Faced with Trump’s threats to cancel the TPP, how should China’s neighbours react?

Japanese Prime Minister Shinzo Abe’s diversion to New York last week to visit President-elect Donald Trump before proceeding to the 2016 APEC Economic Leaders’ Meeting in Peru was an exercise in crash-test diplomacy. Faced with the possible abrupt cancellation of the Trans-Pacific Partnership (TPP) trade agreement, Abe rushed to plead his case with Trump, crashing through normal diplomatic procedures and traditions to convince Trump not to abandon America’s pivot to Asia, which happens to be a cornerstone of outgoing President Barack Obama’s foreign policy.

Japan desperately needs the TPP because it faces two potentially cataclysmic challenges. The first is the incomplete rescue of its domestic economy from nearly three decades of stagnation. Once an economic development and export miracle, today Japan faces a demographic situation that threatens economic growth and the government’s explosive debt burden. Upon taking office, Abe decided one way to get out of the funk was to increase government stimulus – what has been dubbed “Abenomics.” By supporting business in the short-term, and appeasing many within his party, Abe has secured the political capital necessary to introduce long-term changes to the Japanese economy. For example, like many countries in Europe, Japan faces the problem of employers offering more contract jobs with less benefits and security than full-time positions.  

But spending alone will not be enough to secure reform. Abe needs some external pressure – a stick, if you will – to go along with the carrot of more government spending. That stick is the TPP, a free trade deal that would, among other things, lower Japan’s relatively higher tariffs, thereby securing increased competition and dynamism for Japan’s moribund economy. The usual criticism that comes with opening an economy can then be deflected by a government arguing the deal is necessary to maintain vital trade and international linkages.

Which brings us to the second challenge: the continuing rise of China. Since the 1980s, Japan has managed to take advantage of cheap Chinese manufacturing to bolster its export position. This has, in part, contributed to the sluggishness of the domestic economy, as lower-tech jobs moved across the East China Sea. Other industrialized economies know this story well.

But Japan now faces a China that has, essentially, risen. Japan can no longer rely on its mutually beneficial trade relationship with China since it now faces direct economic and geopolitical confrontation. China has leading companies in areas where Japan has traditionally dominated, the most recognizable example being Huawei Technologies.

Such direct competition is where the TPP comes into play. By creating a free(er) trading zone around China – not included in the trade agreement – an effective bargaining counter-weight would emerge to continue to force China to develop its economic and military powers within a set of global rules. Without the TPP, China is presented with the opportunity to completely envelope the smaller East Asian states within its sphere of influence, allowing it free reign economically and militarily in the Western Pacific.

This would effectively leave Japan without reliable allies in the region, except Australia, at a time when U.S. isolationism seems to be (re-)awakening. Recent moves by China to construct new islands so that it can control more of the South China Sea may be just the beginning of its willingness to flout international law. And China may continue to push the limits of international law if it becomes apparent that its neighbours are incapable of imposing credible constraints on its behaviour.

The assumption is that China will not restrain itself, given its newly-found military, economic and financial clout. Indeed, the CBC reported from Peru that “[President Xi Jinping] seemed almost to revel in the arrival of an anti-trade U.S. president, and announced that China would be the new beacon of free commerce in the world”.

With the TPP in place, China could be forgiven for stretching out a bit in the South China Sea, since its neighbours would be secure in the knowledge that further and more serious transgressions will have consequences.

Only a united Asian front, backed by American economic and military power, will sustain a new status quo: China as a regional power that is increasingly integrated into world economic and political institutions. This China may exercise its power within reason and limits. In essence, the TPP is about managing China’s rise rather than containing it.

Even if Trump goes ahead and cancels the agreement, there still may be hope for Japan. And that hope lies with Canada. Absent the TPP, Canada could proceed with trade agreements with Japan and other Asian countries to secure their access to the Canadian market, and thus indirectly, to the U.S. (assuming Trump does not erode the fundamentals of NAFTA as well. Perhaps this is a big if, but one to discuss in another article).

With Asian companies moving some of their operations to Canada to take advantage of free trade with the U.S., their profitability can be maintained, and with it the economic security of these countries, at least in the short term. It would allow time to convince Trump to change his mind, or at least to consider re-negotiation rather than abandonment. Or perhaps time enough to wait for the election of a more trade-friendly and geo-politically savvy president (and Congress for that matter).

Canada occupies a unique position in the world, one that will continue to present the federal government with significant risks and opportunities. The abandonment of Japan by the new American administration is an unfortunate circumstance but all is not lost. Prime Minister Justin Trudeau should seize the initiative and show the world that Canada is prepared to assume the mantle of liberal economics if Trump’s recklessness continues unabated.