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Looking East: The Future of Asia and Free Trade

Wikiemedia. The U.S. faces a massive geostrategic opportunity in Asian markets.

Octavian Report: Given the bitter fight the U.S. has seen over TPP, do you think that the difficult politics surrounding free trade are going to worsen, or do you think that the bipartisan, moderate consensus around it will remain?

Charlene Barshefsky: The politics of trade have always been challenging. Even before NAFTA, when the U.S. was pursuing a free trade agreement with Canada, the authority to do that agreement barely squeaked by the Senate Finance Committee — even though the committee was known as highly internationalist in view. That agreement is one of our oldest free trade agreements. The politics have never been positive. This is because there has long been a view — incorrect, I believe — that trade agreements damage the U.S. economy.

While I think it is the case that trade agreements can put wage or job pressure on lower-skilled workers in import-sensitive industries, trade in the aggregate is clearly a winner for the U.S. economy if one looks at the relationship of trade to GDP. The key for a politically palatable trade policy is to ensure that trade agreements are coupled with provisions to assist workers who might be dislocated by trade, recognizing that aggregate wealth in the U.S. is substantially enhanced by trade. Indeed, a third of the growth in our GDP is directly trade-related. I should also add that about 80 percent of job dislocation in the U.S. is due to technology, with the remainder being due to trade and many other factors.

OR: This doesn’t seem to you a more difficult time?

Barshefsky: Look, these agreements are difficult to get through the Congress. Depending on the year, you’re looking at a narrow band of votes that is slightly bigger or slightly smaller, but the band of votes for pro-trade Democrats has been very small for a very long time. The 28 votes for TPA in the House on the Democratic side came as something of a surprise to many observers; conventional wisdom was that the vote count would be lower. What has made the difference here is an extremely active Republican leadership that has pushed its members as far as those members could be pushed to vote with the President’s agenda. But for that strong Republican push, this would have been a failed effort without question.

OR: This victory, then, could be seen as much as a political vindication of House Majority Leader John Boehner as much as anything else. Is that a reasonable interpretation of it, in your opinion?

Barshefsky: I think it’s a reasonable interpretation. He’s had to push his folks. He has a large coalition that is against trade and/or against taking any vote that would be viewed as favorable to the Obama administration. Boehner has had to work quite hard to get the votes and to compensate for the paltry number of Democratic votes.

OR: How do you see the TPP playing out now?

Barshefsky: It will conclude. There’s no question about that, I believe. The administration will work hard to finish it quickly because the legislation poses quite a long notification requirement and a waiting period before actual votes on the trade agreement itself. The goal now is to get this done as quickly as possible before election season comes into full swing. They’re going to be hustling to finish this agreement. I think there’s no question about that. Trading partners will feel the pressure to complete it as well, because they don’t want to jeopardize eventual Congressional passage of it. I think everyone will double down, concentrate, and make final trade-offs relatively quickly.

OR: When do you think there would be a conclusion? This year?

Barshefsky: Definitely this year. It has to be, in my view, or you bump the trade vote way too close to the 2016 presidential election.

OR: Do you think there will be a similar fight over that vote?

Barshefsky: There’s always a fight. I would not expect to see the Democratic vote count change very much. Boehner again is going to be called on to ensure that his pro-trade caucus remains fully intact. He can’t afford to lose any votes. Nor can the Democratic vote count fall.

OR: What do you think the current outcome means for the bigger political and policy aspirations of the Warren-Sanders wing of the Democratic party?

Barshefsky: It will remain as active as ever. Its members are of a firm view that trade agreements have been a negative for the U.S. I think this is a demonstrably incorrect view, but it appears to be their view, nonetheless. That view, which is also held by Big Labor, has become bedrock for many Democrats. I don’t see that changing anytime soon.

I do think anti-trade Democrats will need to do some soul-searching. As this vote demonstrates, to the extent that Democrats take themselves out of the conversation by opposing agreements that will pass — even if it’s by a narrow margin — they will become more marginal players in an area and a field where being a marginal player is very dangerous. If Democrats want to ensure trade agreements appropriately respond to legitimate concerns, they need to play ball. Simply saying no, regardless of the provisions you do achieve — such as robust labor and environmental provisions — becomes counterproductive.

