The China-led trade initiative is seen getting a major boost from President Trump's decision to drop out of TPP.

SHANGHAI — Out with the Trans-Pacific Partnership and perhaps in with the China-led Regional Comprehensive Economic Partnership.

Following President Donald Trump’s executive order on Monday to pull out of the Trans-Pacific Partnership, observers believe the move could significantly boost China’s sway over trade in Asia — at the expense of the U.S.

The 12-nation TPP was ironed out by the Obama administration as a key part of its pivot to Asia. The pact aimed to strengthen ties between member countries, increase growth and reduce tariffs, among other measures. Although the trade deal would have covered 40 percent of the world’s economy, China was not included in the agreement.

Subsequently, China offered up an alternative Asia-Pacific trade liberalization deal for the 10 member states of the Association of Southeast Asian Nations, along with regional trading partners including Australia, India, Japan, New Zealand and South Korea, in the form of The Regional Comprehensive Economic Partnership.

With the TTP agreement now in tatters, many China watchers believe the China-led deal will come into the foreground.

“China is likely to step in to the vacuum left by U.S. withdrawal from TPP. It has a regional trade pact of its own on the drawing board,” said Jonathan Fenby, author and China Chairman at TS Lombard Research Group.

With the U.S. departure, the TTP is not such an attractive proposal and a more lenient China-backed deal could offer countries added benefits and ease of entrance.

“A number of TPP nations still want a trade pact. Unlike TPP, China’s scheme does not lay down conditions on environmental and labor standards or legal requirements, so it should be more acceptable to Vietnam, for example. We may see a modified TPP led by China,” Fenby said.

Alicia Garcia Herrero, chief economist for the Asia-Pacific region at Natixis and senior research fellow at Bruegel, had previously stated that, “The U.S. is going to lose clout in the region, which China will profit from,” and still holds that viewpoint after the U.S. withdrawal from TPP. But she believes there is still room for maneuvering when it comes to China pinning down agreements between trade partners in different regions.

“RCEP is an ASEAN-based integration process, which means that China will need to pull all ASEAN members so it might be too slow for China’s interest. If that were the case, China will push a new integration process, most likely linked to the countries within the Belt and Road [Initiative, which aims to connect Europe, Asia and Africa via trade] rather than ASEAN. This means that Central and Eastern Europe will be involved and not only Asia,” she added.

With what could be a death knell for TPP following Trump’s action, some observers predict a new era of trade that will benefit and promote China in the Asia-Pacific.

“China is likely to play a much stronger lead role in the future Asia-Pacific trade architecture through a number of multilateral trade liberalization initiatives, notably the RCEP and FTAAP [Free Trade Area of the Asia-Pacific],” wrote Rajiv Biswas, Asia Pacific chief economist at IHS Global Insight, in a note.

“China’s President Xi Jinping made a strong call in his speech at the World Economic Forum in Davos last week signaling that China will position itself as a champion of trade liberalization. Initially, the U.S. withdrawal from TPP will galvanize momentum for the successful conclusion of the RCEP,” Biswas said.

“The U.S. withdrawal from TPP will help to strengthen China’s economic leadership position in the Asia-Pacific, with its leadership on the RCEP and FTAAP building on its other regional economic initiatives, such as the One Belt, One Road regional strategy as well as China’s leadership in creating new development finance institutions such as the Asian Infrastructure Investment Bank,” Biswas noted.

Chinese state-run media took a defiant tone on Monday when it published a provocative op-ed rallying against the TPP deal and the Obama administration and its divisive trade agreement.

“As the TPP goes against the Asia-Pacific economic integration, it deserves to be laid aside or abandoned. Washington’s attitude toward the integration depends on whether it helps the U.S. maintain its leadership in Asia,” commented an op-ed in the English language, state-run newspaper Global Times.

“The Obama administration promoted the TPP relentlessly more to hamper and tear apart the Asia-Pacific regional integration than to forge a multilateral trade mechanism with higher standards. This disguised intention makes the TPP setback a result not unexpected,” continued the op-ed.

There are concerns, however, that Chinese-led trade deals would not be in the best interests of the world economy.

Michael Pettis, a Beijing-based economic theorist and the author of several books on the subject of global economic growth, believes that a U.S. retreat on global trade will not ultimately lead to a shift in power.

“The U.S.-cantered trade regime is built around open U.S. capital markets, which allow unlimited foreign inflows and a persistent U.S. deficit. China’s savings are structurally high and it is extremely difficult to reduce them, and so it must export capital and it must run large trade surpluses. If every country were to shift from the U.S. trading regime to the Chinese, it would be the equivalent for each of them of a contraction in demand equal to 2.0 to 2.5 percent of their GDPs, and even more if China’s trade surplus is understated by disguised capital outflows. What is more likely from a U.S. retreat is a return to the norm of unstable global trade and more aggressively mercantilist policies,” said Pettis.

The Chinese economy is structurally incompatible with what is needed to replace the U.S.-centered trading regime of the past five decades, according to Pettis.

“As for China, its trade surplus is an important moderating factor in the difficult trade-off it faces between rising debt and rising unemployment. It currently requires an increase in debt equal to at least 40 percent of GDP for China to reach its GDP growth target. If the trade surplus is forced by external pressure to contract from, say, 3 percent to 2 percent, the amount of debt required to maintain the GDP growth target will be nearly one-third higher, so instead of over 40 percentage points of GDP, it would take 50 to 55 percentage points. This would not be the case, of course, if the trade surplus contracted because of domestic rebalancing,” he said.

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