China needs strategy to deal with TPP

US-led Trans-Pacific Partnership could limit Beijing's trade and influence unless action is taken now

Besides setting the goal of trade liberalization, the Trans-Pacific Partnership added more content into its scope, including services trade, intellectual property rights, environmental preservation, labor standards and fair competition.

To reach an agreement in the shortest time possible, a transitional period for claiming zero tariffs on some products was reserved by the parties involved. However, the level of tax cuts promised by the parties and the contents covered by the agreement suffice to make the TPP the world's highest-level free trade agreement so far.

The conclusion of such a high-level agreement sets a new standard in establishing rules of global trade, as these trade liberalization targets have been hard to reach under the World Trade Organization in recent years.

From this sense, the real intent of the United States in leaving WTO rules out of the code and starting afresh is to achieve the strategic goal of dominating and reshaping the global trade order, and making itself invulnerable to challenges from China and other emerging economies.

Also, the TPP is the economic pillar for the US to re-employ its Asia-Pacific strategy in an effort to prevent from being excluded from the progress of the East Asian regional economic cooperation. From the perspective of the political economy, it is indeed the most economic choice for the US to safeguard and expand its interests, and suppresses competitors with rules.

So how does the TPP affect China? Economically, there would be some trade diversion effect on China. The TPP specifies that the member states shall eliminate, within the prescribed time frame, tariffs on more than 18,000 goods, including automobiles, machinery tools, information products, consumer products, chemicals and agricultural products such as avocados, wheat, pork and beef.

Exports of some of China's labor-intensive products, such as clothing, shoes and hats, would be diverted to Vietnam. The export of some mechanical and electrical products might be shifted to Singapore and Malaysia. Also, foreign investment would be diverted specifically to Southeast Asian countries at a faster speed, thus reducing foreign direct investment in China.

The reason is that, under the rules, the country of origin can benefit from tax cuts only when over 60 percent of the intermediate goods used to make an export product come from the member country.

Of course, neither can we overestimate the impact of the TPP on China's economy, since zero tariffs would be implemented on only around 90 percent of the products. Some sensitive products carry a transition period of more than 16 years. Also, the free trade of more than 80 percent of the products has been implemented bilaterally by multiple free trade agreements.

Moreover, many TPP member countries have already signed free trade agreements with China bilaterally or at the regional level. From the perspective of foreign investment, even without the TPP, the outward diversion of labor-intensive product manufacturing and investment shifts by transnational companies has become an inevitable trend with the disappearance of China's demographic dividend, and the transformation and upgrading of China's economy.

Second, from the perspective of political safety, with the TPP the US intends to strengthen its economic ties and consolidate its political and military alliances with Southeast Asian countries, thus achieving its goal of gradually regaining its dominance in the Asia-Pacific region and undermining Chinese influence. Therefore, the ultimate conclusion of the TPP is to limit China's constructive role in regional political safety affairs and bring new challenges to China's established Asia-Pacific strategy.

Also, from the perspective of the free trade area strategy, the implementation of the TPP would lure more countries and regions to apply for entrance into the TPP, as currently South Korea, Thailand and China's Taiwan province have applied for entrance. The high-level trade liberalization outlined in the TPP, as well as the gradual increase in participating countries and regions, would definitely delay the trade liberalization process in Asia and the Asia-Pacific region, thus posing grave challenges for China's Asia-Pacific free trade area strategy.

If the Transatlantic Trade and Investment Partnership between the US and the European Union also is concluded before too long, a new global trade system that overrides the WTO might come into being, which would substantially downgrade China's influence under the multilateral system and put China at risk of being marginalized.

In face of the intent of the TPP, China needs to get a clear understanding of the situation and take precautions beforehand, strive to deepen reform, and further open to the outside world so as to adjust to future rules of international trade and commerce, mainly the TPP's rules.

First, research on TPP rules must be reinforced, as it involves the future development trend of international trade rules. Currently, China has established four free trade areas in Shanghai and other cities, the core experimental content of which is to examine to what extent China can adjust to some TPP rules.

The number and scope of experimental regions will be gradually increased, with the purpose of ultimately promoting mature and feasible rules nationwide.

In actual practice, to adapt to new global trade rules, we need to strengthen the building and protection of the labor force. That also applies to the environment and intellectual property rights. That means such measures as vigorously cracking down on infringements of intellectual property rights and the production and marketing of counterfeit and shoddy products, and improving systems and mechanisms governing the labor force and environment protection.

Thus, a solid institutional and policy foundation should be established for China to participate in economic globalization and regional economic integration on a larger scale and higher level to achieve mutual benefits with other countries.

Second, we need to accelerate the implementation of the "going global" strategy to cope with possible trade diversion and FDI drainage brought about by the TPP. With its high-speed economic growth, China has not only become the most important outsourcing country in international industrial transfer, but also has gained certain competitive advantages in industries such as clothing, textiles, home appliances, telecoms and machine manufacturing, as well as in fields such as energy and raw materials.

We must make good use of our advantages, strive to expand our overseas production layout, and increase our investment in current and future potential TPP member countries, thus effectively avoiding the negative effects brought on by rules such as "the rule of origin".

Also, the free trade area strategy must be implemented faster to drive East Asia regional economic cooperation. One of the reasons for the American promotion of the TPP is to weaken China's regional economic influence. China needs to adopt the divide-and-conquer strategy to accelerate regional economic cooperation between China and East Asia, quickening the establishment of the China-South Korea-Japan free trade agreement as well as trade agreements with ASEAN nations to ensure the smooth advancement of East Asian regional economic integration.

Also, the Bilateral Investment Treaty negotiation with the US needs to be vigorously promoted to accelerate the implementing of the Regional Comprehensive Economic Partnership, Free Trade Agreement of the Asia-Pacific, and the Belt and Road Initiative, so that China can better fit in the international trade system and play a bigger role.

The author is a researcher at Institute of World Economics and Politics, Chinese Academy of Social Sciences. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 12/04/2015 page12)