OR: What do you think will be the biggest effect of TPP?

Barshefsky: I think the single biggest effect will be to substantially strengthen and cement U.S. strategic interests in Asia, particularly as against a resurgent China. Reinforcing our relationship with our allies is critical to stability in the region. To me, the single most important aspect of TPP is anchoring the U.S. in Asia in a way beyond security alliances, and in a way that enhances the U.S. economy and the Asian economies — and providing, in addition, something of a counterweight to China.

OR: Do you think that China should have been invited to join the partnership? Will it eventually join?

Barshefsky: I would like to see China eventually enter. I don’t think it’s in the U.S. interest to see two trading blocs form in Asia, one U.S.-dominated, one China-dominated, with some overlapping members but operating on two different sets of rules. That is trade-distortive, and potentially trade-diverting, rather than trade-enhancing. It sets up, in effect, opposing parties in Asia — which is, I think, a serious mistake. I would like to see China either enter TPP, or for the TPP countries and the countries who are now negotiating a large agreement with China (RCEP) to merge those agreements over time so that there is a unitary agreement in Asia effectively co-headed, if you will, by the U.S. and China (and indeed Japan as well).

The question is twofold: Does China have the capability to enter TPP? Does it have the political will? On the capability side, TPP is a very high-standard agreement and goes well beyond WTO rules. For China right now, that is a stretch. On the other hand, China is in the process of undertaking additional economic reform. To the extent it does that, those reforms could provide a stepping-stone toward yet further reform in order to comply with TPP. Over time I think China should be capable of joining TPP. There will be questions on the environmental side and on the labor side, and with respect to certain other standards, but the general capability should eventually be there.

Which brings us to the question of political will. China does not necessarily like to fit itself into the framework of others, and as China has become more economically powerful, it wants to create its own framework. Therefore, the question of political will will revolve not only around the questions: does China want to make the concessions politically that it would need to make? Does China want to reform its economy in a way politically that it would have to in order to take these extra steps on liberalization? But also: does China want to join what is a U.S.-dominated group? I think for China politically that would be very hard. That’s why one potential avenue is through a melding or merging of the China-oriented agreements and the U.S. oriented agreements, but merged on the basis of the higher standards set by the U.S.-dominated agreement.

OR: Let’s say that the politics prove too hard for China. How would the U.S. best deal with a growingly powerful China that won’t work within these bigger structures and frameworks?

Barshefsky: China has never refused dialogue. One of the things that would need to be done is to set up a mechanism that runs among these various agreements in Asia to ensure that the parties are talking with each other, trying to find avenues of cooperation or harmonization — even if it’s only on an area-by-area or chapter-by-chapter basis. It would be important to try and find ways to smooth over, if you will, the fact that there are different agreements in Asia and find ways to make Asian trade more effective and more holistic, rather than atomized among different groups. That would be in everyone’s interest. I think that the members in these various agreements would concur that this would make eminent sense, even if the various agreements couldn’t be merged, even if China did not want to undertake the necessary liberalizations, or even if it did, and nonetheless did not want to join the TPP-related disciplines.

Apart from that, I would say the single most important thing the United States can do has absolutely nothing to do with China and everything to do with our own economy. Unless the U.S. is strong economically, our bona fides will be damaged as it was during the financial meltdown and as it will continue to be if we are viewed as economically weak, inward-looking, and tentative. Today, that is the view of the United States in Asia. The U.S. cannot lead and cannot hope to have its agenda set the pace if it is viewed in that way. Our ability to set the agenda in a way that is favorable to the United States is dependent on the U.S. getting its domestic act together, stopping the nonsense, and producing programs — including with respect to U.S. infrastructure — that will revitalize our economy on a sustainable, robust basis. There is nothing more important than that.

How can you not have a gas tax sufficient to fund the Highway Trust Fund to repair the roads and bridges, for example? We are absolutely destroying our own country and everyone else around the world sees it. It is so obvious and so painful to watch.

