The Strategic Implications of TAFTA/TTIP: Will it Engage or Contain China?

Abstract: As China is moving up the value chain, both the EU and the US have seen their export shares declining in markets that they have traditionally dominated. This quantitative and qualitative evolution of Chinese exports has been to some extent attributed to China’s mercantilist national industrial policy and its leading industrial conglomerates: the State Owned Enterprises (SOEs). An inquiry of China’s strategic calculations vis-à-vis the TAFTA | TTIP would thus provide a better understanding of the EU and US impetus for a grand trade agreement which could shape the norms of the 21st century commerce, and secure the future of a liberal economic order. Chinese elites view the TAFTA | TTIP both as an opportunity and a threat. On the one hand, an exclusive agreement may force China to follow a balancing strategy and form competitive regional trade blocks. On the other hand, an open and transparent TAFTA | TTIP may well engage Beijing to liberalize its economy, and seek to constructively reform rather than expel the current liberal global order. The latter option has been the ultimate end of the US deep engagement strategy towards a rising China.

TAFTA | TTIP – The 5th Tectonic Shift in Contemporary Political Economy

In the recent history of economic integration and globalization three dates may well capture the attention of economic historians:

The first is December 1978, during the third plenary session of the 11th CPC Central Committee, when Deng Xiaoping presented the opening up and reform policy. Under his transformational leadership, China, the world’s most populous nation, would open up its market to foreign investors and gradually embrace the “invisible hand” of the market albeit with strong state supervision.

Eleven years later, on the 9th of November 1989, the collapse of the Berlin Wall and the degeneration of Marxist-Leninism, made the Bretton Woods Institutions – the World Trade Organization (WTO), the International Monetary Fund (IMF) and the World Bank – the movers and shapers of a liberal economic order; that is, of a model of interstate relations shaped by post-WWII US strategic interests and priorities (Ikenberry 2011).

In 2001, China, “a diva of gigantic proportions” (Allison 2012), joined the WTO and espoused free trade and commerce. The world seemed to be moving towards a liberal economic end. Yet, seven years later, the unforeseen collapse of Bear Sterns, a “triple A” Wall Street investment bank, triggered the “great recession” (Grusky & Western et al. 2011), and paused a 17 year process of seemingly teleological liberal integration.

China: the new giant in trade. Photo: Tuija Aalto, published on Flickr under a CC BY 2.0 license.

Following five years of economic and political uncertainty, a new initiative may well cause a fifth tectonic shift. The TAFTA | TTIP could shake the world, for the size of the EU and US commercial relationship fully outperforms any other. In addition, such a broad and deep agreement between the two biggest and most technologically advanced markets in the world will set a precedent that can hardly be matched by any other regional initiatives, and – thus – coerce other countries to follow the EU and US commercial imperatives.

Strategic Calculations Predominantly Shape Great Economic Shifts

The causes of the first three tectonic shifts were shaped by mostly strategic and political, rather than technical, calculations. The fourth shift (the great recession), clearly an outlier, was caused by regulatory and other institutional deficiencies of the US political establishment.

In 1979, China embraced the markets, since its economy and political system were too weak to protect her from Soviet imperialism. Industrialization and the subsequent build up of a strong military had monopolized the strategic calculations of Chinese elites since the era of the opium wars.

In 1989, the collapse of the Berlin Wall was the outcome of a long and fierce antagonism for world hegemony between two blocks adhering to diametrically opposing ideological paradigms: communism vs. liberalism.

In 2001, the entry of China in the WTO was greatly facilitated by Washington’s strategic belief in the effects of free trade on China’s political system as well as by China’s decision to go global and import technology. The 1995 Pentagon’s East Asia Strategy Report (FAS 1998) predicted that the trade of goods would lead to a trade of ideas (Shi 2013). Eventually, trade and commerce would liberalize the opaque and authoritative one party system of governance. This “deep engagement” (Nye 1995) would soften the fear that a rising power inspires to a status quo power, and ultimately motivate China to become a liberal partner in peace. “By the time China would be strong enough to challenge the system, she would have already become reconciled with it”. Treat China as an enemy and it will become one, Nye would famously proclaim (Nye 1995).

It is thus not an exaggeration to examine the decision of the European Union and the United States to promote the TAFTA | TTIP as a vehicle advancing a strategic end: to liberalize the Chinese economy further and integrate China into the Western shaped liberal global order. Indeed there have been many voices arguing that Beijing has taken advantage of its WTO position to promote à la carte liberalization, hijacking market shares from European and American companies. The most vocal criticism focuses on the cornerstones of China’s economic expansion: the State Owned Enterprises (SOEs) (Macgregor 2012). American and European analysts support that the state has offered a constant flow of subsidies to these economic behemoths and has thus distorted fair play (Haley & Haley 2013; Macgregor 2012). It should therefore not be seen as a mere coincidence that an important principle of TAFTA | TTIP is the “level playing field” and the full transparency of state support and market intervention.

