Trade Trends: The Chinese dilemma

Ironically, China could step in to resurrect the Trans-Pacific Partnership (TPP), which could result in a deal that somewhat contradicts its original purpose of weakening the country’s influence in the region.    China’s increasing prominence on the global trade stage is creating a dilemma for multi-national companies: How does a large enterprise balance reacting to short-term changes with planning for the long term?
   One can make the case that China booked this role without having to audition for it. Just seven years ago, China was operating in the shadows of global trade’s macro environment. Today, the country’s appetite to be a main driver of long-term global trade policy is increasingly visible.
   In 2010, careful analysis of China’s currency practices brought the country under broad scrutiny.
   “China buys dollars and other foreign currencies—worth several hundred billion dollars a year—by selling more of its own currency, which then depresses its value,” the New York Times reported at the time. “That intervention helped Chinese exports to surge 46 percent in February compared with a year earlier.”
A series of reports in the same newspaper provided additional context. In late 2009, when much of the world was still in the throes of the Great Recession, the G-20 countries agreed to share their proactive economic plans with one another in order to coordinate how their respective stimulus programs might play out once dominant economies returned to growth and stability. The International Monetary Fund (IMF) was to act as an intermediary for this objective, with U.S. President Obama and President Hu Jintao of China playing leading roles.
   The deadline came and went for China.
   “[T]he Chinese government missed the November deadline and then submitted a vague document containing mostly historical data,” the NYT reported, quoting
sources familiar with China’s response to the agreement. And because the IMF lacked the teeth for aggressive enforcement, the global community could do little to respond.
   This is just a blip in the history of China’s approach to trade policy, but it is a useful illustration of how, in a sense, positions have shifted, principally among China and the United States. If having the negotiating prowess to forge ambitious agreements that reflect its unique interests is a position of strength for a country, then passing on those agreements if they become inconvenient is also an admission of weakness.
   China assumed a passive role in 2010, but fast-forward to 2017. By withdrawing from the Trans-Pacific Partnership (TPP), the United States created a reason for the global community to cast another actor as the leading voice of ambitious approaches to liberalizing trade. The country that seizes this opportunity will be in a position to export goods, services, and perhaps more importantly, its ideology.
   As we wrote in the March 2017 issue of American Shipper (“Trade Trends: What now? U.S. trade without TPP,” pg. 23), China could step in to resurrect the TPP, which would make the deal a principally pan-Asian agreement. This could potentially result in a deal that somewhat contradicts its original purpose of weakening China’s influence in the region.
   And there are other pending examples of China’s increasing standing, namely the country’s proposed export reform measures and its role in the proposed Regional Comprehensive Economic Partnership (RCEP). China’s Ministry of Commerce on June 16 released a draft of China’s Export Control Law, which would be the first law in the country to address export controls while demonstrating a tangible commitment to non-proliferation. “Based on the wording of the draft, exporters and their customers may face additional burdens, such as on-site inspections of end-users, as well as strict licensing review processes,” if they export certain items or technologies, the law firm Covington & Burling said in a recent client note. The firm expects the law to be introduced in 2018. Although China is not a member of the Australia Group, the Missile Technology Control Regime, the Nuclear Suppliers Group, or the Wassenaar Arrangement, the proposed changes, if enacted, would move China closer to adopting the provisions contained within these agreements.
   Separately, China plays a crucial role in the RCEP, an ambitious effort to consolidate the free trade agreements that the ASEAN bloc has with six counterparties. Joining Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam with Australia, China, India, Japan, South Korea, and New Zealand, the agreement would cover nearly 40 percent of global gross domestic product (GDP).
   Because the Southeast Asia region is heavily featured in both agreements, the U.S. withdrawal from the TPP increased the likelihood that the RCEP will be completed, thereby creating powerful new trade linkages for China. Despite murmurings of a recent TPP revival, the RCEP still seems by far the more likely of the two to reach ratification and implementation, especially given that China has been a force since RCEP negotiations began in 2012.
   Regardless of whether the TPP moves forward with China or simply dies on its own and gives way to another agreement with a similarly historic reach, China stands to significantly boost its free trade linkages in the near term.
   But the story goes deeper. Today, influential trade powers generally seek to bundle security dependency and economic dependency, and there is a high degree of brinksmanship on both sides of the U.S.-China relationship. This is creating significant long-term uncertainty for global companies because regional stability is a key factor in trade operations.
   China could use the capital and influence it is accumulating by leading on trade to integrate economically with smaller Asian countries in order to gradually push them away from tight relations with the United States, thereby destabilizing the habits companies have formed for doing business globally. While this may not necessarily be bad in the short term for those Asian countries, given that the Trump administration’s actions may eventually match its protectionist rhetoric, it may not be wise for other stakeholders to assume this state of play is permanent.
   Broadly, this isn’t just about the import and export of goods and services. It’s about what nations are able to export their values and underlying philosophies regarding important topics like climate change and human rights by influencing trade policy. Trade agreements increasingly have non-duty components, so there is a serious need for them to serve the interests of both businesses and human beings alike.

   Keith Haurie is vice president of business development for ONESOURCE Global Trade at Thomson Reuters. He can be contacted at keith.haurie@thomsonreuters.com.