Why China will not rescue TPP

The pact contains new rules, like provisions on state-owned enterprises, that China is unlikely to accept.

Since the announcement of USA’s withdrawal from the Trans Pacific Partnership (TPP) agreement by President Donald Trump, respective governments across the Asia Pacific region are at a loss as to how they need to proceed to address the issue which had promised immense opportunities for them.

Australia is taking keen initiative to salvage the agreement by holding high-level discussions with Canada, Japan, Mexico, New Zealand, Malaysia and Singapore.

Among the various proposals that the Australian government is thinking aloud is to invite new members who could fill the space left open by USA. While suggesting it is aware that the country which can replace USA and fill such vacuum currently is most appropriately China.

Of course, the grounds for such optimism appear weak. First, the TPP looks much less cohesive and attractive to potential new members who will not have access to the market of the mightiest economy in the world. More importantly, the agreement contains some new trade and investment rules that China is unlikely to accept. They are the provisions on state-owned enterprises (SOEs) and designated monopolies.

The provisions earmarked in Chapter 17 of the pact require SOEs to act ‘in accordance with commercial considerations’ when engaged in transactions unrelated to the provision of pu­blic services, and prohibits discrimination on the basis of nati­onality during such transactions.

Articles 17.6–17.8 prohibit the specific provision of ‘non-commercial assistance’ (NCA) where it would cause ‘adverse effect’ or ‘injury’ to other TPP members. Article 17.10 sets out extensive transparency rules, requiring members to produce a publicly available list of all SOEs and provide information where requested relating to government involvement with SOEs.

Under these circumstances, China will find it hard to accept such provisions in a hurry. The SOEs are building blocks of China’s socialist market economy system. More than a lakh SOEs are estimated to contribute between 40% and 50% of China’s non-agricultural GDP.

Many of the largest Chinese firms are state owned unlike India; about 76 of the 98 Chinese firms listed in the 2015 Fortune Global 500 are SOEs. China had just 46 companies appearing on the list in 2010 and only 10 in 2000 whereas the USA has trended in the other direction: 139 American companies made the list in 2010 and 179 in 2000.

While market-oriented reforms in recent years have seen greater corporatisation of many Chinese SOEs, Beijing continues to afford many of these actors’ preferential treatment which will go against the NCA provisions. Moreover, given the scale, complexity and fragmented nature of China’s state sector, the TPP’s transparency requirements may be considered too onerous in the short-run.

China might be able to secure temporary exemptions from some provisions, as was achi­eved by the existing TPP members with sizeable SOE sectors such as Malaysia, Singapore and Vietnam. Still the Chinese government may not feel confident about Chapter 17, as it thinks the provision to be a deliberate strategy of the USA to create an international regulatory regime for SOEs specifically targeting China’s use of such enterprises as tools of industrial policy and economic statecraft.

Previous attempts at regulating SOEs in international trade and investment agreements have lacked precision and coherence. The Chapter 17 allows concerted efforts by the USA and other OECD countries to discipline SOEs by having clear rules ensuring a level playing field between SOEs and private enterprises.

New type of accord

This reflects the fact that the TPP was a truly new type of trade agreement pursuing more ambitious objectives than simple tariff and subsidy reductions. Considering that China is the main target of these efforts, it is quite unlikely that Beijing will opt for it.

If countries like Australia try to use its influence to redraft the provisions of Chapter 17 to accommodate the interests of China, it is unlikely that other vital TPP signatories will accept. Ja­pan has already expressed that the agreement is ‘meaningless without the US.’ Canada echoes such sentiments. It looks clear key members are opposed to any ‘watering down’ of the idea.

Hardcore reality is that it will be almost impossible to salvage TPP without US participation. It is simply not in China’s interest to agree to certain sections of the agreement. Nor it is in interests of Australia to spend years renegotiating a trade agreement that will likely need whole chapters overhauled, if not removed entirely.

The Australian government should thus turn its attention to more orthodox agreements that focus on traditional trade barriers, such as the Regional Comprehensive Economic Partnership currently being promoted by Beijing. Such agreements are the most likely path forward in the near-term. The momentum for TPP looks like is lost temporarily.

But the economic opportunities and trade gains that are locked up in this Asia-pacific region need to be harnessed thoroughly to make this region more robust and politically and strategically more powerful. This can be experienced by encouraging Chinese leadership to engage in a meaningful multilateral negotiations and trade liberalisation. In an uncertain new international order and an era of declining US leadership, this could be a positive step forward for a regional order.

(The writer is Professor, Lal Bahadur Shastri Institute of Management, New Delhi)