VIVEK Y. KELKAR, MUMBAI
Does the Regional Comprehensive Economic Partnership turn the Pacific into a Chinese sea? Has the US lost out?
It might have been very different. Four years and several months ago, the United States stood on the verge of commanding the Pacific by means of a vast trade zone that would exclude China, forcing it to bend to America’s will or be frozen out.
The Trans-Pacific Partnership originated in a 2005 trade deal among small Pacific Rim countries threatened by China. In 2008, George W. Bush spotted the strategic and economic potential of this bloc. Under his aegis, the United States entered negotiations to join and enlarge it.
After seven arduous years of public and private negotiation, including nineteen rounds of official talks, American negotiators emerged in late 2015 triumphant, having wrested painful concessions from Japan’s protected farmers and automakers, Canada’s dairy producers, and the American pharmaceutical industry alike. The TPP, signed on February 4, 2016, would have been the biggest, and certainly the wealthiest, free-trade zone in history.
Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the United States agreed to common protocols for online commerce and foreign investment—all binding and enforceable. More than 18,000 tariffs would have been eliminated immediately. Nearly every tariff on American manufactured and agricultural goods would have disappeared. Customs procedures would have been expedited, reducing time-wasting regulatory friction. Tariffs on electronic transmissions would have been prohibited. The latter was not an anodyne provision. It linked the idea of free trade with free speech. The TPP would have prevented its signatories from building firewalls against information out of tariffs.
The United States sought to establish a Pacific trade bloc that reduced signatories’ dependence on China, brought them closer to the United States, and made them so prosperous and collectively powerful that China would have no choice but to conform to the norms established in the treaty.
The agreement established unprecedented standards for consumer protection, privacy, and security in online transactions. The biggest beneficiaries would have been small businesses that would have otherwise lacked the resources to compete in an unregulated global market. Signatories were required to join the United Nations Convention Against Corruption, write codes of conduct for their public officials, and criminalize bribery. They were moreover required to enforce these provisions. The treaty was explicitly designed to ensure violators ceased, immediately, to reap its economic benefits.
The TPP prohibited forced labor, human trafficking, and child labor. All of these practices were already banned, on paper, in the countries concerned. But the TPP’s novelty lay in its enforcement mechanisms, which were not toothless.
Contrary to myth, the trade deal was not a license for corporate rapine. The agreement included an explicit defense of collective bargaining. Signatories were to pass legislation prohibiting racial and ethnic discrimination in the workplace, ensure modern standards of occupational health and safety, and govern minimum wages and maximum work hours. American negotiators were insistent upon all of these provisions. Paternalistic regard for the well-being of the Malaysian working man was probably not their foremost concern. They understood that unless poorer countries enforced these terms, their workers would undercut American ones. The treaty included more protection for labor rights than any the United States had ever signed. It also included the most robust and enforceable environmental commitments of any trade agreement in history.
The TPP’s intellectual property provisions were notable. The agreement created exceptionally strong standards for patent and copyright protection. Some critics thought them too strong, but the Cosmopolitan Globalists are copyright holders, and we liked what we saw.
Mechanisms for resolving disputes between states and investors were built into the deal. It allowed private companies to sue foreign governments for treaty violations. This was important. Investors like clear and predictable legal environments. Brunei, for example, has two parallel law systems, one based on British common law and the other on the Sharia. Under the TPP, investors would have been able to open a new business in Bandar Seri Begawan confident that disputes, should they ensue, would be adjudicated through the mechanisms of the TPP, not Islamic law. The benefits of this—to investors and to Brunei—were obvious.
There was no mystery about the purpose of the agreement. The United States sought to establish a Pacific trade bloc that reduced signatories’ dependence on China, brought them closer to the United States, and made them so prosperous and collectively powerful that China would have no choice but to conform to the norms established in the treaty.
Nor was it a secret that without the agreement, the United States would not remain the regnant Pacific power. In the wake of the Second World War, the United States controlled 50 percent of the global economy and held 80 percent of the world’s hard currency reserves. No one could ignore the United States. The US now controls 15.2 percent of the global economy. China’s foreign currency holdings are 26 times the size of the United States.’ China can ignore the United States.
The TPP’s signatories, however, would have controlled 40 percent of global GDP and a third of world trade. China may be very big indeed, but no one is big enough to ignore 40 percent of the global economy.
ENTER DONALD TRUMP
Then the American people proposed to embark upon a geopolitical holiday. Upon taking office, one of Donald Trump’s first official acts was to withdraw from the TPP, handing Xi the keys to the golf course and throwing in a personal caddy.
The predictable ensued. On November 15, 2020, a mere twelve days after weary Americans waved Donald Trump goodbye, Xi explained to the world that it is China that now commands the Pacific by means of a vast trade zone that excludes the United States. The unveiling of the new Regional Comprehensive Economic Partnership, or RCEP, suggests that Beijing means to increase signatories’ dependence on China, separate them from the United States, and make them so prosperous and collectively powerful that the United States will bend to China’s will or be frozen out. Why not? It was a good strategy when Americans thought of it, too.
