China eager to fill political vacuum created by Trump's TPP withdrawal

By: Justin Sink, Tolouse Olorunnipa, and Enda Curran

January 24, 2017

U.S. President Donald Trump’s withdrawal from a long-planned Pacific trade pact creates a political and economic vacuum that China is eager to fill, potentially damaging American prestige in Asia.

With Trump making good on his campaign pledge to nix a deal that was the centerpiece of predecessor Barack Obama’s Asia policy, China’s leaders are already ramping up support for globalization and free trade. In a speech last week to the World Economic Forum at Davos, President Xi Jinping likened protectionism to "locking oneself in a dark room."

Trump opposed the pact because he said it could hurt American jobs. But the impact of his decision is likely to go beyond trade, giving more leeway to Xi to position China as an economic and military anchor in the western Pacific. Since coming to power, Xi has sought to expand China’s trade ties with its neighbors and begun an ambitious infrastructure project designed to reinvigorate ancient trading routes to the Middle East and Europe.

The failure of the U.S.-led Trans-Pacific Partnership -- which would have covered 12 nations and about 40 percent of global gross domestic product -- will see China step up its advocacy for an alternative pact first conceived by Southeast Asian countries. That deal doesn’t currently include the U.S. and contains fewer measures to tackle non-tariff barriers to trade. The TPP was contentious in part because it addressed issues like environmental and labor protections.

"The U.S. is now basically in a position where we had our horse, the Chinese had their horse -- but our horse has been put out to pasture and is no longer running in the race," said Eric Altbach, vice president at Albright Stonebridge Group in Washington and former deputy assistant U.S. Trade Representative for China affairs. "It’s a giant gift to the Chinese because they now can pitch themselves as the driver of trade liberalization."

Under Obama, the U.S. used its Asia “pivot” to push back against China, which threatens over time to displace decades of U.S. dominance. While China has grown in clout it has also unnerved neighbors with its military expansion and its behavior over disputed areas of the East China Sea and South China Sea. The TPP was seen as a way to further bind countries, including smaller Southeast Asian nations, to the U.S. -- and act as a buffer.

Aircraft Carrier

China is concerned alongside other nations that Trump will pursue protectionist policies, Zhang Jun, an economic affairs official at the foreign ministry, said on Monday in a briefing before the TPP announcement. “If China has taken up a leadership role, it is because the front runners have stepped back, leaving that place to China,” Zhang said.

Senator John McCain, an Arizona Republican who chairs the Armed Services Committee, ripped Trump’s decision. Obama’s last defense secretary, Ash Carter, once said the TPP would be more strategically valuable than another aircraft carrier battle group in the Pacific.

The U.S. withdrawal "will create an opening for China to rewrite the economic rules of the road at the expense of American workers," McCain said. "And it will send a troubling signal of American disengagement in the Asia-Pacific region at a time we can least afford it."

“It’s arguable that the U.S. would have in fact benefited more from the TPP than Asia as average tariff levels are higher in Asia than the U.S.,” said Shane Oliver, the Sydney-based head of investment strategy at AMP Capital Investors Ltd.

“Bilateral deals could ultimately have the same impact but will take a long time to reach,” he said. “I think the focus will now shift to regional deals involving China.”

The 16-nation Regional Comprehensive Economic Partnership being championed by China takes in Southeast Asia countries, plus Japan, South Korea, Australia, New Zealand and India. Some leaders from TPP nations signaled after Trump’s election they’d shift their attention to the RCEP, with the next round of talks due to be held as soon as next month in Japan.

Read more: A QuickTake explainer on Trump’s trade policy

While some TPP leaders have indicated they might try and push on without the U.S., the pact looks to have run its course, said Victor Gao, director of the China National Association of International Studies who was a translator for late leader Deng Xiaoping.

"In China, we have an old saying: if a ship idles by the river bank by itself, other ships will keep sailing forward, and will leave the idled ship behind,” he said.

Obama regularly warned that failure to pass the TPP would let Beijing replace Washington in driving the rules of global trade. And his Council of Economic Advisers estimated the passage of RCEP would lead to the loss of market share among U.S. industries that now export more than $5 billion in goods to Japan.

Economic Impact

But the TPP never had overwhelming support in Congress, where many Democrats applauded Trump for withdrawing from it.

“I am glad the Trans-Pacific Partnership is dead and gone," Senator Bernie Sanders of Vermont, who campaigned for president as a Democrat on a promise to scrap the deal, said in a statement.

Beyond trade, Asian leaders are stung after investing political capital in the deal.

Killing TPP "really undermines the United States" in the eyes of Asian allies, according to Ian Bremmer, president of the Eurasia Group. "They put a lot of effort into it, and now they feel like they can’t rely on the United States.”

Read more: QuickTake explainer on China’s free-trade strategy

Still, influence in Asia appears less important to the new president than his ability to deliver on a campaign promise and burnish his image as a champion of American workers. At his signing ceremony Monday in the Oval Office, Trump called the move a "great thing for the American worker, what we just did."

And it may not be smooth sailing for China even if the TPP is finished.

"China will try to fill the gap now, and yet China is a colossal net exporter, not importer," said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. "Caveat Emptor for Asia if it rushes from TPP to RCEP.”

Beijing could find challenges rallying its neighbors, according to Barry Naughton, a professor of Chinese economy at the University of California in San Diego. “They are not in position to take their own interests and merge that with a set of global interests and make the kind of sacrifices necessary to bring allies closer to them,” he said on Bloomberg Television.

Vietnam called on Trump to take into account the strategic aspects of the TPP.

“We hope the U.S. will be quick to send a message of reassurance about their leadership or at least their engagement here to prevent other powers from filling the vacuum the U.S. leaves,” said Tran Viet Thai, deputy director general of the Diplomatic Academy of Vietnam in Hanoi, where the country’s diplomats are trained. “The ball is in the U.S.’s hands.”