China and global leadership in a post-TPP era

By Stephen S. Roach Source:Global Times Published: 2016/12/4 21:48:39

Illustration: Luo Xuan/GT

Illustration: Luo Xuan/GT

Now that US President-elect Donald Trump has formally signaled his intent to withdraw from the negotiated, but not ratified, Trans-Pacific Partnership (TPP), there can be little doubt of the seismic cracks that have opened up in the postwar global order. Since the demise of the Doha Round, global trade liberalization has been on shaky grounds. The death of the TPP is the final nail in the coffin. Multilateral trade deals have long been characterized as the glue of globalization. Absent that ingredient, the risk of fragmentation can only grow - injecting a new ambiguity into perceptions of global economic leadership.

It is hardly a coincidence that the battleground for this latest skirmish was Asia - the world's fastest growing region and greatest source of opportunity. But in the aftermath of Donald Trump's surprising election victory that opportunity has been squandered. It's not that the TPP was a poorly designed framework. To the contrary, it pushed the envelope in terms of the high standards of cross-country engagement but it failed to resonate with the populist angst of the middle class. And now the world needs to contemplate what lies ahead in this post-TPP era.  

That's where China enters the equation. As the dominant economy in Asia and the driver of an alternative 16-nation pan-regional trade agreement - the Regional Comprehensive Economic Partnership (RCEP) - US abandonment of the TPP is an unmistakable opportunity for China. While the RCEP framework stops well short of the tariff reductions and standards of the TPP, it can be viewed as an important starting point for greater pan-regional economic integration. With the next round of negotiations slated for early December, full ratification of the RCEP, in conjunction with Chinese-led multilateral institution building would only underscore China's leadership push. Moreover, China's One Belt, One Road initiative, together with the IMF's recent inclusion of the yuan in its Special Drawing Rights construct, reinforces this trend all the more. And, there is the so-called Philippines pivot - the recent move by President Rodrigo Duterte shifting primary allegiance from the US to China. Putting all of this together, many believe that China will now quickly fill the void in a post-TPP world.

If it were only that easy. The baton of global leadership rarely passes so seamlessly. Notwithstanding Donald Trump's "America first" attitude, the US is hardly walking away from its global responsibilities. It may engage the world on different terms but it should continue to take seriously its responsibilities and opportunities as the world's largest economy and most powerful military force. Yet, America has learned that it has become exceedingly difficult to maintain its position as global hegemon in the aftermath of the Great Financial Crisis and Recession of 2008-09. An anemic post-crisis economic rebound played an important role in fueling the populist backlash that gave rise to Donald Trump. Similar outcomes are very much evident in the UK's Brexit, with rumblings of more to come in continental Europe. With substantial problems at home, the appetite for global power understandably wanes.

That same lesson should not be lost on China. While the Chinese economy has been on an extraordinary path of growth and development, a key transition point is now at hand. As China shifts focus from a manufacturing-led producer model to more of a services-based consumer society, transitional risks pose increasingly serious problems. The confluence of debt-intensive growth, renewed property bubbles and zombie SOEs is particularly serious. As underscored by the now famous "authoritative person" interview in People's Daily last May, failure to address these risks could lead to a protracted period of weak economic growth that poses the ultimate challenge to the aspirational global leadership objectives of the China Dream.    

From the US perspective, the TPP was always far more than a trade deal. By excluding China and, in the words of President Barack Obama, endorsing an agreement that would insure that "China would not write the rules" of global trade, the TPP was the strategic lever in America's so-called Asian pivot - a thinly veiled China containment strategy. Nevertheless, the demise of the TPP does not mean Chinese leadership is simply there for the asking. 

The rise and fall of great powers has a long and tough history. Geostrategic overreach, as underscored by Yale historian Paul Kennedy, is doomed to failure if it lacks support from a strong economy. While the US is grappling with that dilemma today, it does so from a position of strength as a rich and prosperous developed economy. China, by contrast, is still relatively poor as measured in per capita income terms and is facing the daunting "middle-income trap" - historically, the ultimate stumbling block for most developing economies on the road to high-income prosperity.   

As such, ratification of a China-centric RCEP does very little to alter the balance of global power. China's outward facing strategic objectives obviously represent a new and important phase in its regional role. But it would be entirely premature to conclude that this is a major step on the road to global leadership. That can only happen over time if China stays focused on the reforms and policies that are required to address imbalances in its domestic economy. Global leadership starts with strength at home.

The author is a faculty member at Yale University and former chairman of Morgan Stanley Asia. He is the author of Unbalanced: The Codependency of America and China (2014).

Posted in: INSIDER'S EYE

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