ICC Research

Preliminary Analysis on the Latest Development of TPP

Author:Dr. Sheng Sixin      Time:2015-11-30

Translated by Wu Zhenru,Zhao Wei and Huang Hongyu

On October 5, 2015, Trade Ministers of 12 countries including that of the U.S. put forward a Joint Statement proclaiming the conclusion of the more-than-five-year-long TPP negotiation. Attention has been lavished on the news. As to TPP’s relation to China, views vary from the conspiracy theory, the threat theory, the opportunity theory to the irrelevance theory. However, most of them are in want of academic depth and neutrality. ICC researchers offer a preliminary analysis on the issue, and will continue to track its latest development for further in-depth analysis.

(1) An Objective Assessment of TPP’s Strategic Impact

TPP is neither 100% good nor 100% bad. Quite a few people say that TPP poses a great threat as it excludes China. Some even cry out that “the wolf is coming”. It is akin to the situation of 2000 when China was in negotiation of WTO accession. Some people, therefore, hold the view that China should view TPP in the same light and strive for an “entrance ticket”. Indeed, based on China’s WTO experience, joining TPP could boost domestic reform and international trade. However, the U.S. developed TPP as it learned lessons from China’s accession to WTO. It is naive to think that simply because WTO has brought more benefits than harms to China, China’s accession to TPP would definitely yield the same results. Given that China’s current economic situation and international environment are quite different from 2000, cautious analysis and comprehensive assessment are needed to evaluate the possibility of China’s accession to TPP and its impact on China. Empiricism should thus be staved off.

In the short and medium term, the conclusion of TPP will weaken trade relations between China and the U.S. as well as that of China and Japan, and have some negative impact on such multilateral treaty negotiations as BIT, BITT and FTA between China and the U.S. and the FTA negotiations among China, Japan and South Korea. Based on the model and statistics put forward by Peterson Institute for International Economics, by 2025 when TPP is put into full implementation contributions made by TPP members to U.S.’s additional GDP growth rate will only be less than 0.4%, which pales in comparison to Vietnam’s 12% and Malaysia’s 6%. China’s GDP growth rate, however, will suffer a loss of 0.2% (around 40 billion U.S. dollars, based on the dollar price of 2007). The majority of the loss is caused by Vietnam and Malaysia’s trade relations with the U.S. and Japan in replacement of China. Were the trend to continue, China would not be able to join TPP in the immediate future. Had it been the case, the current conclusion of TPP negotiations augurs the weakening of economic relations between China and the U.S. It will make a significant strategic impact on Sino-U.S. relations, Sino-Japan relations and the global patterns.

The impact brought out by TPP to domestic politics of the U.S. and Japan is worth taking note and vice versa. Mr. Larry Summers, former Treasury Secretary of the U.S., indicated that the political significance of TPP was larger than the economic one. It signified the U.S.’s leadership in economic and trade relations of the Asia-Pacific region. The “closed-door” TPP negotiations and the four-year confidential period are rather contentious even within the U.S. The American people think that TPP will have negative impacts on the U.S.’s employment, wage, environment, food safety and the development of SMEs. The biggest beneficiaries will only be limited large multinational corporations of the U.S. TPP will also feature prominently in U.S.’s 2016 Presidential election. Lately, in an effort to win votes both from the Party as well as the public the Democratic President hopeful Hillary Clinton made it clear that she was against the TPP. Meanwhile, the Republican’s support of TPP will have some negative impact on the odds of the Republican candidate. The impact of TPP on Japan’s domestic politics, however, is relatively positive. Even though the agriculture sector was opposed to it, the economic benefits and the strengthened relations between the U.S. and Japan will further the governing capacity of LDP and Prime Minister Mr. Shinzo Abe as well as keep the Japanese economy and society on a steady track.

