With the US-led Trans Pacific Partnership (TPP) now officially in limbo after President Donald Trump backed out, Asian markets are open for China to dominate.
That is the analysis that has dominated the world media in depicting the post-TPP scenario. But for one thing, it fails to quantify the so-called domination and the myriad challenges China is likely to face. Most importantly, it is based upon an unreal perception of the United States’ permanent ‘exit’ from Asia—something that is highly unlikely to happen.
We have to start from the point that the demise of TPP doesn’t mean a US exit from Asia, nor does the end imply an automatic elevation of China to a hegemonic and unchallengeable position in the region.
On the contrary, China’s own counter-TPP initiatives such as Free Trade Area of the Asia Pacific and Regional Comprehensive Economic Partnership (RCEP) have lost the primary reason for their existence. Hence, the question: will these programs remain as attractive for regional countries as they appeared to be when the TPP was still alive?
While these initiatives may still look attractive to some countries, ground realities of China's own economy show that they can't be as lucrative as TPP could possibly have been. If anything, they will have a considerably limited impact.
Falling exports, rising debt and overvalued currency
The reason for this limited impact is China’s own economic situation. Notwithstanding the huge ‘One-Belt One Road’ program China has developed, its economy is delinking from the rest of the world.
Last year, China’s two-way trade fell 8.0 percent in dollar terms, partly due to falling exports and partly due to the fact that the renminbi remains overvalued and the products costly. This overvalued renminbi is not only creating internal problems (2016 saw many Chinese dumping renminbi and buying gold) but also likely to create challenges for China’s other programs such as RCEP, making it hard for China to dominate trade flows, even if it gets every country to join RCEP and thereby become a member of its trading bloc.
What adds a lot more uncertainty to it is that no one knows the extent of the currency mispricing because its level is set by the People’s Bank of China, the country’s central bank, and subsequent trading is influenced by state intervention, which in turn takes decisions based upon certain contingencies.
One reason for a stumbling block for this artificially overvalued currency is the ever mounting internal debt – a situation that is a crisis of its own and can potentially explode –connected to the state bid to lend money to boost economic growth.
By mid-2016, China’s internal debt had already risen to a record 250 percent of gross domestic product. While the extent of this debt may not be the immediate worrying point for the Chinese government, the speed at which it has mounted is certainly what should worry planners. Chinese debt was only 148 percent of GDP at the end of 2007, making Li Yang, a senior researcher with the leading government think-tank the China Academy of Social Sciences (CASS), call the situation “fatal” for China’s economic targets.
Such a situation neither warrants high levels of growth nor an unhindered ability to export economic influence in the Asia-Pacific region in the absence of the United States.
TPP is dead but the US is still in Asia
While a lot of attention has been paid to the long and short term consequences of the demise of TPP, one of them being the end of former President Obama’s Asia Pivot, this may not necessarily be the case.
Standing alongside the Japanese premier during the recent visit of the latter to the US, Donald Trump certainly reiterated the US’s commitment to the security of its allies in the region, stamping the US’s stay in the Pacific in the years to come.
What adds additional significance to this commitment is the fact that Trump is asking for the largest defense investment since the 1990s and expanding the US Navy’s current number of 308 ships to 350. This complements the 2016 Naval Force Structure Assessment (FSA) to have a 355-ship fleet including 12 carriers, 104 large surface combatants, 52 small surface combatants, 38 amphibious ships, and 66 submarines.
Therefore, the plan of the Obama administration to transfer 60 percent of American naval assets from the Atlantic to the Pacific by 2020, as part of the Rebalance to Asia, may yet be far from over.
In this context, continued US preference for networked alliances and military force posturing would, in one way or another, remain squared against China’s regional security vision of comprehensive security, cooperative security, common security and sustainable security as stated in the Chinese White Paper China’s Policies on Asia-Pacific Security Cooperation.
Besides, while the TPP is in abeyance, there is nothing preventing the US from engaging in bilateral trade agreements with the countries which were part of the deal. This is what Donald Trump advocated throughout his campaign and continues to do so.
Bilateral ties are therefore unlikely to face a downfall. Consider this, for instance:
Japan’s PM has travelled twice to the US to meet Donald Trump since his election win. He met Trump in Washington on Feb.10 where they agreed to begin new talks on trade and investment. Similarly, countries like Vietnam and South Korea have huge stakes in the US and are likely to push for easing rather than abandon trade relations with the US. Singapore Airlines Ltd. plans a $13.8 billion order of wide-body airplanes from Boeing Co., which represents about a quarter of the value of 2015’s total two-way trade.
In this context, the question of China immediately profiting from the demise of TPP doesn’t arise. While China’s own counter-TPP initiatives are still far from complete, its internal economic situation is perhaps the single biggest obstacle to establishing Chinese hegemony in the Asia Pacific region, where big economies continue to look towards the US not because they expect investment but also because the US, not China, happens to be their one of the biggest trade partners and export destinations and because the US remains the country, in their calculation, that can help them ward off and counter-balance over-dependence on China.
Therefore, far from ‘abandoning’ Asia to China, Donald Trump is pushing for changing the way the US had previously sought to engage with Asia, where China’s own investment initiatives are not necessarily and always looked upon as lucrative and beneficial. Sri Lanka recently saw a wave of protests against large land acquisitions by China.
Such a situation, which is not limited to Sri Lanka, is likely to create more space for regional (Japan) and extra-regional countries (the United States) to tap into and provide alternative sources of investment, thus potentially limiting the extent of China’s influence in the region even when the TPP is dead.
Salman Rafi Sheikh is a Pakistan-based academic and regular contributor to Asia Sentinel.