China’s Comprehensive Economic Ascendency and the West’s Reaction

In 2001 Chinese exports accounted for less than 5% of world exports. By 2012, their share had more than doubled to 12%. In 2013, 95 Chinese companies are included in the fortune 500 (the 10th consequent year-on-year increase). 88 of them, almost nine out of ten, are SOEs representing more than 14% of the list’s aggregate revenues (Caijin 2013). Although correlation does not imply causation, many Western economists and politicians view the sharp increase of Chinese exports with suspicion. The ownership regime of many of China’s economic champions reveals a strong connection with the state and possible access to “abundant” sources of support. A newly published report on Transatlantic Trends (German Marshal Fund 2013) underlines that the majority of the public in the United States and Europe now see China as a rising economic threat.

Hence, it comes as no surprise that the US Congressional Research Service (Akhtar & Jones, 2013) supports that TAFTA | TTIP will also “seek new or expanded commitments in areas such as regulatory coherence and ‘21st century’ issues, including state-owned enterprises-issues either not discussed or only modestly discussed in prior FTAs”.

An ‘Economic NATO’?

Even before President Barack Obama’s January 2013 State of the Union address, David Ignatius (2012) cited the strong commitment of the then secretary of State, Hillary Clinton, to form a version of ‘Economic NATO’ and shape the trade norms of the 21st century. General James L. Jones (2012), the former Supreme Allied Commander in Europe, went even further and directly linked a possible TAFTA | TTIP with the willingness of the Atlantic partners for a strong North Atlantic Treaty Organization (NATO) in the 21st century. Almost a year earlier, the German Marshall Fund had called for an economic ‘coalition of the willing’ to enforce the new trade norms decided by the United States and Europe since “the rise of Asia has eroded the trade leadership role played by the transatlantic partners in the past decades”.

Fred Kempe (in: Nolan 2012) argued that the future challenges of the transatlantic community should be looked at much more through an economic and a security prism. Accordingly, an economic version of NATO would enhance the EU-US security and foster more integration. Ian Bremmer (ibid.) had expanded the concept of Economic NATO to Asia to include Japan and other Asian countries through the Trans-Pacific Partnership (TPP). Michael Froman (2013), US deputy national security advisor, is directly involved in the negotiations for the TAFTA | TTIP and has openly stated that the TAFTA | TTIP has broader goals than a traditional free trade agreement. It aims to shape the global multilateral trading system and set new global norms, Froman argued. Last, but not least, the Congressional Research Service in its July 2013 report (2013, 1) on the TAFTA | TTIP clearly supported that:

The two sides also seek to use eventual TTIP commitments on the global scene: to advance multilateral trade liberalization, set globally-relevant rules and standards, and address challenges associated with the growing role of China and other rising economic powers (REPs) in the global economy.

In a nutshell, the TAFTA | TTIP can be seen as the economic pillar of Washington’s security strategy addressing the challenge of a rising China. As Ignatius (2012) has put it, the TAFTA | TTIP along with TPP form the great vision of President Obama to set the norms of world trade in the 21st century and pressure China to open up its economy and limit the support to SOEs. If successful, this will be “Obama’s lasting legacy” in reinvigorating the liberal global order.

During a personal discussion with the author in Beijing, an economist from a leading American think tank stated that President Clinton’s decision to permit China’s entry into the WTO without a full commitment to liberalize and open up its economy was a grave mistake for the American and European prosperity. The TAFTA | TTIP would somehow correct this mistake, he insisted; in addition, China would finally find a strong reason to open up its financial sector to US investments, an issue high on the bilateral agenda of negotiations between the two sides.

At first glance, the US seems to be the most aggressive promoter of TAFTA | TTIP; however, the EU has also been vocal promoting “a level playing field”. Even Germany, which currently enjoys record trade flows with China, has grown increasingly uncomfortable with Beijing’s protectionist drive to high value-added products (Spiegel 2013). For some Germans, China may limit its dependency on German technology and thus turn into a fierce competitor. Arguably, the recent solar panel dispute can be seen against this backdrop, even though, in the end, Germany opted for pragmatism and aligned with Beijing against the European Commission (Bondaz & Trigkas 2013; Dalton 2013).

TAFTA | TTIP as seen in Beijing

While the United States and Europe form their grand economic and security strategy and negotiate TAFTA | TTIP, China has also searched for a counter-strategy. Before examining the concrete steps that China has undertaken, it is crucial to focus on the rhetoric behind the country’s trade and investment policies that the West observes with increasing suspicion.