OR: A few interrelated questions. Do you think that the Chinese view TPP and the U.S. Asia pivot more broadly as a threat? Do you think that the Chinese, as their talk of rising peacefully suggests, really have a non-antagonistic agenda? Are you concerned about rising regional tensions, particularly between China and Japan? How should the U.S. cope with that?

Barshefsky: I think the U.S. has to be very careful not to take the bait when China accuses the U.S. of a containment strategy. It is not possible to contain China. The U.S. is very clear on this, as is virtually every other country in the world. The U.S. shouldn’t rise to the bait when China demands concessions or alterations in behavior to “prove” that the U.S. is not trying to contain China.

The U.S. isn’t trying to contain China. Period. Full stop. What the U.S. is trying to do is to protect its position in Asia — a historic position, at this point — and to protect its interests in Asia, to protect its ability to navigate the seas around Asia, to protect its national security which encompasses, because of security alliances, our position in Asia. None of that has anything to do with China or with notions of containment.

This is a canard, and the U.S. needs to forcefully put this to bed — and then, frankly, go about its own business in protecting its own interests in the region, regardless of what China’s rhetoric might be.

As for China’s broader Asia agenda, you’ll note that in talking about its own ambitions, China actually doesn’t use the word “rise” because its neighbors thought the word “rise” was threatening. They talk about peaceful “development.” This shows a sensitivity on the part of China to its neighbors, at least in terms of rhetoric. I think with respect to its activities in the South China Sea and the East China Sea there is obvious concern in the region as there should be: the status quo has changed dramatically and in an entirely unilateral manner, notwithstanding the protests of China’s neighbors.

Those neighbors feel somewhat intimidated. After all, they’re much smaller than China. At the same time, those neighbors are dependent on China economically and therefore somewhat trapped. I don’t think there is necessarily an answer to this problem, but I do think that the Asian nations as a group need to make their views known. I think Japan, the United States, and South Korea, as larger powers in the region, need to make their views known so that there is no miscommunication and no misunderstanding on the part of China as to what is viewed as acceptable and what is viewed as concerning.

It will be for China to ultimately make decisions with respect to its own behavior, but I think it’s very important that the signals China receives are unified, uniform, very clear, and consistently articulated. The biggest risk right now is miscalculation.

OR: Do you think that the nationalist rhetoric we are now seeing gain strength in Japan is dangerous?

Barshefsky: I think nationalistic rhetoric is always dangerous. We’ve seen how dangerous it can be if we simply consider Europe in the 1920s, 30s, and 40s. Certainly pride in one’s country is appropriate. Nationalism or the stoking of nationalistic fervor to foment hostility or as a means of denigrating other nations ought not to be acceptable in any country, whether it’s Japan, China, the United States, or elsewhere.

I think for Japan the calculation in Asia has long been complicated, in large part because of its refusal to apologize for its actions during World War II, which in Asia still genuinely looms large. It’s an issue that rankles. The feelings of enmity are reinforced when one considers Japan’s latest textbooks on World War II. I think in the case of Japan there’s long been a delicate dance. It is clearly a regional and global power, and it’s clearly a regional source of trade, aid, and economic assistance. But relations between Japan and other Asian nations have long been marked by periods of tension and some hostility. Nonetheless, I think nations welcome Japan as a potential stabilizing force in the region. To the extent the Japan/U.S. alliance remains strong, there is some comfort to Asian nations that Japan will act in a positive and stabilizing manner and not in an aggressive manner.

OR: You were one of the primary people, if not the primary person, involved in the United States negotiating the WTO. Turning to the question of China’s own politico-economic terrain, how under control do you think the situation is there? Do you see instability coming economically, politically, or both? What do you think they will be doing over the next few years to address those issues?

Barshefsky: I think the slowdown in China’s economy is quite real. There are estimates that place China’s actual growth rate not at seven percent, but between 5.5 to 5.8 percent. Some argue the growth rate is even lower than that. By any measure, there’s no question the economy has slowed quite substantially in the last several years and continues to slow.

