The Trans-Pacific Partnership is “the next big thing” in international trade. Its 12 members account for about 40% of the world GDP, concentrated around the economically dynamic Pacific region. The deal promises to slash tariffs across a range of products, and to deal with sensitive yet vital issues of 21st century-trade; intellectual property rights and state sovereignty in a globalized world. Yet despite its Asia-Pacific focus, the TPP does not include China. Was this a mistake on the part of the TPP’s signatories, considering China’s enormous economic influence? The answer is no, because the TPP is as much about international politics as it is about international trade. The US is using the deal to pre-empt China in shaping the future of the global economy, and force China to play by its rules.
How the TPP is carried out illustrates the US’s political motivations. The deal’s contents themselves look like ordinary economics: slashing barriers to trade, and setting down international trade regulations. However, simply pushing for the trade deal gives the US “first-mover advantage”. An insight into this can be gleaned by reading US President Obama’s explicit declaration that “the TPP allows America – and not countries like China – to write the rule of the road in the 21st Century”. Since neither China nor America looks forwards to a direct military clash, international commerce is the most significant arena where their competition will be played out. With the TPP’s rules applied over nearly half of global GDP and in currently unregulated but critical areas, the US can use this deal to entrench its will in the global economic sphere. China will then have to face an ultimatum: accept these rules, or go against the world.
Through the TPP the US is setting down regulations for critical areas in future international trade. The first area is Intellectual Property (IP) rights. It is no longer possible to ignore the effects of the “knowledge sector”. For instance, just look at the spectacular rise of technology companies like Facebook and Google, and how technologies have transformed our lives and the broader economy. Intellectual Property rights are hard to enforce across borders, and are particularly weak in many of the TPP’s developing signatories. Thus, beyond clarifying and standardizing regulations regarding IP, the TPP also focuses in making sure that its members enforce its rules, with penalties if they fail to do so.
The second area of particular importance is state sovereignty in a globalized economy. If the TPP is to be successful in increasing global trade, it will also inadvertently increase the chances of legal conflict between companies and governments. Accordingly, the deal includes a mechanism known as Investor-State Dispute Settlement (ISDS), which sets out the protocols on how foreign private companies can sue a government if it suspects there are unfair interventions in the local market. Having clear regulations on the matter would help developing economies attract foreign investors, who may have concerns about risks. They will also address situations where governments may set public policies that clash with private companies’ interests. However, there is opposition to the concept of ISDS, due to fears that it will help increase the power of large multinationals at the expense of ordinary consumers.
Signatories to the trade pact have much to weigh up between its pros and cons, both politically and economically. The economic benefits are substantial. The TPP will cut 18,000 tariffs, or about 98% of the tariffs in the combined market. Exports and imports will both be cheaper. Australian farmers should see their sugar exports to the US rise, while consumers can look forward to prices of electronics imported from Japan falling. Moreover, the deal strengthens members against outsiders. Malaysian apparels exports, for example, should become relatively cheaper than those from a non-member competitor, like Bangladesh. Developing countries such as Vietnam have been among those most driving the development of the TPP.
For some signatories, the political gains may rival – or even surpass – economic ones. US Secretary of Defense Ash Carter emphasizes that TPP is a golden chance for the US to “deepen our alliances and relationships abroad”, and considers it as strategically important as an aircraft carrier. Vietnam and Malaysia cannot be less eager for a chance to align themselves with the US, considering their conflicts with China in the South China Sea. The same logic applies to Japan, which has been strengthening its Southeast Asian ties against China.
Yet the deal is not all sunshine and rainbows for its signatories. The aforementioned regulations may very well harm their citizens. There are suggestions that stricter patent rules will strangle generic drug manufacturers and raise drug prices for patients with HIV and cancer. Proponents of internet freedom accuse the TPP’s IP rules of cracking down on files sharing to benefit large corporations at consumers’ expense. The aforementioned ISDS mechanism means government’s ability to pass public policies (such as health regulations) may be challenged by foreign corporations. Even if these negative effects can be countered, implementing the deal itself is a challenge. Countries will have to deal with entrenched interests in dismantling tariffs, and enforcing tougher IP rules will not be easy for members from developing countries.
The big question, of course, is how will China react to the TPP? With the deal being presented by the US almost as a direct challenge to China, it may very well regard the TPP as such, and act accordingly. The US should do well to remember the diplomatic coup that was the Asian Infrastructure Investment Bank. Set up by China as an act of protest against what it sees as a Western-dominated global financial order, the bank now counts among its patrons many US allies, including Australia. If China decides that it needs a rival trading bloc to impose its own image of the future global economy, it will probably find many supporters. Russia has plenty of interest in countering American influence, and China can count on its strong relationship with many Asian, African and South American nations.
The other scenario is that China may just accept the TPP’s existence, and might even eventually join it. After all, the Chinese economic miracle relied on an integrated global economy that encourages trade and foreign investment, which is precisely what the TPP hopes to cement and push forwards. Furthermore, the TPP will create legal precedents that China should find it hard to dislodge. There are other benefits for China. Joining the trade bloc gives China insider status, and a much stronger hand in shaping how the regulations should be played out. It could very well turn the US’s creation into a double-edged sword.
The future of international trade will be heavily influenced by the US-China rivalry. The Trans-Pacific Partnership is not just a deal that will encourage economic integration between countries and a breakthrough in international trade law, but it is also a chess move by the US to check China’s influence. Its outcome can only be guessed. However, what the TPP does show us beyond doubt is that economics can never be separated from politics, and they intertwine in myriad different ways. It will be fascinating to see how the trade relationship between the two superpowers develops in years to come.