Trade Agreement-Signing Competition: US vs. China

US, China race to sign preferential trade deals...which exclude the other.

With the WTO Doha Round safely written off--it's so stale that even the obituaries declaring it dead date to 2012--another "great game" has preoccupied the great (trading) powers. Aside from being the two largest economies in the world, the US and China are also its two largest traders in goods and services. Paying no heed to the notion of "trade diversion," both are racing to sign preferential trade agreements with any and all comers--except each other, that is. As it so happens, Laura He has an interesting description of this contest to ink PTAs at MarketWatch.

Let's start off with China. Its strategy involves linking together a series of bilateral arrangements for an eventual wider, regional deal known as the Regional Comprehensive Economic Partnership [RCEP]. After the RCEP, there will be an even broader deal in China's plans for APEC member nations known as the Free Trade Area of the Asia-Pacific [FTAAP]:

Last week, China signed a landmark free-trade agreement with Australia, the latest entry in Beijing’s recent parade of high-profile trade deals. [T]hese deals can also be seen in the context of a “free-trade race” with the U.S., in which each side racks up competing — and often overlapping — free-trade agreements, or FTAs. Specifically, the Australia deal follows closely a similar agreement with South Korea, inked June 1, and falls into China’s plan for a Regional Comprehensive Economic Partnership, which Beijing hopes will in turn serve a grander, more globe-straddling strategy for a Free Trade Area of the Asia-Pacific.

RCEP and FTAAP, as the latter schemes are known, are more than just another pair of Chinese government acronyms. Back in the 1990s, China was struggling to conform to the rules of the World Trade Organization, which it finally joined in 2001. But today, as an editorial by the state-run Xinhua News Agency put it last week, China wants to transition to “actively helping write international economics and trade rules” rather than following a system set up by other nations.

This month’s new trade deals are a step in that direction, Xinhua said, with China trying to “thread the beads of a China-South Korea FTA and China-Australia FTA onto the string” of its RCEP plan and eventually “create a plane” for the more ambitious FTAAP. In fact, Chinese President Xi Jinping went so far as to tell Australian Prime Minister Tony Abbott in a public letter that the FTA between their countries would “set an example” for similar agreements in the Asia-Pacific region.

Allegedly, China's reinvigorated mania in signing preferential details left and right has been spurred  by fears of being frozen out by the Trans Pacific Partnership [TPP]*:

But perhaps the root of China’s proliferation of trade deals and multinational organizations is yet another set of initials, emanating from Washington: the TPP. The TPP is the U.S. government’s Trans-Pacific Partnership, currently under negotiation by the Obama administration, with 12 countries in the Asia-Pacific arena — but not China.While neither side has openly declared an FTA race — President Obama even said that China has shown interest in joining the TPP “at some point” — many observers see the TPP and China’s RCEP as rivals.

“It is indeed commonly perceived that the TPP is designed to exclude China,” said Francis Lui, director of Hong Kong University of Science & Technology’s Center for Economic Development.

Certainly, there’s a good deal of overlap between the two proposed trading spheres, with Australia, New Zealand, Japan, Singapore, Malaysia, Vietnam and Brunei all marked for inclusion in both the TPP and RCEP. And in seeking to promote the TPP in the U.S., Obama warned in April that if the trade group isn’t set up, then China will write the trade rules for the region.

Lui said China’s rush to sign trade pacts and set up the RCEP is Beijing’s counterweight to the TPP, and “the emergence of this large number of FTAs shows that [the U.S.’s TPP] strategy can be mitigated easily. If China can sign individual FTAs with many members of TPP, then the American goal of using it to isolate China would no longer be of any significance,” Lui said. “The fact is that many members of the TPP indeed have the incentive to go into FTAs with China.”

While it's all very interesting to read about, you do have to wonder why they don't just conclude a simpler WTO agreement that China, the US and everyone else can agree to. Instead, we have multiple possibilities for trade diversion. Moreover, it gets hard for customs authorities to know just what tariff rate to administer with so many overlapping PTAs. It's going to be a nightmare to keep track of which is which if this keeps going on.

* - Also see a previous post on how FTAAP turned from an American into a Chinese advocacy.