Not easy to build an ‘anyone but China club’

Here are two things that New Zealand, Vietnam, Peru, Japan and the United States have in common. First, they all hope to join a nascent trade agreement called the Trans-Pacific Partnership (TPP), the biggest game in free-trade town since the collapse of the Doha round of the World Trade Organisation (WTO) talks.

Second, none of them is China.

The two are very much linked. No one will say it out loud, but the unstated aim of the TPP is to create a “high level” trade agreement that excludes the world’s second-biggest economy.

The 12 countries now hoping to join — which also include Canada, Mexico, Chile, Malaysia, Singapore, Brunei and Australia — make up 40 per cent of global output and about a third of world trade. That is a big club to be barred to Chinese entry.

There are two motives at work. The first is to wind back time to before China’s accession to the WTO in 2001.

Many politicians, trade unions and businesses now rue the day that China was let in.

China got a huge lift from gaining access to global markets. But, the argument goes, it paid only a small price for admission.

Joining the WTO did not stop China from “manipulating” its currency, from rigging its tender procedures, from funnelling cheap finance to its state-owned behemoths, or from systematically flouting intellectual property rules.

The view that China is a freeloader and a cheat rather ignores the fact that today’s advanced economies — including Britain, the US and Japan — all pursued rampantly mercantilist policies during their take-off phases. But there you have it.

A POLITICAL PROJECT

The second motive for the TPP sounds like the opposite of the first. It is to create a block so powerful and attractive that China will feel obliged to mend its errant ways in order to join.

To further that aim, TPP rules will penalise China in some areas.

One example is rules of origin. Under the TPP, tariffs on garments produced in, say, Vietnam and shipped to the US would fall to zero. That would be a potentially huge boost to Vietnam’s already sizeable garment industry.

Yet, to qualify, fabric such as cotton would have to come from a TPP country, most likely the US. At the moment, of course, much of the cotton for Vietnam’s huge garment industry comes from China.

So how do you design a club that excludes China but admits the likes of Vietnam? After all, Vietnam is also a command economy with huge state-owned enterprises, opaque regulations and a keen disregard for intellectual property.

The TPP is meant to bear down on all those sins. Those close to negotiations in the country say the aim is to push Hanoi to make root-and-branch reform of its state sector. That is wishful thinking at best and disingenuous at worst.

When push comes to shove, deciding whether to admit Vietnam — and several other potential TPP members — will be more about politics than economics. That is because the TPP itself is at least partly a political project. For Japan, the fact that it is an “anyone but China club” is decisive.

Mr Shinzo Abe, the nationalist Prime Minister, regards membership as a chance to sit at the table with the big boys. When he recently committed Japan to joining, he said the TPP would help the country’s “security” — hardly part of its official remit — and spoke of TPP members’ shared “values of freedom, democracy, basic human rights and the rule of law”.

That description pointedly excluded China, yet somehow managed to accommodate Vietnam — an authoritarian communist state.

With a need to accommodate such varied members, it is no wonder that TPP negotiations have dragged on. This week, the 17th round of talks is being held in Lima. The deadline for completion has slipped by more than a year. Few see any prospect of completing negotiations until the first half of next year at the earliest.

NEED FOR ARTFUL ‘FLEXIBILITY’

Like all good free trade agreements, the TPP will naturally contain plenty of protectionism and pandering to special interests.

Japan will take rice off the table and the US sugar. No doubt Canada and New Zealand will want to protect their dairy farmers.

There will also need to be careful wording on “currency manipulation” to please US manufacturers: Here the trick will be to exclude China, whose currency has appreciated 40 per cent against the US dollar in eight years, but include Japan, whose currency has fallen 25 per cent in less than eight months.

The need for such artful “flexibility” suggests there will be nothing too onerous in the final agreement.

Yet, opponents of the TPP process say it has been hijacked by big business and that negotiations have been conducted under a veil of secrecy. By intruding into national law, they contend, TPP rules could endanger everything from labour standards to universal healthcare.

Patent protection rules could make it harder to use generic medicines and rules on sanitary standards could compromise food safety, they say. Strict adherence to copyright protection could harm Internet freedom. The list goes on.

As a result of such concerns, it seems inevitable that the TPP will have to be watered down if it has any hope of being signed, let alone ratified by respective members’ Parliaments.

Even a diluted TPP might help the likes of Vietnam through giving it preferential market access and Japan through nudging industrial and agricultural reform.

But it will not turn the clock back. The Chinese cat is long out of the bag. THE FINANCIAL TIMES LIMITED

ABOUT THE AUTHOR:

David Pilling is the FT’s Asia editor.