As US pulls back from Pacific trade deal, countries look to China

The decline of the TPP free trade agreement sought by Obama has given new attention to China's own trade pact. Some see a strategic shift in leadership in the region.

TPP is dead. Long live RCEP?

As the Trans-Pacific Partnership sought by President Obama has fallen on hard times – the victim of the presidential campaign and President-elect Donald Trump’s pledge to scrap the free-trade accord – new attention is being paid China’s own trade pact for Asia, the Regional Comprehensive Economic Partnership.

With TPP apparently dead, some Pacific-rim South American countries including Peru and Chile are expressing interest in joining an expanded RCEP.

At the same time, China’s President Xi Jinping, in South America for the weekend Asia-Pacific Economic Cooperation (APEC) summit in Peru, has busied himself cementing ties with Latin American countries – signing a “strategic partnership” with Ecuador, for example.

The foundering of the 12-nation, US-led TPP and the emergence of the 16-nation and China-led RCEP is widely seen in the Asia-Pacific region as an example of how the impending shift in occupancy of the White House is portending America’s withdrawal and is helping to pave the way for an expansive China.

“We’re at an inflection point,” says Eric Farnsworth, vice president of the Americas Society and Council of the Americas in Washington. “There is a strategic shift going on between the US and China for leadership in the Asia-Pacific region, and a TPP on the rocks is very much a part of that.”

In a bilateral meeting with Mr. Obama in Lima, Mr. Xi spoke tantalizingly (and uncharacteristically frankly, some China experts say) of a “hinge moment” in US-China relations. Some leaders in the Asia-Pacific region heard the Chinese leader’s words as applying to the region, as well.

Most countries in Latin America and even in the larger Asia-Pacific region would prefer to hitch their economic and strategic wagons to the US. For many, shared values like democracy and transparency are a significant motivation, some regional analysts say. But they add that few of those countries will opt to “sit back and wait” to see if the US pullback from trade pacts hardens into a broader regional withdrawal.

Countries across the region are taking stock of which of the US and China is ready to move forward, Mr. Farnsworth says, noting that the traditional US hold on regional leadership is over.

“In the past, the approach more often than not was, ‘We’ll wait to work out a way forward with the US,’ but that is changing with more eyes turning towards China. Now,” he adds, “we hear regional leaders like the president of Mexico and others saying, ‘We want and need the US engaged in the region, but if the US withdraws, we’re going forward without them.’”

Region reacts to Trump

Mr. Trump confirmed in a video message Tuesday that pulling the US out of TPP would be one of his first acts in office.

Response from the region was swift: Japanese Prime Minister Shinzo Abe, the first world leader to meet with the president-elect last week, called TPP “meaningless” without the US and cast doubt on any possibility of renegotiating the deal with the US. Australian Prime Minister Malcom Turnbull predicted the other 11 countries would proceed with TPP without the US, while New Zealand took an “It’s their loss” approach to Trump’s announcement.

“The United States isn’t an island. It can’t just sit there and say it’s not going to trade with the rest of the world,” a “disappointed” prime minister, John Key, told reporters Tuesday. “At some point they’re going to have to give some consideration to that.”

Obama envisioned TPP as a way to anchor fast-growing Asian economies to the US – and to the US-led internationalist economic model – as a counter to China’s economic rise. Leaders like New Zealand’s Mr. Key and Mexican President Enrique Peña Nieto have been suggesting in recent days that they believe Trump will eventually embrace international trade.

Trump also called for a 45 percent tariff on Chinese imports during the campaign and blasted NAFTA as a “disaster,” pledging to either scupper the three-nation free-trade deal or to renegotiate it. But North American trade officials note that 48 of the 50 states count either Mexico or Canada as their top trading (and job-creating) partner, so they believe a dose of economic realism will result in calmer heads on NAFTA.

Long-term Chinese plans

But in the meantime, China, which has been planting economic stakes in Latin America for at least a decade, is going further.

“Xi Jinping’s visit [to South America] this week is another step forward in a longer process of China imbedding itself in the region,” says David Shambaugh, a China expert at George Washington University.

The author of “China goes Global: The Partial Power” says the flurry of speculation about China suddenly rushing in to “fill an economic institutional vacuum left by the death of TPP” is off the mark.

“The death of TPP is damaging for the US, no doubt about it,” Dr. Shambaugh says. “But I don’t think it leaves a vacuum for China to fill.”

RCEP will remain an East Asian trade pact, he suspects, while Asian-Pacific countries with strong economic links to the US will maintain those ties.

What he does expect are continuing efforts by Latin American countries in particular to diversify their economic partnerships. “Instead of just looking north, these countries have started looking east and west over the last eight to 10 years,” he says, “and that’s going to continue.”

China was not part of TPP, just as the US is not included in RCEP, which so far brings together 10 Southeast Asian countries, plus India, Australia, Japan, South Korea, and New Zealand, with China in the lead role.

For some regional experts, the same economic realism they predict will ultimately bring Trump back to the regional trade arena was already on full display at the weekend’s APEC forum. 

“For the first time, the US was not in a position to say, ‘Here’s our vision, and here’s why it’s better,’ ” says Farnsworth, who attended the summit. “Instead, the buzz in the hallways was, ‘China’s not just here, but here to stay, so let’s figure out how to work with that.’”