China in Transition
The Saga of Three Kingdoms—Japan, the United States, and China—and the TPP
Chi Hung KWAN
Consulting Fellow, RIETI
(Published in the November 16, 2011 edition of the Allatanys Newspaper Guide)
TPP as de facto FTA between Japan and the United States
Japanese Prime Minster Yoshihiko Noda officially announced at the summit of the Asia-Pacific Economic Cooperation (APEC) forum held in Hawaii on November 13 that Japan will enter into consultations with other countries as a first step in participating in the Trans-Pacific Partnership (TPP) negotiations. If Japan, Canada, and Mexico, which have all recently announced their intentions to participate in the negotiations, are added to the negotiating parties, the number of countries participating will increase to 12, including the present nine, namely Singapore, New Zealand, Brunei, Chile, the United States, Australia, Peru, Vietnam, and Malaysia. Of these countries, however, the United States and Japan together account for approximately 80% of the GDP, and so it is widely believed that the TPP will be a de facto FTA between Japan and the United States ("TPP to Become a De Facto FTA Between Japan and the U.S., Tariffs to be Abolished with Participation in the TPP," Nihon Keizai Shimbun on November 10, 2010).
China wary of U.S. intentions
Concerned that China could become an economic champion in East Asia in the future, the United States is seeking to maintain and strengthen its clout in the region, making a preemptive move by forging the TPP. In fact, Deputy United States Trade Representative (USTR) Demetrios Marantis emphasized in his remarks at a congressional hearing in late October that as China is increasingly entering into free trade agreements in the Asia-Pacific region, the TPP is essential for the United States to maintain its competiveness. Lael Brainard, Under Secretary for the Treasury for International Affairs, also said that the TPP is part of the U.S. strategy to encourage China to provide the protection of intellectual property, exchange rates based on the market mechanism, and fair competitive conditions. ("The U.S. Leads Trade Rulemaking, Strongly Aware of Competition with China," Nihon Keizai Shimbun on November 4, 2011).
By participating in the TPP, the United States will gain a new card in economic and trade negotiations with China. If China tries to participate in the TPP in the future, it will have to comply with rigorous demands by the United States, as it experienced 10 years ago when it joined the WTO. In addition, China is worried that a U.S.-led TPP will become a counter to the ASEAN Plus Three, which it is promoting. On the economic front, China fears that such a TPP would change the trade flows throughout the Asia-Pacific region. On the political and security fronts, China worries that the United States may seek to build a coalition with Asian countries against it, using the TPP as leverage to strengthen its relations with Asian countries.
Stated reasons and real intentions of Japan
When it came into power in September 2009, the Democratic Party of Japan was initially looking to create an East Asian community that included China. In the wake of the deterioration in the relationship with China following a series of incidents triggered by the collision of a Chinese fishing boat with Japan Coast Guard patrol vessels on September 7, 2010, however, the Japanese government changed course, favoring economic cooperation with the Pacific region, centering on the United States.
When announcing its intention to participate in the TPP negotiations, Prime Minster Noda emphasized that "Japan, which has built its prosperity to date as a trading nation, must usher in growth in the Asia-Pacific region to preserve its present affluence for future generations and develop a vibrant society" (press conference given by Prime Minister Noda on November 11, 2011). However, some question how much benefit Japan will enjoy from participating in a TPP without China, the growth engine in Asia and Japan's largest trading partner.
Yomiuri Shimbun points out that "participation in the TPP will deepen the Japan-U.S. alliance. It is also important in terms of reining in China, which is increasing its presence as an economic and military power" (Editorial "Participation in TPP: Decision to 'Open up the Country' Beneficial to Japan" on November 12, 2011), and it is conceivable that there are similar opinions within the government. In fact, Akihisa Nagashima, assistant to the prime minister, whom Prime Minister Noda invited to the prime minister's office as an expert in foreign policy and security, clearly stated in a speech in Tokyo that the significance of participating in the TPP negotiations is "to develop a strategic environment that China views as quite formidable" and that "we need to take a very active posture, as if to say 'Japan and the United States will build the Asia-Pacific order'" ("Making TPP Two Pillars Together with Japan-U.S. Security Agreements: Government Aware of China's Moves," Nihon Keizai Shimbun on November 4, 2011).
However, even though Japan and the United State share a common interest in reining in China, they differ greatly in issues such as opening up agriculture. Public opinion in Japan has already polarized over whether it should participate in the TPP negotiations, and it is still uncertain whether actual negotiations will proceed smoothly.
China is wary that the TPP may be part of a U.S. strategy to contain China. With Japan's announcement that it will be participating in the TPP negotiations, China now must decide how to respond, including a decision on whether to participate.
At the moment, the prevailing view is a cautious one that China should not rush to take part but leaving the possibility open. Reasons for this stance include China needing time for adjustment, as the country is now undergoing a critical economic transition involving many social and economic challenges. Specifically, for China, it is pointed out that: 1) its agriculture could be devastated without tariffs as it lacks international competitiveness, 2) the opening up of its financial industry to the world could cause macroeconomic destabilization, as its financial system is still fragile, 3) given that it needs time to improve its environmental and labor standards, if it were to meet the requirements of the United States before it is ready, the decline in processing trade could accelerate, while labor problems could worsen, and 4) it is premature to open fully its high-tech and high-end service industries, as they are still in their infant stages and need appropriate policy protection.
If it is impossible for China to become a member of the TPP in the near future, it is likely that Beijing will accelerate FTA negotiations with more countries for the foreseeable future as a self-defense measure, playing a leading role on its own. The negotiating partners on which it is likely to focus will be the emerging countries that form with China the so-called BRICs, namely India, Russia, and Brazil, in addition to Japan and South Korea, which are China's neighbors and important trade partners. The FTA between China and the ASEAN came into effect in 2010. If China were to conclude similar agreements with Japan, South Korea, and the BRICs, the United States will be unable to isolate China even if Washington dominates the TPP.
Free Trade Area of the Asia-Pacific as a common goal
While keeping an eye on the TPP, to avoid conflict with Japan and the United States, "China supports steady efforts to build a Free Trade Area of the Asia Pacific (FTAAP) on the basis of the East Asia Free Trade Area (ASEAN Plus Three), the Comprehensive Economic Partnership for East Asia (ASEAN Plus Six), and the Trans-Pacific Strategic Economic Partnership Agreement (TPP), with the goal of achieving economic integration in the Asia-Pacific region" (speech by President Hu Jintao at the APEC CEO Summit held in Hawaii on November 12, 2011). At the same time, with the United States and Japan increasingly reliant on trade with China, the Chinese market is essential for their post-crisis economic recovery. Therefore, the most practical choice for the United States and Japan, as well as China, is to seek to realize the FTAAP as the final goal for regional integration.
- Related article
- "What is Missing in Discussions on TPP?" posted in China in Transition on March 15, 2011
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