Why Trying to Hurt China in the Trade Game Could Backfire

What’s good for the goose is often good for the gander in the world’s intertwined economies

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Kyodo / AP

U.S. trade representative Michael Froman shakes hands with Chinese Vice Premier Wang Yang while U.S. Secretary of Commerce Penny Pritzker shakes hands with Chinese Agriculture Minister Han Changfu at a meeting in Beijing on Dec. 20, 2013

Michael Froman, the U.S. trade representative, is in the midst of negotiating two of the largest trade bills ever envisioned. The Atlantic and Pacific pacts, once completed, could encompass more than 60% of the world’s economy, including most of Europe and Asia. The dirty little secret about the treaties: they both exclude the world’s largest and fastest-growing economy: China.

“While I don’t think you’ve ever heard the President say it publicly, it’s a containment policy for China,” says Michael Wessel, a commissioner on the U.S.-China Economic and Security Review Commission. “Clearly, behind closed doors, that’s the way it’s promoted. The goal is to strengthen U.S. economic ties, have the enhanced reliance on the U.S. market rather than on China’s market and also upgrade rules so that China is more of an outlier.”

But what’s good for the goose is often good for the gander in the world’s intertwined economies. In codifying its policies on things like state-owned enterprises, rules of origin and currency manipulation in the Pacific trade deal, the U.S. could actually end up helping China.

(MORE: When Exactly Will China Rule the Economic World?)

One of the biggest hang-ups on the trade deals is currency manipulation. Legislation introduced last week to fast-track the trade deals noticeably lacked the support of the top Democrat on the House Ways and Means Committee, Sandy Levin. The Michigan Representative has said for months that the Pacific agreement must include tough anti-currency-manipulation language, which the current version apparently lacks. The “legislation needs to address currency manipulation not only through a ‘negotiating objective,’ but also through legislation that provides direct relief to U.S. industries materially injured by imports,” Levin wrote last week in announcing his opposition to the bill. Levin’s biggest beef is with China’s currency devaluation, which he says has cost U.S. businesses $125 billion in net exports. Whatever guidelines are adopted in the Pacific bill will form the foundation of the bilateral trade agreement being negotiated between the U.S. and China. “Once we set rules in these areas, China can presume that’s the approach taken with them,” Wessel says.

The U.S. has also been working with Vietnam and Malaysia on how to deal with state-owned enterprises. Vietnam, still run by the Communist Party, has many such enterprises, and opening them up to foreign competition is a subject of some delicacy. Malaysia isn’t communist but it has been ruled by one party for decades and has over 2,000 state-owned enterprises. China, of course, is the gorilla in the arena of state-owned enterprises, and is watching closely to see how the U.S. treats Vietnam and Malaysia. The U.S. has been eager to give big Chinese companies more opportunities to invest in the U.S, like the $4.7 billion Smithfield Foods acquisition last year, Sinopec’s $2.1 billion investment in shale drilling across the West, Tianjin’s $1 billion facility being built in Texas and numerous chemical-company investments. But some observers have complained the U.S. hasn’t been hard enough on state companies when it comes to ensuring separation from government objectives and politics, all but giving China a pass when it comes time to negotiate with them.

Finally, China will benefit directly from the Pacific deal itself given the weak rules-of-origin clauses, according to a leaked version of the negotiating text posted on WikiLeaks in November. Though Froman is quick to note that none of these provisions is set in stone yet — negotiators are hoping to nail down a deal before President Barack Obama’s visit to Asia in April — if the draft version stands, a car built in Malaysia with 65% parts made in China could still be considered Malaysian. Given the vast amount of manufactured goods and parts China supplies virtually all 12 of the Pacific countries negotiating the free-trade deal, it will almost assuredly benefit from increased sales if and when the pact is ratified.

So, for all the intent to exclude China and demonstrate American free-market hegemony, China is already clearly too big to work around. Ignoring King Kong isn’t going to make him go away. Worse, it might make him angry.

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