China not part of it?

Reflective paper submission for the fulfillment of course requirements for,
Global Immersion and Global Awareness- 1
Submitted by,
Venkata Satya Srikalyan Bhamidipati (SRI)
GMAY16GL80
GMBA May 2016, GLSCM, S.P Jain School of Global Management

Table of Contents
INTRODUCTION

KEY FEATURES OF TPP

TRADE BETWEEN THE US AND CHINA

CHINAS TAKE ON TPP

CONCLUSION

REFERENCES

APPENDIX

10

Introduction
Countries enter trade agreement to mutually benefit from the tax, tarif
and duty impositions of certain services and goods. These agreements
can either be a preferential or free trade and can be between two
countries or more. Regional trade agreements are much more beneficial
than bilateral trade agreements in a way that they reduce the noodle
bowl efect i.e. the need for multiple agreements is reduced. The recent
multilateral (more than two signatory countries) trade agreement signed
is the Trans-Pacific Partnership agreement (TPP).
The TPP agreement was initiated by four countries Chile, Brunei,
Singapore and New Zealand and later 8 other countries have joined the
negotiations, with the US being the major economy. The agreement has
been signed by all the twelve countries; the US, Japan, Malaysia, Vietnam,
Singapore, Australia, New

Zealand,

Brunei, Canada,

Mexico,

Chile

and Peru, and will enter into force after the ratification by at least 6 states
that together have GDP higher than 85%. Per the US, this trade
agreement is very crucial to integrate trade relations among the Asia
Pacific countries and the West. It is also the central theme for the US to
rebalance itself in the Asia Pacific, as the aggregate trade of these
countries in this agreement amount to approx. 35% of the global trade. No
trade agreement in the past has looked into reaching out to behind the
border regulations to regulate capital flows, investment, intellectual
property and SOEs.
One concern that looms the agreement is the exclusion of China. China is
a major economy in the Asia Pacific region which is too large to ignore.
However, it has not entered the partnership agreement, possibly due to
multiple reasons, Chinas existing practices that do not align with the key
objectives of the partnership or the vision of US to use TPP as a tool to
contain China, as its Asia-pacific strategy.
This article will discuss the key aspects to look at reasons why China will
not like to enter the agreement and the alternatives that China has to

keep the Asia pacific integrated, and at the same time maintain trade
supremacy in the Asia Pacific and the world.

Key features of TPP

In order to answer the questions, a prior understanding of the key aspects
of TPP is needed. As already stated before, TPP, unlike the previous
multilateral free trade agreements, has enhanced understanding between
the signatory members. Some of the important features have been listed
below,

Reduction of tarifs over a wide spectrum of goods and services,

approx. 1800 tarifs are afected (example elimination or reduction

of restrictive policies on agricultural products and industrial goods

Regional approach to commitments: TPP aims at opening up the
domestic market to facilitate the development of production and

supply chain and seamless trade.

Addressing new trade challenges: promotes innovation, productivity,

and competition and also address role of state-owned enterprises

Inclusive trade: TPP includes new elements that pursue to ensure
that all, businesses of all sizes and economies at all levels can
benefit from trade. It breaks the barriers such that all SMEs benefit

to bring their issues to the TPP government.

Intellectual property protection: The agreement raises the bar for
the

implementation

of

intellectual

property

rights,

primarily

afecting pharmaceutical and digital data sector. As an example, the

patent protection for a pharmacy invention is it strengthened the
benefits for monopolists extending the life of the patent in certain
ways, at the same time adversely afecting consumers with the

likelihood of increased costs for life-saving drugs.

Investor-State arbitration dispute settlement (ISDS): this important
feature of giving the right to an investor to sue the State is existing
in many bilateral trade agreements. It is also listed under chapter 11
of the NAFTA. This protects the Multinational or foreign countries to
fight discrimination by the state.

These features provide mutual benefit for the businesses and also the
governments to work and promote a growth in terms of economy.