Oddly, given China’s formal dedication to socialism with Chinese characteristics, the new deal makes no mention of workers’ rights. Or the environment. Or intellectual property.
XI JINPING SUGGESTIONS
The RCEP comprises 15 countries in the Asia-Pacific, including Japan, Korea, and Australia. It represents nearly a third of global GDP. That Australia signed is painful. Japan joined reluctantly. India abstained. The US was not invited.
Twelve days after announcing the happy news, Xi Jinping clearly spelled out his vision, and thus China’s, at the 17th China-ASEAN Expo. This was held, virtually, in Nanning, the capital of south China’s Guangxi Zhuang Autonomous Region. ASEAN, in principle, is an association of Southeast Asian countries, and China is not a Southeast Asian country. In principle, it shouldn’t be there at all. But China is often invited to partake.
Xi had many suggestions, as he put it. The usual platitudes: “strategic mutual trust,” “closer people-to-people exchanges.” All very routine. Then he got to the important parts. He sketched out his suggestions—plans, really—for weaving the whole region’s development into a tight mesh. He pushed the Belt and Road Initiative, the Master Plan on ASEAN Connectivity 2025, and the New International Land-Sea Trade Corridor.
The trade relationships China has developed in the Asia-Pacific now allow it to be the region’s coercive power. This is a weapon that may be used in strategic competition with the United States, and because it may be, it will be.
None of it was merely a call to integrate industrial, supply, or value chains across the region. Xi was calling for ASEAN’s “cooperation,” as he put it, in developing the technologies that will power the globe in the decades to come: artificial intelligence, 5G, blockchain, and big data. “China will work with ASEAN,” he said, “on the China-ASEAN Information Harbor to advance digital connectivity and build a digital Silk Road.” If that sounds soporific, it is supposed to. That’s to prevent anyone from thinking it through and realizing that all of these roads lead to Beijing.
To top it off, Xi announced China’s eagerness to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP)— the neutered rump of the very TPP the United States’ diplomats painfully negotiated, for years. Only now minus the United States.
THE MIDDLE KINGDOM’S MIDDLE FINGER WRIT …
China joined the World Trade Organization in 2001, when more than 80 percent of the world—as near as we can tell from available data—did more trade with the United States than with China. By 2018, this figure was 30 percent. Of the world’s 193 countries, two-thirds now do more trade with China than the United States. Of these, almost half do twice as much trade with China.
Asia is now the center of the global economy. Projections by the usual people who make such projections, such as McKinsey, suggest that by 2040 the region will be in the position the United States held at the end of the Second World War: It will account for half of global GDP, and perhaps 40 percent of global consumption.
China intends to use the RCEP to connect the whole region with its infrastructure: railways, highways, ports, airports, power, communications.
Increasingly, the region is trading internally, which is not a surprise, and its economies are integrating, which is not a surprise, either. American passingly familiar with the Monroe Doctrine should not be surprised by what’s coming next, although they probably will be. The negotiation of the TPP was meant to forestall that surprise.
TOO LATE NOW…
China is putting its cards on the table now, transparently. It’s the pivot of the Pacific in trade, technology and, most vitally, information networks. It sees neither India nor Japan as impediments. Xi has presented Biden with a fait accompli: China is now the region’s hegemon. The Biden Administration hasn’t yet assumed office, formally, so it’s in no position to object.
Trump has spent the past four years annoying China in flailing and incoherent fits and starts. He tried half-heartedly to build an alliance with Japan, Australia and India; in between he tried whole-heartedly to offend their leaders and their publics—except India’s Narendra Modi, perhaps; if he failed to offend him, it was owed to forgetfulness. He conveyed very effectively to the world that the US has entered some near-indescribable state of psychedelic weirdness such that imagining consistency from one Administration to the next, signing treaties with the United States, or trusting American security guarantees would be reckless. It might work. But it might not.
China and the United States have both become wealthier in the past two decades. But China has made bigger comparative gains. The trade relationships China has developed in the Asia-Pacific now allow it to be the region’s coercive power. This is a weapon that may be used in strategic competition with the United States, and because it may be, it will be.
Americans throw out presidents with ease. Every four years, they render their verdict, and if the president displeases them, he’s gone. It’s perhaps a normal cognitive error to imagine that a president’s mistakes may be undone just as easily. It’s certainly one many Americans make. But that is a cognitive error, not reality. This cat can’t be walked back.
AND HAVING WRIT, MOVES ON …
For China, gaining the digital advantage was crucial, and tied to its goals for its 14th Five-Year Plan, which begins in 2021. China’s competitive advantage, for now, is cheap and labor-intensive manufacturing. By 2035, Chinese strategists believe, its advantage will be capital-intensive supply chains driven by artificial intelligence. These will boost productivity and the quality of Chinese goods.
