For some businesses in China, the cost of exclusion from TPP is too high

Share

Few people in China can boast of a pedigree like Kong Sijun, whose family tree arches back 76 generations to Kong Zi, the philosopher known in the west as Confucius. Like his celebrated ancestor, Mr. Kong has remained dedicated to the well-being of his country. As president of Uptop Group, a Fuzhou-based maker of Samsonite suitcases and Walmart shoes, he runs six factories in China, employs 3,300 and brings in $260-million (U.S.) in annual revenue.

But Mr. Kong is now thinking about uprooting from China. The problem lies not in his workers or the people who buy the 1.4-million bags and suitcases, and eight-million pairs of shoes his factories make each year, 90 per cent of them exported. It lies instead with a free trade deal struck a continent away — an agreement whose exclusion of China stands to disadvantage domestic manufacturers and knock a full 2.2 per cent from its future growth, the central bank's top economist warned this week.

"It is unavoidable that China will feel the impact of the Trans-Pacific Partnership," Mr. Kong said. He is now mulling opening factories in Vietnam, one of the 12 TPP signatories, "because we need to adapt to the needs of the American market." And the U.S. market will, if TPP is set in place, suddenly see tariffs fall on Vietnamese products, while remaining in place for goods from China.

"It's almost a must for us," Mr. Kong said. "The Mainland operations in our company will move toward taking orders, R&D and sales. But the manufacturing base will gradually move to southeast Asia."

When the world's largest free trade pact was concluded on Monday, China's commerce ministry offered an optimistic take, saying it hopes such agreements can "contribute to the Asia-Pacific's trade, investment and economic growth."

But a new forecast from Ma Jun, the chief economist at the research bureau for the People's Bank of China, offers a much more grim outlook, suggesting the country stands to pay a heavy price for being left outside TPP.

Mr. Ma calculated the losses to China at 0.5 per cent of GDP growth for each of the four years of an expected implementation period for TPP. That amounts to a total of 2.2 per cent of foregone economic activity, a percentage that, measured against last year's Chinese GDP, is worth $226-billion (U.S.) — more than the economies of Venezuela or Peru.

Other estimates have suggested much more modest implications for China, including an earlier analysis by the Peterson Institute for International Economics that suggested China would forego $47-billion by being kept out.

But the new central bank estimate "raises a very important issue that neither the central government nor ordinary people should ignore TPP's potential impact on the Chinese economy," said Lin Jiang, who heads the Public Finance and Taxation Department at Lingnan College in Sun Yat-sen University.

Mr. Ma has served in senior economist roles with the International Monetary Fund, the World Bank and Deutsche Bank. His analysis, published by Chinese state media, assumes South Korea, Thailand and Indonesia join the current list of 12 TPP signatories, what he called a "TPP-15". In that scenario, China's absence also has an outsized effect on other nations, shaving 1.5 per cent off growth in South Korea, and 0.6 per cent from Japan. European Union nations, Singapore, Vietnam and others would see greater gains without China.

The trade deal, whose text has not yet been made public, has received broad praise among industry groups and economists. But its conclusion this week has also come amid mounting public concern. The front-running U.S. presidential candidates both both spoken out against it, with Donald Trump saying "it stinks." Hillary Clinton said, "based on what I know so far, I can't support this agreement."

Joseph Stiglitz, the Nobel economics laureate and Jim Balsillie, the former BlackBerry CEO, have both come out against it.

The concern may be greatest in China, however, a country that had sought to gain entry to the pact only to have the U.S. block it, on the grounds that Washington's leadership was needed lest Beijing write international trade rules.

The degree of impact, however, is a matter of much debate. Tim Condon, head of research for Asia with ING Financial Markets called the 2.2 per cent figure an "outsized" loss forecast. Prof. Jin noted that China's pursuit of free-trade deals has already knocked down tariffs with several TPP nations, including Australia, New Zealand and Association of Southeast Asian Nations. And markets shook off the forecast, with the Shanghai Composite Index rising 1.27 per cent Friday.

China will be at least partly shielded from the implications of free trade among TPP nations by its continued reliance on heavy domestic investment to fuel growth, said Victor Shih, an expert in the Chinese economy who is an associate professor of political science at UC San Diego.

"Whatever impact TPP may have, I think it would probably be smaller than China just building another high-speed railroad," he said.

Others saw the central bank forecast as an effort to leverage TPP as a way to urge economic change. Without upgrading its laws on protection of state-owned enterprises, intellectual property, labour and the environment, China would not likely be welcomed into the free trade pact. Highlighting the economic cost of not doing so could be one strategy of influencing the politics it would take to move in that direction, observer said.

That likelihood may, however, have now diminished, with TPP finalized and China's Communist Party having no say in its drafting — and little incentive to make the wrenching changes at home that might be required.

Some China's manufacturers, meanwhile, believe the party will protect them, no matter the consequences of free trade outside their borders.

TPP is "still just talk for now. It won't affect us much," said Jason Zhou, sales manager at Aukio Finery Co Ltd., a knitwear maker in Ningbo. If there are problems, the government "will find solutions if it really happens in the future."

-With reporting by Yu Mei