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TOKYO – It was as if Chinese President Xi Jinping made a dunk, perfectly timed to take advantage of the presidential transition in the United States.
On November 20, Xi said China would “look favorably” on joining the Trans-Pacific Partnership, an 11-member trade pact that includes Japan and Australia. Days earlier, China and 14 other countries had signed the Regional Comprehensive Economic Association, creating the world’s largest free trade bloc.
Xi’s enthusiasm for the TPP in addition to the RCEP dealt a blow to US President Donald Trump, whose administration has sought to isolate China from the international community. Xi’s comment invoked concerns that, at least when it comes to trade, Washington may be at greater risk of isolation than Beijing.
A look at the global economy supports these concerns. The United States accounted for 24.5% of the world’s gross domestic product in 2019, compared with 16.4% for China. But the 15 RCEP members combined accounted for 29.6%, outperforming the US.
China is by far the largest economy within RCEP. It produced 55.5% of the bloc’s total GDP last year, compared with 19.6% for Japan, which ranks second.
Now officially known as the Comprehensive and Progressive Trans-Pacific Partnership Agreement, the TPP was originally intended to curb China’s massive influence on the global economy and trade. Japan hopes that, in cooperation with Australia, it will be able to attract the United Kingdom as a new member, and even that the president-elect of the United States, Joe Biden, will reverse Trump’s decision to leave the frame.
But Biden’s top diplomatic priority is repairing Washington’s ties to Europe. And with the number of U.S. Senate seats up for grabs in the 2022 midterm elections in the country’s Rust and Corn belts, areas with strong opposition to the TPP, the Biden administration may be hesitant to accept the deal. commercial.
Xi’s comment takes advantage of this void. Although China faces major obstacles to joining the TPP, such as reforming its state-owned companies, Beijing’s openness to the deal will likely be welcomed by many of the pact’s members.
The 19 countries, which are part of the RCEP or the TPP, or both, represent 33.6% of world GDP. If the Biden administration decides that it cannot compete on its own, the United States may end up giving in to China’s trade demands.
Once focused on expanding exports, China now seeks to attract resources from around the world to become an indispensable link in global supply chains. China will become a “gravitational force” on global resources, Xi told the Central Committee on Financial and Economic Affairs on April 10.
But when it comes to food and the real economy, Xi has made it clear that his guiding principle is “China first.” He has also said that China’s state enterprises should not be rejected or weakened.
China is eager to take a leading role not only in creating trade and investment rules, but also in terms of currency. Still, the yuan accounted for just 2.02% of all international foreign exchange reserves at the end of June, a fraction of 61.9% of the dollar.
As long as China itself uses the dollar to negotiate and settle payments, the United States could use the currency as a tool in financial sanctions. Washington froze the assets of key Hong Kong officials this year in response to the political situation there. In theory, it could also exclude China from dollar-denominated settlements.
Beijing is working strategically to increase the use of the yuan in international trade. China is boosting domestic consumption, increasing imports that are paid for in yuan. RCEP presents an excellent opportunity to advance this strategy, especially given China’s central role in the bloc. More regional financial institutions in Japan could start trading directly between the yen and the yuan, bypassing the dollar.
The dollar remains the currency of choice for international agreements. But even in this area, digital currencies are changing the game. China’s deep interest in issuing a digital yuan is partly related to finding a user-friendly alternative to international agreements.
China claims that the United States did as it pleased during its time as economic hegemony. Although the argument is not without merit, Beijing itself is guilty of intimidating other countries through economic policy. When Australia questioned China’s responsibility for the coronavirus pandemic and political repression in Hong Kong, Beijing responded by imposing a series of trade sanctions on Canberra.
China is also pursuing new opaque trade rules that confuse partners, such as a law due to take effect on Tuesday that allows the Chinese government to ban exports to protect its security and national interests.
Japan’s trade and investment ties with China could be affected if Beijing needs to approve Japanese exports of items containing Chinese components, for example. And there is little clarity regarding which final destinations are blacklisted, or what penalties violators could face. As the law covers exports tied not only to national security but also to China’s interests, Beijing appears to be seeking protection for its industries.
China’s Ministry of Commerce released a draft of the law in June 2017, so it was not intended to be a retaliation against US trade sanctions. Major business lobbies in Japan, the United States and Europe repeatedly urged China to reconsider, but their calls fell on deaf ears, a possible indicator of what rule-making might look like in a world led by China.
Concerns are also growing about China’s approach to its financial sector. Ant Group, the financial arm of e-commerce platform Alibaba Group Holding, was forced to suspend its initial public offering in Shanghai and Hong Kong at the last minute, at Xi’s urging. Alibaba co-founder Jack Ma infuriated Xi by criticizing China’s financial regulations.
China has become an economic superpower thanks to its enormous purchasing power and financial influence. But the influence of the Chinese Communist Party and the military over the nation’s business and market presents risks to neighbors.
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