SHANGHAI — In what many considered a foregone conclusion following the election, TPP is all but dead in the water.
In a video overview of his plans for his first 100 days in office released Monday night, President-elect Donald Trump called the 12-nation Trans-Pacific Partnership trade deal a “potential disaster for our country,” adding that he will seek to withdraw the U.S. from the trade pact on Day One of his administration.
This change of course has led major Asian powers to pivot to China’s proposal for an alternate megadeal — one that omits the U.S.
The Regional Comprehensive Economic Partnership is a trade pact between the 10 member states of the Association of Southeast Asian Nations plus regional trading partners including Australia, China, India, Japan, New Zealand and South Korea.
According to data from Australia’s foreign ministry, countries within the RCEP contain roughly 3.5 billion people and account for a total gross domestic product of around $22.6 trillion.
China began negotiating the RCEP as a counterbalance to the TPP, which it was not a part of. Last year, the U.S. and 11 countries in the Pacific region agreed as part of the TPP to liberalize trade and cut barriers among participating countries.
President-elect Trump has called the TPP “catastrophic” for the U.S. economy and President Obama has suspended efforts to pass the deal before Trump takes office.
In response, Chinese President Xi Jinping has taken the opportunity to promote its regional trade bloc at last week’s Asia-Pacific Economic Cooperation summit in Peru, according to reports in China state media.
“The scope of the RCEP covers trade in goods and services as well as investment, intellectual property and e-commerce. The collapse of the TPP agreement may galvanize momentum for the successful conclusion of the RCEP, with China and ASEAN playing central roles in strengthening the Asia-Pacific trade architecture,” said Rajiv Biswas, Asia-Pacific chief economist for IHS Markit.
Already this week, countries such as Japan and India, which had been somewhat reluctant partners in the RCEP process, and much more enthusiastic about the TPP, have overtly voiced their intention to support the China-led pact.
“There’s no doubt that there would be a pivot to the RCEP if the TPP doesn’t go forward,” Prime Minister Shinzo Abe was quoted as saying in the Kyodo News.
There are several reasons for reticence toward the RCEP, with countries that have butted heads with China in the past — Japan, India, Taiwan — perhaps more inclined to work with the U.S. as a partner, but the RCEP is also a watered-down trade agreement, when compared with the lofty goals of the TPP.
“The TPP was a beacon of hope in an environment of subdued trade activity and weak global growth,” Hong Kong-based HSBC Holdings’ economist Joseph Incalcaterra wrote in a research note. “Despite drawbacks, the RCEP should help boost trade volumes across Asia and spur investment in new supply chains,” he added.
The 16th round of RCEP talks is scheduled to take place in Indonesia in December. Earlier this month, ministers from RCEP countries noted in a joint media statement that “the soft outlook for world trade growth and increasing protectionist sentiment underscored the urgency” of concluding the trade deal.
In spite of this newfound enthusiasm, experts are split about the impact that the success of a China-led mega deal over the U.S.-led effort will have in terms of the balance of power in global trade.
“If RCEP does reach implementation stage and TPP fails, this would put China at the forefront of regional trade leadership in the Asia-Pacific, adding to its regional economic influence through other initiatives such as the One Belt One Road initiative and the creation of the Asian Infrastructure Investment Bank,” Biswas said.
“The TPP negotiations had been perceived by the U.S. to be part of its strategic pivot towards Asia, so to the failure of TPP would probably be seen as a setback to the overall U.S. strategic efforts to strengthen its relationship with Asia.”
Alicia Garcia Herrero, chief economist for the Asia-Pacific region at Natixis, similarly believes that the fall of the TPP is likely to benefit China and the promotion of the RCEP in the region.
“Basically, I agree that RCEP is very likely to go ahead and the U.S. is going to lose clout in the region, which China will profit from,” she said.
Though she also said while Trump’s words seem to indicate a desire to undo Obama’s move toward Asia and the current “cordial” U.S. relationship with China, this is easier said than done.
And according to Beijing-based economic theorist Michael Pettis, who has authored several books on the subject of global economic growth, any major international trade agreement that omits the U.S. is going to be “pretty meaningless.”
“The way the U.S. enforces these global trade regimes is not with battleships or any of that nonsense, it’s by the willingness to run very large current account deficits, which then allow other countries to grow when they need growth. So unless somebody steps in and says, we are now willing to run the very large deficits that the U.S. has run, I don’t see any other trade regime replacing them,” Pettis said.
China, which is facing what Pettis describes as “an extremely difficult” adjustment, requires a large current account surplus, making the country unable to replace the U.S. as the dominant force in the global trade regime.
“If China’s current account surplus shrinks that will make the adjustment far more difficult. Maybe in 20 years China can run a deficit, but who knows, in 20 years anything could happen,” Pettis said.
“For the moment, if the U.S. withdraws its support as the global backer for international trade, then the result will not be alternatives; the result will be a breakdown in international trade.”
According to Huang Yiping, a professor at Peking University’s National School of Development, the U.S. and China’s history of being at odds over the standards of new economic reforms looks likely to continue whichever form these international trade agreements eventually take, which is bad news for everyone.
“It is no bad thing for there to be competition in the process of liberalization. If the world’s two largest economies choose to reject each other and act like it’s every man for himself, it is very likely to send significant shock waves throughout the structure of international trade and investment,” he said.
“It’s only a matter of time before [America] loses its ranking as the world’s biggest economy,” Huang added.