Seizing Opportunity in a Post-TPP World

Trade is the glue for globalization and without it other connections can subside. But US voters rejected a US leadership role in global trade deals and elected billionaire Donald Trump who has already signaled intent to have the United States to withdraw from the Trans-Pacific Partnership with 11 other nations. Analysts suggest that China could step into the US role, but “The baton of global leadership rarely passes in such a seamless fashion,” cautions Yale professor Stephen S. Roach. The United States has global responsibilities not easily dismissed, and China confronts multiple risks including high debt and other economic imbalances. Roach proposes that Trump could pursue another huge opportunity by concluding the US-China Bilateral Investment Treaty, under negotiation since 2008. China is the third biggest US export market. Roach concludes, “For a growth-starved US economy, there could be no better way of tapping into what promises to be the world’s greatest market expansion in the years ahead.” – YaleGlobal

Seizing Opportunity in a Post-TPP World

Trump dismisses TPP, but could pursue another big opportunity – the US-China Bilateral Investment Treaty
Stephen S. Roach
Thursday, December 1, 2016

America and Asia: Will US President-elect Donald Trump, top, sway the United States towards Asia? China President Xi Jinping's ambitious leadership in Asia could provide incentive

NEW HAVEN: The demise of the Trans-Pacific Partnership is the final nail in the coffin of global trade liberalization. The handwriting was on the wall with failure of the Doha Round, which floundered immediately after its initiation in 2001. But now that US President-elect Donald Trump has signaled his intent to have the United States withdraw from TPP – signed, but not ratified, after eight years of tortuous negotiations among 12 nations – there can be little doubt of the seismic cracks in the postwar global order.

The kneejerk reaction is to presume that China will quickly fill the void. After all, it is the driver of an alternative 16-nation trade agreement – the Regional Comprehensive Economic Partnership, or RCEP.  While the RCEP framework stops well short of TPP’s tariff reductions and high standards, it still has the potential to play a catalytic role in fostering greater pan-regional economic integration in the world's fastest growing region. That would certainly seem to enhance China's power base.

Moreover, with the next round of negotiations slated for early December in Indonesia, full ratification of RCEP, in conjunction with Chinese-led institution building – notably, the Asian Infrastructure Investment Bank and the New Development Bank – would underscore China’s global leadership push. So, too, would China’s ambitious One Belt, One Road, a 60-country cross-border investment initiative, together with the International Monetary Fund’s recent inclusion of the renminbi in its Special Drawing Rights construct. And there is the “Philippines pivot” – the recent move by President Rodrigo Duterte to shift his nation’s primary strategic allegiance from the United States to China. On the surface, these considerations paint a picture of China is stepping into a global role just as the United States steps back.  

If it were only that simple. The baton of global leadership rarely passes in such a seamless fashion. Notwithstanding Donald Trump’s “America first” attitude, the United States is hardly walking away from its global responsibilities. Yes, America has learned a painful lesson in the past eight years – that it has become exceedingly difficult to maintain its position as global hegemon in the aftermath of the great financial crisis and recession of 2007-09. An anemic post-crisis economic rebound that has consistently been running at half the pace of earlier recoveries played a big role in fueling the populist backlash giving rise to Trump’s victory. Similar outcomes are, of course, evident in the UK’s Brexit, with rumblings of more to come in continental Europe – especially Italy and France. With economic problems simmering at home, the appetite for global power understandably wanes.

Yet that same lesson should not be lost on China. While the Chinese economy has been on an extraordinary path of growth and development for more than 35 years, it has reached a critical juncture – the need to shift focus from a manufacturing-led producer model to more of a services-based consumer society. This has given rise to increasingly daunting transitional risks, notably the perils of debt-intensive growth, loan quality problems in the Chinese banking system, renewed property bubbles in first-tier cities and “zombie” state-owned enterprises. Even senior Chinese officials are concerned that a failure to address these risks could well lead to a protracted period of weak economic growth that would pose the ultimate challenge to the aspirational global leadership objectives espoused by President Xi Jinping in his vision of the China Dream.     

From the US perspective, TPP was always more than a trade deal. By excluding China and, in the words of President Barack Obama, endorsing an agreement that would ensure “China would not write the rules” of global trade, TPP was the strategic lever in America’s so-called Asian pivot – a thinly veiled China containment strategy. Nevertheless, its demise does not mean Chinese leadership, either in Asia or on the broader global stage, is simply there for the asking. 

There is a long and tough history to the rise and fall of great powers. Geostrategic overreach, as underscored by Yale historian Paul Kennedy, is doomed to failure if it lacks support from a strong economy. While the United States is grappling with that dilemma today, it does so from a position of strength as a prosperous developed economy. China, by contrast, lacks that strength. It is relatively poor as measured in per capita income terms and faces the dreaded “middle-income trap” – historically, the ultimate stumbling block for most developing economies on the road to high-income prosperity.   

As such, ratification of a China-centric RCEP does little to alter the balance of global power in a post-TPP world. China’s outward facing strategic objectives – from trade liberalization and multilateral institution building to the Belt and Road initiative and its more muscular approach in the South China Sea – obviously represent a new phase in its nascent role as a regional hegemon. But it would be premature to conclude that this is a major step on the road to global leadership. That can only happen over time if China stays focused on the reforms urgently required to address the imbalances that have been building in its domestic economy. Global leadership starts with strength at home.

Meanwhile the incoming Trump administration is about to confront a major dilemma in framing its China policy. Its campaign bluster – high tariffs and charges of currency manipulation – is a non-starter, both on merits as well as potential repercussions. The functional equivalent of a tax hike on prices of Chinese imports would only stoke the populist backlash that swept Trump into power. Moreover, as America’s third largest and most rapidly growing export market, to say nothing of being the owner of more than $1.3 trillion in US Treasuries, and as much as $500 billion in other dollar-denominated assets, China is hardly lacking in potentially powerful retaliatory ammunition of its own.

But Trump, the dealmaker, actually has the opportunity to draw on his self-professed greatest strength and strike an extraordinary deal – breaking the torturous gridlock on negotiations of a US-China Bilateral Investment Treaty, or BIT. What more could a pro-business president hope for than to open up rapidly expanding domestic Chinese markets to US multinationals? Since 2008, when BIT discussions were formally initiated, there have been 25 rounds of painstakingly slow negotiations. Significantly, there is now broad agreement between both countries on the principles of cross-border investment – especially in terms of transparency, technology transfer, ownership caps and nondescriminaton of "national treatment." 

The hang-up is on the so-called negative list – sensitive sectors including telecommunications, defense, technology, domestic airlines and courier services, and certain financial services that one party or the other wants to exclude from foreign ownership. So far, there have been three revisions to joint negative list proposals, and the differences appear to be narrowing. But if Trump attacks China with aggressive protectionist measures, negotiations will break down and BIT will end up just like TPP. By reversing course and converting the so-called China threat into a meaningful opportunity by concluding negotiations on market access, Trump has the chance for a quick win in his pro-growth agenda. For a growth-starved US economy, there could be no better way of tapping into what promises to be the world’s greatest market expansion in the years ahead. 

Most of us have learned never to say never when it comes to predicting the ebb and flow of Trump world. Rather than bemoan America’s loss of global leadership in a post-TPP world, maybe it’s time to rethink the opportunity of a very different approach. The fate of a fair and equitable globalization may well hang in the balance.

Stephen S. Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China (2014).

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