As TPP Collapses, China Steps Into The Free Trade Agreement Vacuum

| About: iShares China (FXI)

Original Post

By Stuart Burns

Many of the promises made by Donald Trump in the recent presidential election campaign have been vague on detail and promptly been followed by backtracking or denial, but one of the policies president-elect Trump has espoused consistently from the beginning has been his position on the Transpacific Trade Partnership (TPP).

President Obama saw TPP as a key component of his pivot to Asia. The agreement was intended to lower tariffs and sets standards on a broad range of trade issues, from labor and environmental regulations to the treatment of intellectual property. More than anything, TPP was intended to create the framework for developing free trade within Southeast Asia and, in partnership with the U.S., that most closely adhered to U.S. policies. It was intended to establish U.S. economic leadership in the region.

Trump, on the other hand, saw TPP as a threat to U.S. industry and, as part of his wider objection to globalization, he has been adamant since the start of his campaign that he would sooner see hell freeze over than TPP, in its current form, implemented.

TPP was to have been the biggest regional free trade agreement in history and the biggest trade deal struck since the 1994 completion of the Uruguay round of the General Agreement on Tariffs and Trade (GATT) world trade talks that created the World Trade Organization (WTO).

China Steps In

According to Reuters, the 12 countries involved include Australia, Canada, Chile, Japan, Malaysia, New Zealand, Peru, Singapore, Vietnam and Mexico, in addition, of course, to the U.S., but pointedly excluding China. The hope was, at some stage, that China would join the agreement as well, but now, with the prospects looking so negative for the U.S. to take TTP forward, China is stepping into the vacuum and seeking support for a Beijing-led Asia-Pacific free trade area at an upcoming regional summit in Peru later this month.

President Xi Jinping's personal involvement illustrates how seriously China is backing this idea. As the U.S. turns it back on TPP, this is an opportunity for Beijing to set the agenda. China has proposed the Free Trade Area of the Asia-Pacific (FTAAP) and the Regional Comprehensive Economic Partnership (RCEP), which includes an even larger group than would have been involved in TPP. The 10 members in the Association of Southeast Asian Nations would be joined by China, Japan, South Korea, India, Australia and New Zealand to form the RCEP Group.

All this may not bother Trump, but in the years to come, it may bother U.S. companies that find themselves on the outside of a trade club they could have established more to their own agenda. Not all free trade is good trade, but at least if you get to shape the rules, you can mitigate the downside and maximize the upside. As Britain will find with the European single market post-Brexit, if you are outside the club, you get no say in the rules.