Did We Hand Asia to China?

The outcry has begun over the TPP. Richard Haas says that it will slow US growth and the primary beneficiary is China. Micheal Mcaul says we just handed China a major victory. For free! I don’t need to mention the others including John Mccain espousing gloom and doom.

What Actually Happened?

We cancelled a multi-lateral trade deal with a bunch of countries in Asia. Does this mean that we will cease all trade with all Asian countries for now till eternity? No it does not. We have bilateral agreements. We have the WTO. We have prior relationships. All it means is that we will not have this particular trade agreement.

Why are we against it? Well first off bi lateral agreements are much easier to manage and negotiate than ones involving multiple countries. They are also much easier to change and annul. We also have a problem with the potential for outsourcing that this deal has as we have experienced first hand with NAFTA.

Why TPP?

The main argument for TPP seems to be that if we do not do it China will. China is pushing this deal called Regional Comprehensive Economic Partnership which would theoretically replace the TPP. According to foreign policy analysts this would freeze out America and give China regional dominance in Asia. Basically China would replace the US in the web of Asian trade.

Let us take a look at the numbers. TPP includes 37.5 of global GDP , 25.9% of global trade, and 11.1% of the global population. RCEP includes 30.5% of global GDP, 27.4% of global trade, and 47.9% of the global population.

Do you see the problem now?

Can China Replace the US?

In short no. If you look at the numbers all the economies involved in the RECP are producer economies. For normal trade deals to work there normally has to be a stronger economy which outsources the jobs to the poorer one who then makes cheap products. The stronger economy now has access to cheap goods extending their budget and can then shift to other more productive fields.

In the case of RCEP the economies involved are the ones that are being outsourced too. The sweet sweet irony here is the countries involved in the RCEP have even lower wage scales than China! China will be in the exact same position as the US as its manufacturing base is outsourced to Vietnam and the other countries.

30.5% of the GDP shared by almost 50% of the populace means that there are almost no consumers to sell to and very little opportunity to make the profits required for the deal to be worth it. It says that almost everyone involved is barely subsisting.

The misconception here is that China can replace the US because of the size of its GDP. The US is the most desirable market in the world not just because of the production of its people but because of its purchasing power. Welfare, Food Stamps, Government Assistance, Easy access to credit. You may not like some of these things but it means that the average American can spend consume a much greater amount of goods than their paycheck would suggest.

In summary. China cannot replace the US in Asia with its trade deal. China and the US fulfill different roles in trade. RCEP is looking a lot like their version of NAFTA. The people who think that China will use this deal to be “economically dominant” are the same people who thought NAFTA was a good idea. The people in RCEP will need bilateral agreements with the US to have a market to sell to. For most of them the US will still be the most important trading partner.