However, there are concerns that such an agreement would cause higher
unemployment and structural change in the developed economies, mainly
the US. Fear of losing the jobs to the Asia Pacific region is one of the
primary concerns of the people in the US.
Other members in the pact, though concerned of the negative aspects of
enhanced liberalization, look forward to benefit in terms of trade, and also
reduce their dependency on China. A recently released World Bank report
on Global Economic Prospects outlines that the major winners of the
partnership is Vietnam accounting to a 10% increase in Growth by 2030
(Ref: FIG 1), and an overall growth in member countries by 1.1%. The
report as well suggests that there is not much impact on the GDP and
trade of non-member countries, primarily China. China can look forward to
the transition from a manufacturing economy to a service economy with
the manufacturing resources moving to the developing TPP member
countries.

Trade between the US and China

Is the strained economic relation of China and other TPP countries a
reason for China not being part of the agreement?
The trade flows between the US and China have increased considerably in
the recent past with US exports and imports increasing from approx. 7
billion in 1985 to 598.1 billion in 2015. China is currently the secondlargest trading partner and also the biggest import partner for the United
States. Despite the fact that both countries have strong commercial ties,
the bilateral economic relationship of both the countries is quite complex
with trade tensions building periodically. In the view of the US, China has
not transitioned completely into a free and transparent market. Though
China has liberalized trade, over the past few decades, it maintains or
implements state decisions that hamper trade flows and investment. An
analysis of the major trade disputes brought in by the US and China
against each other shows that there is more to add to the economic
relation than what the numbers indicate.

Major issues raised by the US in the recent past are (reference to WTO
Trade Dispute website)
1) Hidden tax exemptions are given to certain Chinese aircraft
producers.
2) Chinas ofering of undue advantage to its domestic exporters by
the

means

of

establishing

clusters

of

industries,

called

demonstration bases and discounting goods and services from

governments to facilitate exports. This preferential hidden policy has
a negative impact on the American MNCs manufacturing out of
China.
3) imposing anti-dumping(AD) and countervailing duties (CVD) on
American automobile exports to china. The dispute has been
resolved with China accepting to waive the duties and create a fair
trade environment for the trade.
4) Chinas restriction and duties on rare earth material, creating
partisan towards Chinese domestic firms gain to the resources. The
argument of China towards the impose of these restrictions was that
the resources are limited, and to restrict pollution caused by mining
activities. On further analysis and through dispute resolution China
had to remove these regulations.
The underlying theme of these disputes is Chinas closed trade system
and its preferential policies to domestic companies. It will take a lot of
efort and restructuring within Chinese government to accommodate the
key objectives on which TPP is built.

Chinas take on TPP

Are the objectives set forth in TPP the reason for Chinas reluctance to join
TPP? Does the US want to contain Chinas economic growth? Or does
China have greater benefit in forming its own regional trade pact, the
Regional Comprehensive Economic Partnership (RCEP)?
Key features of TPP vs China: It is very evident from the objectives of the
TPP that the agreement was pro- US. The key regulations in the TPP
agreement such as ISDS, transparent trade, and intellectual property

which expand the role of the market is a great liability for countries whose
government programs have built their basis on social welfare, national
development and international cooperation. As an example, most
countries have governments promising free or reduced medical care. The
intellectual property clause in the TPP will tend to benefit the private
enterprises and in turn, increase the prices of essential drugs. China
though liberalized, still has the highest level of state intervention in all its
national and foreign afairs which prevents it from joining TPP. As per Eric
Stadius and Elizabeth Briggs (2012) Beijings policy of sustaining staterun enterprises, the difficulties surrounding land purchase in China, the
Chinese Central Banks intentional undervaluation of the currency, and
various barriers to free trade, all violate the principles of the TPP.
Many China watchers both national and foreign opine that there is already
open trade between the members of TPP and that the agreement has
ulterior motives such as to contain China, reorient discussion in Pacific
trade away from China and to compete with Chinas economic interest.
(Cai 2011, Li 2012, John Ross (2011), K.V. Kesavan and Kartikeya Khanna
(2012)).
China on the other edge is on a leading front to negotiate a regional free
trade agreement with countries in the pacific. This trade agreement is
closed door negotiation and is an alternative form to the more open and
high-standard TPP. The RCEP is seen as a complementary free trade
agreement (FTA) to the TPP. In the view of China, RCEP enhances
cooperation between the ASEAN countries, India, Australia, Japan and New
Zealand. With India and China, two major economies on the east and the
ASEAN countries, the RCEP tends to a have stronger hold on the eastern
hemisphere trade. The RCEP has a relatively weak agenda than the TPP,
with lower standards of regulations for intellectual property and Investor
relations. Considering the political and business environment of China and
India, RCEP is a reasonably achievable, and implementable FTA.
The United States has a higher power in the TPP with 62% share in total
GDP (Figure 2). The key implication of this would be major decisions in
favor of the US. Even if China decides to join the pact, US will still have a

45% share in the total GDP of the members. The key decision maker with
a larger pie will still be the US, but there will be a slight shift in the power.
Therefore, in terms of power, the US will still be in the driver seat, but with
China applying the brakes.

