[Viewpoint] China’s jitters over free trade

Something unusual happened in the lead-up to the Asia-Pacific Economic Cooperation Leaders’ Meeting in Hawaii last week: China went on the diplomatic offensive against the United States. The Chinese Foreign Ministry spokesman said the U.S. agenda was “too ambitious” and officials from Beijing raised objections to everything from U.S. proposals on reducing tariffs on environmentally friendly goods and services to President Barack Obama’s trumpeting of the nine-member Trans-Pacific Partnership (TPP) trade negotiations.

Official Chinese criticism of the U.S. over Taiwan arms sales, meetings with the Dalai Lama and other bilateral issues is not new. But public U.S.-China collisions at APEC are rare. Until now, Beijing has used APEC as a forum to emphasize cooperation with the U.S. (except for the occasional behind-the-scenes tussle over Taiwan’s role). Now, it appears that Beijing views regional trade negotiations as another front in the increasingly complex and confrontational U.S.-China relationship.

How did this happen?

One important factor was the recent surge of U.S. activism in Asia. For the first few years of the Obama administration, Washington did not appear to have a clear trade strategy. Obama had campaigned against the Korea-U.S. FTA as a candidate, and the White House did not appear eager to take on its own political base of support with the labor unions by pushing free trade.

Then suddenly the White House pushed for Congressional passage of the Korus FTA just in time for President Lee Myung-bak’s October visit to Washington. With the FTA cleared, the administration could make last minute progress on the TPP in time for APEC. Then Japan - which was drifting and indecisive under prime ministers Yukio Hatoyama and Naoto Kan - got its act together just in time for APEC with Prime Minister Yoshihiko Noda’s statement of intent to join the TPP negotiations.

When the other eight countries in the TPP negotiations had relatively small economies, the negotiations looked less imposing. But Japan is the world’s third-largest economy, and Korea’s docking into the TPP seems likely after the passage of the Korus FTA. Plus, Canada is now actively trying to get in. In less than six months, all the major economies in APEC are in the TPP or lining up to join - except China. Even Taiwan has expressed interest.

Given China’s historic paranoia about encirclement and the major setback Beijing suffered in relations with neighboring states last year in the wake of the Cheonan sinking and territorial clashes in the East and South China seas, this all probably came as a shock. A year ago, China had trade negotiations under way with most of Asia, and it appeared that the U.S. was the odd man out in the region, beset by its own problems. Now, the trans-Pacific trade architecture appears to have all the momentum.

Chinese officials before and during APEC complained that Beijing was never asked to join the TPP talks and demanded that the process not exclude anyone. In fact, the Obama administration has been clear that TPP is a building block towards a broader Free Trade Area of the Asia-Pacific that would be made up of all the member states of APEC, including China.

That is probably another reason for Beijing’s discomfort. With China’s economy booming and the U.S. and Europe in trouble, Beijing had the upper hand in negotiations ranging from the Korea-China-Japan trilateral FTA concept to the Economic Cooperation Framework Agreement with Taiwan. Most of these trade talks have been easy for China because they avoided behind-the-border issues and they allowed for numerous exemptions. With high-level trade agreements like the Korus FTA and the TPP proliferating, Beijing will inevitably lose negotiating leverage when it deals with countries like Korea and Japan.

Beijing’s major trading partners are all now encountering the same problems in the China market: The coercive extraction of technology, difficulties with intellectual property rights protection, labor practices, corruption and exchange rate policies. The long-term impact of deeper trans-Pacific trade architecture is not so much the reduction of tariffs as the establishment of 21st century rules for trade and investment as Asia integrates.

Beijing is apprehensive about this. But ultimately the Chinese economy may benefit most of all. This isn’t like the formation of trading blocs in the 1930s. Most countries today seek an open and inclusive Asia-Pacific trade architecture. The fact that no country wants to be excluded only helps intensify trade liberalization.

Korea is in a pivotal position to help ensure that the net effect of competitive trade liberalization in Asia is better regional integration and more prosperity - rather than political competition. Of course, Korea’s leverage and leadership depends on passage of the Korus FTA in the National Assembly.

*The writer is a senior advisor and Japan chair at the Center for Strategic and International Studies in Washington.

By Michael Green