The Trans-Pacific Partnership: Can an Asian Trade Pact Survive Without China?

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The Trans-Pacific Partnership (TPP) trade talks, which include the United States, Japan, and ten other Pacific Rim countries, wrapped up on October 5, 2015.

The TPP covers an expansive economic area, bringing together states that represent two-fifths of the global economy in the world’s largest ever trade deal. The agreement’s components cover a range of topics, including everything from abolishing tariffs to relaxing visa requirements and strengthening environmental and labor protections. Yet the deal also has political and strategic elements, with President Obama making it a key element of his economic agenda and a cornerstone of the U.S. foreign policy re-balance toward Asia.

In this interview, David Dollar, Senior Fellow at the Brookings Institution and former World Bank country director for China and Mongolia from 2004 to 2009, speaks with the Yale Journal of International Affairs (YJIA) about the TPP’s relevance to the Asia Pacific region, also touching on Vietnam’s growing strength and China’s future role in global trade.

Yale Journal of International Affairs: How does the Trans-Pacific Partnership rebalance the trade dynamics in Asia?

David Dollar: The TPP is a good step forward. It has been a long time since we had any sort of trade agreement in the region. The last important event was probably China joining the WTO in 2001. Originally, Asia-Pacific Economic Cooperation (APEC) was set up to bring about a free trade area in the Pacific. That was almost twenty years ago, and since then there has been almost no progress on a free trade area in the Asia Pacific. The TPP is a collection of twelve countries in the region that want to move ahead on trade liberalization. The hallmarks of the TPP are opening up trade in services—not just manufacturing but also services, agriculture, and foreign investment.

YJIA: How effective is a trade pact in Asia if it does not include China, the region’s biggest manufacturer, who has not opted to join?

Dollar: It’s a shame that China does not want to join. China is very closed in its service sector, very closed to foreign investment. Among all the G20 countries, China is the most closed to foreign investment. I guess the issue is whether China is ready to open up more. Some other developing countries are already ready, including Vietnam and Malaysia.

YJIA: Is it worrying that China is reportedly pursuing its own trade agreement—the Regional Comprehensive Economic Partnership (RCEP)—that includes India and some TPP member countries, but leaves out the United States?

Dollar: I don’t have any problem with China pursuing its own trade initiatives. I’m a big fan of trade liberalization. I support open agreements, which means other countries can join if they meet the standards. As I see it, RCEP is not a very deep agreement, and it involves only a very small amount of trade liberalization. I don’t think it will have a big effect. Instead, TPP is what I call deep integration. It’s an effort to really open up all economic sectors and investment.

The big winners from the TPP will be places like Vietnam, if they can follow through. Vietnam has preferential access to the U.S. market, it will get pulled into value chains that it would otherwise not be part of.

Initially Vietnam will probably be doing the more labor intensive, low-technology work. I understand countries worry that they are going to get stuck there, but that’s not what historical evidence tells us. Taiwan and South Korea are nations that used to produce a lot of cheap, labor-intensive products. They used that as a stepping stone to develop their own human capital and their own firms. Now, South Korea is an advanced economy.

YJIA: Are we being overly optimistic about Vietnam? It’s lacking a lot of infrastructure.

Dollar: The issue is: does Vietnam follow through. It’s easy to sign an agreement. The problems in Vietnam are things like too much bureaucracy, red tape, corruption, and complicated procedures for getting things through the ports. The TPP is aimed at dealing with issues like customs facilitation and harmonization, so if Vietnam can meet those standards, it should be a lot easier to move goods in and out of the country.

But then there’s also the hardware side. I don’t think it is a contradiction that Vietnam is in the TPP and also one of the early members of the Asian Infrastructure Investment Bank (AIIB). I’m a supporter of the Bank. It’s smart for developing countries to use this bank and Chinese resources to improve infrastructure. If you only improve infrastructure and you don’t have the software, you’re going to have disappointing results. You need both.

In the longer run, it would be nice if China joined the TPP and became part of a more open community, and it would be nice if the United States joined AIIB and supported this Chinese initiative to provide more resources for infrastructure.

YJIA: What are the top challenges facing the TPP?

Dollar: First, there is the political challenge of getting it approved by all the countries involved. The negotiators have signed the deal but it has to go through the U.S. Congress and other countries’ parliaments. I’m cautiously optimistic that it will get through the U.S. Congress.

In terms of implementation, the most difficult—and interesting—thing is that it involves countries at very different development levels. It’s an exciting challenge, as I believe developing countries benefit by integrating with more advanced economies. But it is a challenge for a country like Vietnam to meet the standards that we are talking about—even basic things like customs harmonization and trade facilitation.

Personally I am skeptical about whether you can use trade agreements to enforce labor standards and some of these other issues. Yet it’s good that these countries have a clear statement of principle.

In a country like Vietnam, wages are rising rapidly, life is improving for workers, and there are a lot of positive things happening. I’m a believer in labor and collective bargaining. If these agreements can lead to a freer organization of labor, I think that is positive.

YJIA: How will China lose out by not joining the TPP?

Dollar: In the short run, some trade will be diverted from China to Vietnam. Imagine an efficient value chain that currently involves South Korea, China, and the United States. There will now be some incentive to shift part of that value chain to Vietnam. China will lose out to a small extent, but we shouldn’t exaggerate how important that is.

I think in the longer run China will lose more. You will start to see the development of important new value chains that will exclude China, because in today’s world there is more of a connection between services and manufacturing. China is a manufacturing powerhouse, but its service sectors are very closed and uncompetitive. It’s missing an opportunity to be part of this evolving world.

Let me give you an example. We think of cars as a classic manufacturing product. Today’s cars have very sophisticated computers and chips, they have a voice that talks to you, they have “brains.” A lot of this would be registered as services.

As we develop more smart cars, smart phones, and other smart things, there will be a tight link between manufacturing and services. China’s strategy of being open in manufacturing but closed in services—that’s going to be a losing strategy in the future.

About the Interviewee

David Dollar is a senior fellow with the Foreign Policy and Global Economy and Development programs at the Brookings Institution.

Interviewed by Liza Lin, Editor for Interviews.

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