Conclusion
TPP is designed on an ideal platform of liberal views and is very beneficial
for multi-national companies. However, stricter laws have to be enforced
by emerging countries to ensure to meet the requirements of TPP. This
will need a greater amount of government involvement, and would also
lead to a major resistance from domestic markets. This is one of the major
issues that China would not like to join TPP. Secondly, the dominance of
the US in the TPP may also be a reason for its reluctance to join and finally
the strained trade relations between two major economies also play an
important role.
The emergence of two individual regional FTAs, the TPP and RCEP, will
have a higher impact on the global trade. The countries such as Vietnam,
Malaysia etc., which are mere spectators currently, will become direct
beneficiaries due to the complementary trade agreements with the US
and China in the form of TPP and RCEP. Some of the countries which are
willing to be part of both the trade agreements will see added advantages
of increased exports to China, and tax-free imports from the US at the
same time.
Therefore, at this point in time, in my opinion, China not being a part of
TPP would benefit the global economy. There will be increased scope for
MNCs to reap the benefits of competition from smaller emerging
countries and cheaper trade when operating from the East Asian region.
The host countries will enjoy a growth in GDP. China can also benefit from
the manufacturing sector moving to less developed economies, and can
concentrate on transitioning to a service economy to increase its growth
rate.

References
Summary of the Trans-Pacific Partnership Agreement | United States Trade
Representative.
(n.d.).https://ustr.gov/about-us/policy-offices/pressoffice/press-releases/2015/october/summary-trans-pacific-partnership
Trans-Pacific Partnership: Summary of U.S. Objectives | United States Trade Representative.
(n.d.). Retrieved June 14, 2016, from https://ustr.gov/tpp/Summary-of-US-objectives
World Bank Group. 2016. Global Economic Prospects, January 2016: Spillovers amid Weak
Growth. Washington, DC: World Bank. Washington, DC: World Bank. doi:10.1596/978-14648-0675-9. License: Creative Commons Attribution CC BY 3.0 IGO
Stadius, E., & Briggs, E. (2012, August 20). The Trans-Pacific Partnership:
Free Trade at What Costs? http://www.coha.org/the-trans-pacificpartnership-free-trade-at-what-costs/
Cai, Penghong (2011) The Trans-Pacific Partnership: A Chinese
Perspective, presentation delivered at the 20th PECC General Meeting,
Washington D.C., www.pecc. org/resources/ cat_view/44-trade-andinvestment?limit=40&order=name&dir=DESC
Kesavan, K.V. and Kartikeya Khanna (2012) Japans Dilemma On The
Trans-Pacific Partnership Analysis, Eurasia Review, 11 September.
www.eurasiareview.com/11092012-japans-dilemma-on-the-trans-pacificpartnership-analysis/
Ross, John (2011) Realities behind the Trans-Pacific Partnership,
China.org,
18
November,
www.china.org.cn/opinion/201111/18/content_23953374.htm
Yu, P. K. (2015). How Chinas exclusion from the TPP could hurt its
economic growth. Fortune.Com, N.PAG.

Source of cover page image:

YAFEI, H. (2015, October 23). China Sees a Chance in TPP to Stimulate
Reforms.
Retrieved
from
http://www.chinausfocus.com/financeeconomy/china-sees-a-chance-in-tpp-to-quicken-reforms/

Appendix
Figure 1: Forecast of Changes in Growth due to TPP among members and non-members

Source: World Bank Group. 2016. Global Economic Prospects, January 2016: Spillovers amid Weak Growth. Washington, DC: World
Bank. Washington, DC: World Bank. doi:10.1596/978-1-4648-0675-9. License: Creative Commons Attribution CC BY 3.0 IGO

Figure 2: Comparison of power with or without China as a member in TPP