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China’s Concerns Regarding TPP No More than Empty Worries?

Jianmin Jin, Senior Fellow

January 11, 2012 (Wednesday)

Japan’s global strategy is at a crossroads; it must soon decide whether or not to join the TPP. It will take a lot of work to gain consensus from across the country, and strong political leadership is necessary. Not only will this decision affect the direction of Japan’s political economics in the future, it may even affect the regional integration and economic development of East Asia. China is actively promoting the economic integration of East Asia, which depends heavily on external economies, and is therefore extremely interested in Japan’s FTA/EPA strategies; it anxiously awaits Japan’s decision.

China’s FTA Strategy: Integrating Political Economics and Security Policy

While in Japan the positive and negative effects of FTAs on the economy and industry are often discussed, China tends to think of FTA strategy with a wider perspective, including the strategic meaning in terms of politics and diplomacy. The fusion of economic profits arising from FTAs causes the politics and diplomacy of the member countries to become very intimate and brings them closer to joint profit. In other words, while China’s FTA strategy pursues the country’s economic profits, it was developed to realize China’s politics and security more than create profits for its partners. This understanding seems to be in concurrence with the “Asia Collective” proposed by Japan’s former PM Hatoyama and the “Asia Community” proposed by South Korea’s pundits. It is also close to the US’s FTA strategy.

China takes into account the strategic economic, political, and diplomatic significance of FTAs and aims to 1) realize scale merit of economic development, 2) obtain resources necessary for its own economic growth, 3) erase the “China Threat” doctrine, 4) suppress separate independence movements like “Taiwan Independence”, and 5) improve the international environment, especially the surrounding environment. It has made FTAs and similar agreements with ten countries/regions and has moved towards carrying them out. Additionally, China is in negotiations with six countries/regional groups regarding FTAs and conducting FTA research with India, South Korea, and Japan. When looking at the countries/regions China has made FTAs with or is in negotiations with, these can be grouped into: greater China economic region (four cross-strait regions: mainland China, Hong Kong, Taiwan, Macau); surrounding regions (ASEAN, Pakistan); resource regions (GCC, Australia); and developed countries (Switzerland, etc.).

Figure 1: China’s FTAs and related negotiations and research

Agreements
(10 countries/regions)
Negotiations
(6 countries/regions)
Research Projects
(3 countries/regions)
• Cross-strait regions: Hong Kong, Macau, Taiwan
• ASEAN10, Pakistan, Chile, New Zealand, Singapore, Peru, Costa Rica
• Australia, Iceland, Norway, Switzerland
• Gulf Cooperation Council (GCC), Southern African Customs Union (SACU)
• Completed: India, South Korea
• In progress: Japan-South Korea

Great Expectations for China-Japan-South Korea FTA

Over the past few years—in particular, since the global financial crisis—correcting and stabilizing the global economy (including problems with governance of the global economic system) has become an issue for the entire economics world. As a consequence of this change, China will likely become unable to rely on western markets, upon which it has been largely dependent; furthermore, China has decided that it should not be completely dependent on those markets in the first place, and is adjusting its development strategy to rest on the two main pillars of increasing domestic demand and market diversification.

In striving to diversify its markets and create a multipolar global economy, China has high hopes for an FTA with Japan and South Korea. These three countries account for approximately 20% of the global GDP and 70% of East Asia’s GDP, but China, Japan, and South Korea have an intra-regional dependency rate of only 25%. China’s trade dependency on Japan and South Korea is particularly low, dropping from 21% in 2005 to 16% in 2011. Therefore, there is great potential to increase trade within northeast Asia, and this would overlap with the priority target areas of China’s market diversification strategy. In fact, according to Chinese researchers, among possible FTAs with other regions, the FTA with Japan and South Korean would be the most effective and beneficial, and they are actively promoting these two countries as regions of importance.

Moreover, advancing the China-Japan-South Korean FTA would actively ameliorate past acrimony within northeast Asia and begin to create a community within the region through shared profits. That is to say that an additional motive for China to want this FTA is to create a framework of security and political stability in the region.

 Figure 2: China’s top 10 trade partners

Source: Created by the author based on China customs’ trade statistics

Concerns over US-Led TPP

Meanwhile, Japan’s increased interest in the TPP has caused China some disquiet. Stuck in a dilemma between being unable to blithely join an American-led TPP and missing out on the benefits it entails, China also worries about a centrifugal force arising to rip asunder the economic integration of East Asia and shows a distinct feeling of restlessness. In other words, China is beginning to worry that if Japan, which never actively pushed for the China-Japan-South Korea FTA in the first place, chooses the TPP, its motivation towards the FTA will decrease even further.

The US has strongly recommended that Japan join the TPP (although it may not appear that way to Japan). China has analyzed the US’s motives for promoting the TPP as follows: while the US is trying to grasp the leadership of the Asia-Pacific cooperative through the TPP in order to share in the high economic growth of Asia, it is also trying to restrain China from taking the lead for security reasons. In fact, China thinks that the US is setting many conditions on the TPP that China will find difficult to meet in order to prevent it from joining. The US has showed concern for Asia’s over-dependency on China and taken advantage of the hopes of Asian countries that the US will act as a balancer, and it presents itself as having brought about Asia’s recovery. If China is unable to join the US-led TPP, its national interests will be hurt, but experts say that it will have no choice but to accept its neighbors’ hedging strategies.

In order to take on the above challenges, China is refining countermeasures such as: 1) continuing to promote East Asia FTA strategies such as China-Japan-South Korea FTA and ASEAN+3; 2) making use of its enormous market power and promoting FTAs with other countries (e.g., the Shanghai Cooperation Organization’s FTA); 3) accelerating urbanization, bringing about a switch to a domestic demand-led economic growth model, and reducing external dependency.

China Must Handle the Situation Soundly

However, it is not clear that what China sees as an effort to exclude it from the TPP is in fact part of the US’s strategy and that it is not simply a misunderstanding or mistaken assumption. Otherwise, why would the US want to include in the negotiations Vietnam, also a one-party state but less developed than China? There is no reason why Vietnam, but not China, should be able to accept labor unions, labor standards, environmental standards, and strict standards relating to intellectual property protection, which China views as obstacles excluding it from the TPP. As was seen in the NAFTA negotiation process, due to internal pressures in the US (senate, labor unions, NGOs), the trade authority was forced to set very strict labor and environmental standards and seek after liberalization without exception. Therefore, China must speed up its domestic reform, come to a compromise with the US on the TPP, and actively take on rule-making.

On the other hand, China’s efforts to push forward the China-Japan-South Korea FTA have been highly praised. In contrast, Japan’s indecisiveness (to China, Japan appears to be doing Tai Chi) is quite puzzling (Japan is likely hesitating over domestic vested interests). One sometimes hears reasoning such as “We can’t enter into a FTA with China because it has a one-party administration, and we have different values.” However, Japan already has an EPA with Vietnam, another one-party state, and such an ideological reason for not making an agreement sounds like nothing more than an illogical excuse. Such an FTA with its largest trade partner, China, would not only be an economic coup for Japan, but it should also be viewed as a chance for the two countries to reconcile past differences. An FTA with a neighboring country by which both countries can prosper peacefully (or when tensions rise, strive for peace) should be considered an effective security tool. Therefore, as the central country tying together the China-Japan-South Korea FTA and the TPP, Japan should not choose between the two, but balance them with each other.

 Figure 3: Japan’s export destination shares

Source: Created by the author based on Ministry of Finance trade statistics