The RCEP will allow China to reorient its trade and economic ties. It will be less dependent upon faraway powers and more integrated with East Asia. Analysts estimate the bloc’s members will increase trade by more than US$400 billion per annum and reduce trade with the excluded countries by about US$50 billion.
As a result of this trade, China, Japan, and Korea will build complex production chains in advanced manufactured goods, perhaps differentiated and branded as they are in the EU.
Significantly, China, Japan, and Korea began discussing a trade agreement in 2014 and promptly held 15 rounds of fruitless talks. Meanwhile, in the background, the RCEP negotiations continued apace. In the end, the RCEP gave all concerned a face-saving deal that papered over their differences. These three countries, alone, control a quarter of the world’s economy.
INDIA AND THE UNITED STATES: THE LOSERS
Americans are too distracted right now to grasp the implications of this. But the implications dawned immediately on India and Japan.
India’s intention to stay out of the deal was clear by late 2019. Over the summer, the People’s Liberation Army began massing forces in an unprecedented and deeply alarming way along the so-called Line of Actual Control that functions for now as a Sino-Indian border, moving into areas previously under Indian control and preventing Indian troops from entering territory they had patrolled in the past.
On June 15, 2020, conflict erupted in India’s Galwan Valley. Blood was shed on the border for the first time in 45 years. Chinese soldiers beat and clubbed Indian soldiers to death. Indian soldiers returned the favor.
It is unclear why Xi thought alienating India would be a good idea. Perhaps he believes tying India down by forcing it to defend its land borders will keep it too busy to challenge China at sea. Perhaps Xi has noticed that these provocations ensure turbulence in Kashmir, which keeps that issue at the forefront of Indian and global headlines—to the benefit of China’s ally, Pakistan. We don’t know. The Cosmopolitan Globalists are not privy to Xi Jinping’s Thought.
Despite these obvious signs of Indian diplomatic displeasure, Japan made strenuous attempts to keep India in the deal. Bloomberg interviewed a Japanese trade minister who explained that Japan was particularly keen to get India on board lest the bloc be completely dominated by China. We wonder if it has occurred to Japanese diplomats that if you are China, and if you wish completely to dominate such a pact, you might, at a critical juncture, go to war with India, making it politically impossible for India to join? We have no evidence for this speculation; we just wonder.
India’s trade was less integrated into the region from the outset. Unlike other Asian countries, India has always preferred bilateral trade agreements to joining trade blocs. And India never managed to use these agreements as effectively as it hoped. Disappointingly, the tariff liberalization that came with trade deals affected India adversely. In 2009, India signed a free-trade deal with ASEAN. Several ASEAN countries came in and made bank selling electronics in India. Nothing special happened in the other direction. If Indians were wary of the RCEP, it was in part because earlier free-trade agreements hadn’t lived up to the hype.
Indians feared, too, that the RCEP would act as a covert free-trade agreement with China. India’s trade deficit with China was 2.2 percent of its GDP in 2018. Joining the RCEP would have obliged India to do away with about three-quarters of its tariffs on steel, electronics, dairy, fisheries, chemicals, pharmaceuticals, and textiles. Indians feared Chinese imports would flood their market and weaken their own manufacturing. On November 16, Foreign Minister Subrahmanyam Jaishankar warned that China’s economic and strategic gain would be India’s loss:
Look, we are one of the few countries where today we have to give our own industry a level-playing field at home. What have we gone and done to ourselves? … Building on national capacity doesn’t make you anti-global. On the contrary, I would argue that if you don’t have capacities, you end up as a market for other people’s goods … I would say if you want to actually participate more vigorously in the global economy, you must build stronger domestic capacities, and do what it takes for the gaps to be closed as a result of decades of disadvantage.
Well and good, but with whom will India be closing the gaps once it’s rectified these decades of disadvantage? For that matter, why do these gaps exist in the first place? Introspection would serve India well: Indian industry took the easy road, relying on imports rather than establishing itself in highly competitive global manufacturing chains. India has not gone up the ladder in global ease-of-doing-business rankings, nor has the government actively encouraged investment in manufacturing for exports, as China and much of Southeast Asia have. The decades of disadvantage will not mysteriously heal themselves.
Japan and Korea may fret about China’s dominance, but they still stand to gain. Both will expand their production networks and build connected, collaborative, digital manufacturing supply chains. China intends to use the RCEP to connect the whole region with its infrastructure: railways, highways, ports, airports, power, communications. The China-ASEAN Multimodal Transport Alliance sounds bland enough, we suppose—so long as you’ve never given a moment’s thought to the role of road-construction in the Roman Empire.
But India and the US stand to lose, and lose a lot.
The roads you see in the maps below led to once-great empires. But in the end, they all led to Rome.
Vivek Y. Kelkar is co-founder and editor of The Cosmopolitan Globalist.