China’s economic model, the basis on which its growth has taken place, is running out of steam. The large demographic dividend that China enjoyed through rural-to-urban migration has slowed. And China is rapidly aging because of its one-child policy.

Real estate and other bubbles have occurred because of the misallocation of resources in China, necessitating change in China’s structure of growth from the current export-dependent, fixed-asset, investment-led growth, with fixed assets mainly being real estate, to domestic-demand led growth and a substantial increase in services. China is in the process of working toward this transition, which will take some time. Years. Bear in mind that as an export-dependent economy, China suffered mightily during the financial meltdown when you saw the near-synchronous decline of the economies of the U.S., Europe, and Japan, on which China had been dependent for export growth.

Increases in domestic consumption can hardly make up fully for its diminution in export performance and the slowdown in growth, but certainly as one component of an altered strategy consumption is vital. China, in the meantime, is looking at a variety of additional economic reforms that loosely fall into six or seven different buckets, including financial sector reform, monetization of land, banking sector reform, upgrading of manufacturing to move toward higher-end goods and better paying jobs, additional assistance to better bolster the rural economy, and so on.

There are a number of reforms and we’ll have to see among the list what China implements, over what period of time, and how effectively they strengthen the economy. There’s no question that an overall allocation of resources to best use will be critical, as is further financial-sector liberalization, including continuing to increase returns to savers by substantially loosening interest rates. Reform in general is not proceeding as quickly as people would like to see.

And all of this has to take place with an economy that the Chinese government does not want to see slow further. It’s like changing a tire when you’re going 100 miles an hour and maintaining speed. This is a very tricky time. I think the Chinese have shown themselves very adept at economic management. Quite sophisticated, actually. I would expect with fits and starts and some ups and downs to see these transitional measures and further liberalizations proceed successfully. There’s no question vested interests will have to be further disciplined, particularly the state enterprises which are their own fiefdoms. Here again, given Xi Jinping’s anti-corruption campaign and other measures, the government seems willing to take them on and to better ensure that they are more market-oriented, leaner, and far more competitive

It’s a tall order. I think they’re up to the task. In terms of the populace, so long as China can keep showing economic progress — even if the economy slows from time to time — and so long as people’s lives are better today than they used to be, to paraphrase Ronald Reagan, then I see the country as actually quite stable. But not without challenges, to be sure.

When you think about its population of 1.3 billion people, one-fifth of the world, it is remarkable that China has accomplished what it has accomplished in the 35 years since Deng Xiaoping, and remarkable to see the extent of stability overall, even with the tensions and political and economic disaffection that one sees.

OR: Do you think that the TTIP, the trans-Atlantic agreement, will happen?

Barshefsky: I would suspect it’ll happen in the next administration. It is not nearly as far along as TPP. It is an agreement that will have the ordinary market-access provisions, which will be far less impactful because the two economies — Europe and the U.S. — are very open to each other already. Still, there’ll be some progress on traditional market-access measures. The bigger progress will occur in regulatory harmonization. This will be the meat of the agreement: the U.S. is a highly regulated economy, whether you look at, for example, automobiles, safety standards, the FDA, insurance, or professional associations. And Europe is worse: the principal dampener on trade, investment and growth tends to be regulatory. Regulatory harmonization would ensure much smoother functioning between the markets, a greater sameness so that trade flows are more robust and move faster and with a minimum of red tape.

The harmonization exercise is very difficult. Having negotiated harmonization agreements, I can say they’re among the most difficult to negotiate both because bureaucracies spring up around every set of regulations and bureaucracies hate to change. In addition, for consumers and businesses on both sides — which may dislike regulation to some extent — the rules of the game are known and each have organized their own operations to comport with those rules. Having to redo everything when the rules change in order to accommodate each other’s regimes is quite a big task. These are difficult areas to negotiate. I think if they are successfully negotiated, they advance the prospect of further increasing trade and investment flows between the U.S. and Europe, which would be positive all around. That’s the point of TTIP and the regulatory portion is the most crucial.

OR: Thank you.