Bridging the Pacific

25 January 2012

by Stephane Rouschmeyer

Obama, continually pushing for progress, now sets his eyes on a much anticipated pacific free trade agreement. It was at the APEC summit in mid November that the details of the proposal were outlined, free trade based on removing taxes and other barriers to trade for nations hugging the pacific ring of fire. Such a free trade area would harbour huge benefits for all parties of the region and, for sure, fuel growth for all nations involved. But not all is as meets the eye.

A pacific trade plan, as outlined, calls for the destruction of trade barriers as well as limitations of subsidiaries given to domestic firms. Essentially, it is a union promoting free trade and free markets, open to those who adopt those notions. This is important for two reasons, firstly, the current APEC agreements are lose and have very marginal benefits. Too many of its member nations over protect the domestic markets and give unfair advantages to their businesses for true free trade to be possible. Secondly, Obama is testing China’s resolve. A true free market encompassing South American nations, South East Asian nations, Australasia, Japan, the US, Canada and Mexico would create an economic area 40% larger than the 27 EU nations (Reuters), an irresistible prospect for the Chinese economy.

For the moment, the Trans-Pacific Partnership includes nine member states, but Japan, Mexico, Canada and a host of other states have publicly declared their interest in joining the partnership. Rules state that new members have to be agreed upon by current members, but until the trade agreement is finalised and running (Obama has set 2012 as his deadline), pacific members are apprehensive of the delays caused by the introduction of new states.

Karan Bhatia, former deputy US trade representative described the initiative as a “gravitational force that would bring others in”. Essentially, creating an economic affiliation that would benefit close rivals of Chinese industries, such as Malaysia, Vietnam and South America, would lead China to economic reform, paving the way for its entry into the pact. Many analysts see the trade plan as an attempt by the US administration to force China to allow the Yuan to float, one of the conditions of entry. Without membership, China would lose huge trading partners to rival economies, but by adopting conditions of membership, the People’s Republic will lose its key advantage – an undervalued currency. Far from contradicting the consensus, Obama was later quoted as saying he wanted China to “Play by the rules” shortly after meeting with President Hu Jintao. The Chinese administration is therefore running out of time. Once the Trans-Pacific Partnership comes into force, an undervalued currency will be no match for the economic benefits of TPPs member states. The US has forced China to face a ticking clock, either reform or lose a competitive edge.

However, the TPP should not be viewed as an American economic attack on China. The TPP creates a genuine opportunity for pacific nations to kick start growth and change the face of the global economy. The US is also using this opportunity to find larger trade volumes after difficult quarters with European trading partners. Just as you might look away when you give a blood test, Obama sees trouble in Europe and looks to the west for new markets.

Ever the optimist, the Russian Premier Dmitry Medvedev was last week quoted as saying of the TPP “I don’t understand what the result of this club will be.” With planned implementation set for the end of 2012, the TPP will be a game changer, and one to watch out for.