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U.S. and China at Odds Over Free Trade Agreements in the Asia-Pacific Region

Posted November 05, 2014

An article in The Diplomat yesterday (based largely on a recent report by the Wall Street Journal), provides some fascinating insight into the trade policy maneuvering of both China and the U.S. in the Asia-Pacific region ahead of the Asia-Pacific Economic Cooperation (APEC) forum next week.
US-China Currency
At issue is the allegation that the U.S. is blocking China’s efforts to use the upcoming summit to jumpstart negotiations on a new free-trade zone spanning the Pacific. Known as the Free Trade Area of the Asia-Pacific (FTAAP), the ambitious trade pact would be comprised of the 10 member states of the Association of Southeast Asian Nations (ASEAN) plus China, Japan, and South Korea.

The notion of creating FTAAP was first floated over a decade ago with formal discussions on the concept beginning in 2006. Initially proposed as a reaction to the lack of progress on the Doha Round of World Trade Organization talks, the FTAAP was also seen as potentially being an effective way of integrating the numerous overlapping (and often conflicting) bilateral and multilateral free trade agreements in the region.

The concept has failed to gain much traction since that time though, owing to differing views concerning the economic impact of such an arrangement, along with a host of other complex factors. This spring however, both the Chinese Premier and Vice Foreign Minister called for greater action to be taken on beginning feasibility research into the FTAAP and said that starting the negotiation process for the new trade pact “will be an important goal for APEC this year.”

Wall Street Journal reports that the U.S. pressured Beijing to drop two provisions dealing with FTAAP from the draft APEC communiqué. One provision called for APEC to begin a feasibility study for FTAAP, which would be the first formal step in negotiating the new FTA. The other provision set a target date of 2025 to close the deal. According to the Wall Street Journal, both provisions were removed from the draft after the U.S. protested.

It should be noted that in response to the WSJ story, USTR spokesman Matthew McAlvanah issued the following statement: “The United States is a strong supporter of APEC’s long-term vision for realizing the FTAAP by building on ongoing bilateral and regional negotiations.” Not exactly an unequivocal denial of what the WSJ had reported.

Aside from whether or not the U.S. pressured China to drop plans to promote FTAAP at the APEC summit, arguably the far more intriguing part of The Diplomat article concerns the dueling perspectives of the two largest economies in the world:

According to estimates from the Peterson Institute of International Economics cited by the WSJ, FTAAP would represent a “win-win” for the U.S. and China – although China would “win” far more. PIIE estimates that, by 2025, the FTAAP would help the U.S. gain about $626 billion in exports, while China would gain a whopping $1.6 trillion. Under the TPP arrangement, the U.S. would gain far less in exports (about $191 billion) but China would actually stand to lose roughly $100 billion in exports as the TPP nations would shift their trade focus to other TPP member economies.

From a Chinese perspective, then, the U.S. move to block FTAAP smacks of containment. When Chinese analysts complain of a “Cold War” or “zero sum” mentality, this is exactly the sort of political calculation there are talking about: Washington would rather minimize its own gains to ensure maximum Chinese losses. Plus, U.S. pressure to kill FTAAP mirrors a similar attempt by Washington to persuade its allies and partners not to sign on to China’s Asian Infrastructure Investment Bank. To Beijing, it certainly looks like Washington is out to block any regional economic initiatives that stem from China.

From a U.S. perspective, though, this decision is simply pragmatic. The TPP negotiations are close to being finalized, but recent deadlocks have stalled progress. Under these circumstances, the Obama administration likely feels that introducing a new, even larger trade proposal would sap what little momentum remains for the TPP. FTAAP negotiations would be a long, messy process (as seen by China’s original target date of finalizing negotiations by 2025) and may ultimately end in failure given the number of countries and divergent interests involved.

“When it comes to regional trade arrangements,” the article’s author concludes, “the U.S. and China are simply not on the same page.”