Trading strategies
The Economist | May 19th 2012
Trading strategies
China and America compete to lead regional free-trade arrangements
TRADE negotiations sometimes seem like scrubbing the floor. They feel virtuous, take for ever and entail back-breaking work; but, when done, it is often hard to see any difference. So a first reaction to the announcement on May 13th that China, Japan and South Korea are to open talks on establishing a trilateral free-trade area is to shrug. The idea has been around for a decade. There are many obstacles to its realisation. And not so much as a date has been announced for the talks to begin.
A second response is to recognise that, if it did come to anything, this would be a very big deal. In aggregate, the three countries account for nearly a fifth of global output—more than the euro area—and 18% of world exports. A third is to note that, with the stalling of the Doha round of multilateral trade talks, regional free-trade agreements (FTAs) in Asia have become one of many arenas of strategic competition between America and China.
There are a couple of shrug-worthy elements to the proposed free-trade area. The first is that it will be terribly hard to bring to fruition. In all three countries, important lobbies will resist the opening to free competition: Japanese farmers, Chinese state-owned enterprises, South Korean exporters hoping to steal a march over Japan through a bilateral free-trade agreement with China. Secondly, any agreement is likely to be a “shallow” one—allowing plenty of exemptions. South Korea has signed “deep” agreements with the European Union and America, though they have been fiercely controversial. But China’s trade agreements, such as that with the Association of South-East Asian Nations, ASEAN, tend to be sneered at by American and European trade negotiators as feeble substitutes for the real thing—FTA-lite. Meanwhile, domestic political pressures suggest that Japan’s government is hardly in a position to negotiate a full-strength one.
It would be wrong to dismiss the effort as pure symbolism, however. China is the biggest trading partner for both Japan and South Korea. All three countries recognise that their futures are intertwined and are sincere in wanting both to ease the suspicion left by historic animosities and to remove barriers—at least to their own exports. At the summit meeting in Beijing where the planned talks were announced, they also agreed on an investment-protection agreement, their first trilateral treaty. And their three-way FTA is seen as a stepping stone to an even bigger free-trade area, including the ten-member ASEAN.
In the dreamland in which some trade negotiators live, this would then merge with another, parallel project, the Trans-Pacific Partnership (TPP), which is being pushed by America, to form a grand Asia-Pacific free-trade area. The failure of global trade negotiations would be mitigated by an encompassing regional achievement. In the real world, however, the TPP is not complementary to the China-promoted trilateral initiative. It is in competition with it. Besides America, the TPP brings in eight other countries (Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam) which met this week in Dallas for their 12th round of talks. America insists it would welcome talks on Chinese membership. But some of the provisions it has introduced to the TPP—such as those directed at the activities of state-owned enterprises—seem designed to hinder Chinese entry.
The Chinese government professes an “open” attitude to the TPP. But the official press has aired reasonable suspicions that the TPP is part of the broader rebalancing of American global strategy towards Asia and the Pacific, which China sees as part of a plan to contain its rise. The involvement of Vietnam, for example, lends weight to this interpretation. At odds with China over territorial disputes, it has strengthened ties with America. But in its economy, too, state-owned enterprises play a big role. It is not an obvious candidate for membership in a “21st-century” trade pact, as the TPP is advertised. Unlike the trilateral FTA, the TPP is to cover, for example, intellectual property and environmental and labour standards, as well as tariffs. These American concerns may be hard to impose on the other TPP countries.
The biggest problem facing the TPP, however, is the failure so far of Japan to join the process. Without it, says Razeen Sally, an economist at the Lee Kuan Yew School in Singapore, the TPP “would look emasculated”. As Japan’s prime minister, Yoshihiko Noda, put it in March, it would be like The Beatles without Paul McCartney (America is John Lennon, he said).
However, at the best of times, leading Japan into the TPP would require political courage, given the resistance of domestic lobbies, such as farmers, to such a “deep” trade agreement. And these are not the best of times. Mr Noda is a TPP enthusiast, partly it seems for strategic reasons. But he has decided to spend his limited stock of political capital elsewhere, in trying to force through an unpopular rise in the sales tax. If he succeeds, he may call an election. If he fails, he will probably have to quit. To make matters worse, in his own Democratic Party of Japan (DPJ) a faction loyal to the “shadow shogun”, Ichiro Ozawa, a former DPJ president recently acquitted of fund-raising offences, favours better ties with China. So it might prefer the trilateral deal to one that antagonises farmers and other important lobbies at home.
Inconvenient truths
Liberals in Japan champion the TPP for precisely the reasons that conservatives oppose it, and that their counterparts in China in the late 1990s advocated membership of the World Trade Organisation: that it would force reform on change-resistant institutions and firms at home. Talking in Tokyo this week, for example, Takeshi Niinami, boss of Lawson, a huge convenience-store chain, argued both that Japan should join TPP talks as soon as possible and that TPP rules should be the basis for the trilateral discussions. Neither possibility seems to be on the cards. More likely, both sets of talks will drag on, and the conclusion will seem as distant as the process is painful.