The U.S.-dominated TPP could be complementary with China’s Belt and Road initiative. The general view is that the U.S.-dominated TPP and the China-led Belt and Road are two economic arenas that compete against each other. However, ICC holds the view that the Belt and Road should not be seen as a counter force to TPP and TTIP. Instead, the two could be complementary and promote the development of each other. The potential for cooperation between China and the U.S. in this area is huge. The U.S.’s TPP and TTIP and China’s Belt and Road suggest different needs of developed and developing countries in economic and trade integration. The U.S. and China can bring their advantages into full play via the joint development of FTAAP and the Belt and Road as well as promote win-win investment and trade in the Asia-Pacific and Road-and-Belt regions. Mechanisms of strategic reassurance and communication and coordination will also be established to extensively speed up global economic integration, effectively power economic recovery and sustainable development and shape the world into a stable as well as a harmonious place.   

(2) Analysis on the Positive Effects of TPP on the Economy and Trade of the 12 Member States

Peterson Institute for International Economics is the major think tank for the design of TPP and TTIP. According to the estimation from researchers at the Institute including Jeff Schott, by 2025 when TPP is put into full effect and strict implementation, trade  increase brought by TPP will propel significant GDP extra growth of most member countries: Vietnam 10.5-13.6%, Malaysia 5.6-6.1%, Japan 2.0-2.2%, New Zealand 2.0-2.2%, Singapore 1.9-2.0%, Peru 1.2-1.4%, Brunei 0.9-1.1%, Chile 0.9%, Mexico 0.5-1.0%, Australia 0.5-0.6%, Canada 0.4-0.5% and the U.S. 0.4%.It can be seen that TPP will make fewer positive effects on the economic growth of the U.S. than that of countries which have yet signed free trade agreements with America, such as Vietnam, Malaysia and Japan. The boosting effect of TPP to the economy of the three countries is worth taking note. Vietnam will benefit the most in terms of growth rate while Japan will top the list in terms of national income increase, which is expected to rise to 10 billion to 12 billion U.S. dollars in 2015, far surpassing that of other TPP members.

TPP will have various impacts on 18 industries including rice, wheat, other agricultural products, mining, food and beverages, textiles, foot wares and clothing, chemicals, metals, electrical products, machineries, transportation equipment, other manufacturing products, public utilities, constructions, trade services(logistics), public sectors and government procurement and so forth. Amongst them, industries such as textiles, foot wares and clothing, manufacturing (electrical products, machineries, and transportation equipment), constructions, public utilities and government procurement, agriculture, mining and metals that overlap with China’s advantageous industries, will be affected the most by TPP.

Here is industry-based analysis according to the model introduced by Professor Peter A. Petri and others from Brandeis University based on the estimation of industrial added value. Vietnam, Brunei, Malaysia and Japan will benefit the most in textile industries, in terms of industrial added value, their year-on-year growth rates are expected to be 49%, 25%, 18% and 12% respectively, while this number for Mexico and the United States will decrease by 9% and 6% separately because of TPP.

In foot wares and apparels industries, Vietnam, Malaysia and Brunei will benefit more from TPP than other TPP member states, whereas Mexico, the United States and Canada will have a comparatively greater loss because of TPP. By 2025, in terms of industrial added value, foot wares and apparel industries in Vietnam, Malaysia and Brunei are expected to attain year-on-year growth of 62%, 42% and 10% respectively, whereas, this number for Mexico, the U.S. and Canada will fall by 17%,12% and 10% respectively.

In electromechanical manufacturing, TPP has the most significant boosting effect on Malaysia, Vietnam, and Japan, and has a relative negative impact on Peru, Brunei, Australia and New Zealand. Industrial added value of electrical products and machinery industry in Malaysia can attain a year-on-year growth of 23%. In Vietnam, these numbers are 18% and 20% respectively. For Japan, its transport equipment and machinery manufacturing will increase by 14% and 4%. For New Zealand, Peru and Australia, year-on-year growth of industrial added value of transportation equipment will be 23%, 18% and 12% respectively.

In terms of construction, almost all the member countries will benefit from TPP, but Vietnam and Malaysia are the two biggest winners. By 2025, construction industry in Vietnam and Malaysia will increase by 21% and 7% respectively. Vietnam will also enjoy the benefit from TPP in the public utilities and government procurement, and these two sectors’ year-on-year growth of industrial added value will increase by 14% and 7% respectively. Vietnam and Malaysia are losers in their private service industry and the same number will decrease by 10% and 9% respectively.