Chinese elites argue that the post-Cold War global order was shaped at a time when China was weak and absent from the global stage. As Tsinghua’s Yan Xuetong (2013) has put it, the United States is not willing to renegotiate the Potsdam and Yalta agreements with China. John Mearsheimer (2013) in a conference at Tsinghua University argued that China is the most realist power in the world. The country is thus gradually liberalizing following a pace that optimizes its own strategic, security and economic goals.

Many Chinese recall America’s early to mid-19th century economic strategy as inspired by Alexander Hamilton’s Economic Report on Manufactures (Carey 1827) and applied by Henry Clay’s American System (Clay and Hopkins et al. 1959), to justify their own economic imperatives. The American system was based on three protectionist pillars: tariffs, a national investment bank and subsidies for infrastructure. Chinese policies in many ways reflect similar tactics. State-owned banks have provided liquidity to large SOEs en masse and thus facilitated their “going global” (浬놔혼濫쫠) strategy (Macgregor 2012). In addition, Beijing has funded major projects of infrastructure, housing, and research and development (R&D). Even though at first glance such policies can be seen as pure dirigisme, in many cases subsidies and accessible low cost capital increase economic efficiency. In that sense, the infant industry argument and the need for large economies of scale can provide a reasonable justification for China’s economic strategy. After all, back in 2001, Beijing used similar arguments to successfully tame some of Washington’s fears and facilitate China’s WTO entry. Yet China’s recent assertiveness in Asia combined with its going global economic strategy 2.0 (CSIS 2012; Campbel 2013) have led Washington to seek a new approach to reignite liberalization. The TAFTA | TTIP should thus be seen as the cornerstone of such strategy.

Yet, Chinese economic planners will not easily allow an economic encirclement by the US and the EU. They have instead pursued a sinocentric trade system promoting their own bilateral free trade agreements (He 2013). In March 2013 Iceland became the first European country to enter an FTA with China; Switzerland followed four months later (Chinese Ministry of Commerce 2013). In addition China has expanded its foreign direct investment in Europe and has now built strong relations with major economic actors across Southern Europe. On the Asian front, China promotes the Comprehensive Economic Partnership as a direct competitor to the TPP (Zhang 2013).

As Shi Zhiqin (2013) has put it, China has the economic leverage to play the game of the ‘trade noodle bowl’ and to some extent balance a US-EU trade agreement. However, according to Shi, such an outcome would undermine the global economic recovery. The best scenario would be the negotiations for the TAFTA | TTIP to be as open and transparent as possible and pay attention to other major trade actors and the concerns of the public. An open process in the Atlantic that would allow China and other countries to voice their worries could potentially facilitate the reform of large SOEs and subsequently increase the efficiency of the global economy. Unfortunately, as of today, negotiation texts are not even open to legislators, and this raises uncertainty and mistrust not only within civil society on both sides of the Atlantic, but also in China and other emerging economies (Venhaus 2013).

Overall, Chinese elites look to the TAFTA | TTIP with scepticism. The public statements of leading EU and US decision makers and intellectuals on the necessity for an Economic NATO to counter China’s increasing economic clout have been well noticed in Beijing’s elite circles. China in principle does not object to bilateral negotiations and also looks to the TAFTA | TTIP as a catalyst to boost the efficiency of its economy. The factor, however, that will strongly determine the trajectory of China’s strategy on the TAFTA | TTIP is the transparency and openness of the agreement. It is thus up to the EU and the US to build a responsible, transparent, and inclusive 21st century free trade agreement that will attract, rather than coerce, China. Such an engagement will define the quality of European and American statesmanship.

Conclusion

The Chinese view of TAFTA | TTIP reflects a realist school of thought that sees commerce as crucial for the welfare of the nation. Contrary to the liberal hypothesis of rising multinationals and non-state actors as the movers and shapers of globalization, the state remains the fundament of high-politics. Following the paradigm that first the United States set; the Chinese state is both the consumer of first resort and the investor of last return. It provides the necessary demand and liquidity to strategic industries and aim to make China an equal commercial power with the EU and US. Beijing supports that the country is following historical precedent and copying the commercial models of the West while at the same time respects its WTO obligations. Even though China has achieved the greatest liberalization during peacetime, its recent assertive trade policy has greatly worried Washington and Brussels. The TAFTA | TTIP is thus the commercial balancing of the transatlantic community to the increasing Chinese economic clout and to China’s faltering liberal democratic political reform.

In the early 20th century, John Hay, then US Secretary of State, eloquently proclaimed that the Mediterranean had been the sea of the 19th century, the Atlantic Ocean is the sea of the 20th century, and the Pacific Ocean will be the sea of the 21st century. The TAFTA | TTIP has the potential to make the Atlantic important and relevant well into the 21st century. Its success, however, will be judged on the broader vision of forming one greater “sea” together with the Pacific and peacefully engaging, rather than containing, China.

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