Could Apec 2021 lead to trade reunion between the US and China?

In November 2014, Asia-Pacific leaders met at Yanqi Lake, Beijing, for the 22nd Apec Economic Leaders’ Meeting. The theme was “Shaping the Future through Asia-Pacific Partnership”. There, China and the US pushed separate trade deals. China was promoting the Free Trade Area of the Asia-Pacific (FTAAP), while the US was endorsing the then Trans-Pacific Partnership (TPP), which excludes China. President Donald Trump later pulled the US out of TPP — now China wants in to what is now the CPTPP. Confused? Rob Scollay unpacks the dance.

This wasn’t a dream, it really happened: at their meeting last year hosted by Malaysia, the leaders of the 21 Apec members committed their governments to work together towards realising an agreed vision of an “open, dynamic, resilient and peaceful Asia-Pacific community by 2040, for the prosperity of all our people and future generations”.

To achieve this “Putrajaya Vision” they agreed among other things to continue working together to “deliver, a free, open, fair, non-discriminatory and predictable trade and investment environment”, including “through the work on the Free Trade Area of the Asia-Pacific (FTAAP) agenda”.

The FTAAP is a proposed free trade agreement covering all Apec members. It was first proposed by the Apec Business Advisory Council (Abac, the voice of the region’s business community). It was endorsed by the Apec Leaders in 2010 as a “major instrument” of the regional economic integration agenda adopted by Apec as a means to transform its membership into an “economically integrated” community “in which goods, services, and business people move seamlessly across and within borders, and a dynamic business environment is further enabled” — effectively achieving the objective of free trade and investment in the Asia-Pacific that Apec set for itself in its famous “Bogor Goals”, adopted by leaders at Bogor in Indonesia back in 1994. The FTAAP has been a permanent feature on Apec’s agenda ever since that declaration in 2010.

A major step forward was taken in 2014, when China as Apec host in that year secured the agreement of leaders to a “roadmap” for realisation of the FTAAP, building in particular on progress being made in two major pathways — the Regional Comprehensive Economic Partnership (RCEP) as the “East Asian pathway” and the TPP as the “trans-Pacific pathway”. As the largest economies respectively in the TPP and the RCEP, the United States and China would obviously play key roles in this process.

The “roadmap” included the commissioning of a Collective Strategic Study on issues related to the realisation of the FTAAP, jointly chaired by the United States and China (yes, this too really happened).

An accumulating body of research, most notably by United States economists Peter Petri and Michael Plummer was meantime demonstrating substantial economic benefits from the FTAAP for all Apec economies, and most especially for the United States and China.

The Collective Strategic Study was presented to the 2016 meeting of Apec Leaders, who responded by reaffirming their “commitment to advance …. in a comprehensive and systematic manner towards the eventual realization of the FTAAP”, and setting a substantial work agenda for officials and ministers to pursue in support of that commitment. The retention of that agenda in Apec’s work programmes, acknowledged most recently in the Putrajaya Declaration, testifies to the ongoing support among many Apec economies for the FTAAP concept, which also continues to receive strong and steadfast support from the Apec Business Advisory Council and within the membership of Apec-linked Pacific Economic Co-operation Council (PECC).

Prospects for further progress toward the FTAAP quickly evaporated however with the advent of the Trump Administration. President Donald Trump’s immediate withdrawal from the TPP seriously compromised one of the agreed pathways, even though the remaining eleven TPP members agreed to continue with the agreement, renamed as the Comprehensive and Progressive Trans-Pacific Partnership (the CPTPP), with a provision left in place to facilitate United States re-entry to the agreement if it wished. The key relationship between the United States and China has since spiralled rapidly downward through trade wars and other confrontations to the point where commentators speak openly about a “new Cold War” and even the possibility of a nuclear war. Meantime, the underlying trade and investment flows have proved surprisingly resilient, despite the substantial additional barriers and costs that now impede them.

Faced with these developments, can any realistic prospect be held out for implementation in the foreseeable future of the FTAAP and the deeper economic integration that it would represent? Or has it become simply a mirage?

Glimmer of an opening?

In fact, two recent developments in relation to the CPTPP provide the glimmer of an opening, if the two superpowers and the CPTPP members are minded to take advantage of it.

First, China has applied to join the CPTPP. As well as boosting the regional and global significance (and benefits) of the CPPTPP, this may be an important signal of China’s willingness to commit to stronger rules for international trade, since the CPTPP, while by no means perfect, contains more comprehensive and deeper trade rules than the RCEP. In particular the CPTPP rules on state owned enterprises, while certainly not the last word on the subject, arguably represent current international best practice for trade rules on this contentious subject. Conformity by China to these and some other CPTPP rules would remove major grounds for complaint by the United States and others against China’s trade practices.

Second, pro-trade economists in the United States have been arguing strongly that the US should rejoin the CPTPP. Provided the United States did not seek to use the occasion to renew mercantilist demands for provisions in areas like intellectual property that New Zealand and other CPTPP members fought strenuously and successfully to exclude from the original TPP (possibly a big “if”), it is reasonable to assume that such a move would be welcomed in principle by the CPTPP members.

Accession to the CPTPP by China, the United States, or any other applicant like the United Kingdom requires the unanimous assent of all existing CPTPP members. It may be that the goodwill necessary to facilitate the simultaneous accession of China and the United States simply does not exist.

But it’s worth noting that the entry of both China and the United States into the CPTPP would be a giant step towards realising the original FTAAP proposal, with all its attendant economic benefits for the two super-powers, and for the region as a whole. A “domino effect” would likely then draw other Apec members into the agreement, potentially completing the original FTAAP design.

It is difficult to overstate the extent to which the “concessions” that would be required from the United States and China to take advantage of this opening would be greatly to the economic benefit of both countries.

China would have to reform policies and practices towards its state-owned enterprises, which have in fact been holding back China’s economic growth rate, by as much as 2 per cent per year according to Washington-based China expert Nicholas Lardy.

The economic gains to the United States would be potentially even greater, as it would essentially have to reverse the Trump changes to trade policy, which have been largely kept in place by the Biden Administration. These have imposed heavy burdens on the United States economy, beginning with the substantially increased costs imposed on American consumers and businesses dependent on imports of industrial and business inputs newly subject to higher tariffs, the consequent loss of American jobs that far outweighs the number of jobs that may have been created or saved in the newly-protected industries, and the cost to American taxpayers of the billions of dollars paid out as subsidies to American farmers to compensate them for their lost markets in China.

Add to this the substantial economic benefits to the rest of the region from bringing the United States and China together in the CPTPP and eventually in the FTAAP: if the resulting vision is a mirage, it is obvious why it is a tantalising one.

Rob Scollay

Associate Professor Rob Scollay is the director of the Apec Study Centre at the University of Auckland
Scollay, has had a long involvement with both Apec and the Pacific Economic Cooperation Council (PECC). He has been a visiting scholar at the Institute for International Economics (Washington DC), UNCTAD (Geneva), the Institute of Southeast Asian Studies (Singapore), Bocconi University (Milan) and Universidad del Pacifico (Lima). His recent publications have focused on issues relating to regional trade agreements and regional economic integration, especially in the Asia-Pacific region, to multilateral liberalisation and globalisation, and to Apec’s future agenda. For several years he was coordinator of the PECC Trade Forum, a network of trade experts from countries around the Pacific Rim. He has undertaken consultancies on trade issues for a number of international organisations, as well as for agencies of the New Zealand and Australian governments.

Rob Scollay is Director of the Apec Study Centre.

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