TPP brings the largest loss to Japan’s agriculture, whereas, Vietnam, Australia, and Mexico will become the biggest beneficiaries with the implementation of TPP. By 2025, the year-on-year growth of industrial added value of rice of Vietnam and Australia are expected to increase by 7% and 3%, while this number for Japanese rice, wheat, and other agricultural products will fall by 5%, 40%, and 6%. This rate for Mexico’s wheat will increase by 7%.

In mining and metals, Vietnam is victim of TPP, whereas Mexico, Peru, and Malaysia benefit relatively more than other TPP member states. By 2025, due to joining TPP, the industrial added value of mining and metals in Vietnam will fall by 7%, while these numbers for Mexico and Peru are expected to be 3%.

In conclusion, based on the aggregated economy and industry development, current version of TPP has the most significant boosting effect on Japan, Vietnam and Malaysia. To some extent, this effect is resulted from replacement of China’s investment and trade with TPP member countries. It is indeed in favor of US’ strengthening its influence of economic affairs in the Asia-Pacific region, and as a consequence, China’s comparative economic competitiveness in this region is weakened.

(3) Policy Recommendations

According to the evaluation and analysis above, following suggestions are proposed:

        (i) Strengthen the implementation of Belt and Road initiative, accelerate China-led regional economic integration, study and explore the strategic connection between Belt and Road initiative and TPP/TTIP, which contributes to new model of major-power relations between China and the United States. In implementing Belt and Road initiative, we should keep strategic perseverance and patience, and strengthen China’s “hard power” and “soft power” along the Belt and Road region through infrastructure construction, foreign aid and cooperation, Free Trade Zone (FTZ) and multilateral trade mechanism. We should bear in mind that the United States and China have different interests in this region, especially different conceptions with regard to the Asia-Pacific FTZ. We should seek common interests, respect differences, manage divergence, seek mutual benefits and win-win results, and adhere to the principle of competition and cooperation.

        (ii)  Further strengthen the studies on TPP and its related investment and trade issues, track and evaluate TPP’s impact on China’s economy and industry continuously and carefully; keep promoting investment and trade agreements among China and other TPP member countries including the United States and Japan (in forms of FTZ among China, Japan and South Korea, FTZ between China and Japan, and BIT and BITT between China and the United States). At the same time, we should focus on studying and leveraging divergences between the Democratic Party and the GOP in U.S. congress, and make efforts to mitigate TPP’s negative influence on China.

        (iii)  Accelerate RCEP negotiations and reactivate WTO multilateral mechanism based on expanding China’s bilateral FTZ. In doing these, China can strategically hedge TPP’s impact, and make China developing countries’ representative and trade rule maker soon as possible.

        (iv)  Continue adhering to domestic reforms in order to meet high standards of TPP, be prepared to the fact that China will still not be a member country of TPP at its first round expansion. In this case, we should fully take advantage of Hong Kong’s strategic position in its economy, trade, and “One Country, Two Systems” institution design, and conduct careful study on possibility of Hong Kong’s joining TPP at its first round expansion as well as its following results.

        (v)  Focus on solving unbalanced domestic development during the 13th Five Year Plan, and be prepared for China’s joining TPP in the future. Due to TPP’s high standards in economic and trade agreements, China’s joining will be highly likely to exacerbate the existing unbalance domestic development, and therefore bring about more challenges in national security and social stability. Thus, in addition to continuing adhering to the reforms during the 13th Five Year Plan, we should work hard on narrowing the gap between the developed East and the underdeveloped Midwest and West.

  • Add:Floor7,No.1 Baiyun Road,Beijing,P.R.China
  • Post Code:100045
  • Tel:(86-10)63269862
  • Fax:(86-10)63264390
  • E-mail:postermaster@icc-ndrc.org.cn
  • Copyright by International Cooperation Center of National Development and Reform Commission
  • 京ICP备12049217号
  • 京公安网备110102005851