Freer trade with China is win-win for everyone

The US News & World Report

By Geoffrey Garrett

China's rise evokes geopolitical questions. Will China be an aggressive superpower? How should the United States respond? What about American allies like Australia that increasingly rely on China for their prosperity?

Last week we learned that the Chinese economy grew more slowly in 2013 than in any year since 1999, and before that than any year since the dark days of Tiananmen Square at the end of the 1980s. This is good news for the U.S. in traditional real politik terms because it portends a less muscular Chinese foreign policy. But there are real concerns too. The simple reason is that while the geopolitical China challenge is real, the Middle Kingdom is also indispensible to the global economy.

As the "designed in California, assembled in China" label on the back of every Apple device attests, low-cost Chinese assembly and manufacturing has long been a boon for the American economy. Australia owes its escape from the global financial crisis above all to China's insatiable appetite for its iron ore and coking coal to make the steel used to build a dizzying array of new cities, ports and high speed rail networks. Now China's growth slowdown signals two big facts that will shape the world economy for years to come.

First, China is at last transforming its economy from being a low cost producer and exporter to the world to becoming its biggest and fastest growing middle-class consumer. For years, cheap Chinese assembly meant big profits for Apple. While Shenzhen is now too expensive to assemble iPhones and iPads, China is now Apple's biggest and fastest growing market.

Second, President Xi Jingping has grabbed most headlines for tackling corruption, but his biggest commitment has been to resist the temptation to follow Hu Jintao with ever more government investment on infrastructure and state-owned enterprises. Australia is already feeling the effects as new mining investment has dried up.

Now America and Australia must turn their attention to competing in the burgeoning Chinese market, among other things by convincing Xi to loosen the constraints on foreign firms.

There are already success stories. An unsung hero in General Motors' return to solvency and profitability is the fact that it sells more cars in China than it does in the U.S. While most big Australian law firms have merged with American and British conglomerates, Mallesons went the other way to join forces with Chinese law firm King and Wood.

But for every GM and King and Wood Mallesons, there are dozens of western companies frustrated by lack of access to the Chinese market, intellectual property mimicry if not theft and an impenetrable wall of Chinese bureaucracy.

History suggests hectoring the Chinese government is unlikely to succeed. A bigger opportunity is offered by the proposed Trans- Pacific Partnership for free trade in the Asia-Pacific in which the U.S. and Australia are prime movers. The deal promises to be the most important free trade agreement of the 21st century so far, including Canada, Japan and Mexico in addition to America, Australia and a host of smaller free traders.

China, the biggest trading partner of most TPP countries, remains conspicuously on the outside looking in. It is unfathomable to contemplate an Asia-Pacific free trade agreement that doesn't include the world's biggest trading nation, prompting Henry Kissinger to worry that TPP represents economic containment of China.

Xi has been much more open to the possibility of Chinese participation in TPP than Hu was. Participation would no doubt require real concessions on issues like market access and intellectual property. But the benefits to China are clear in terms of its emerging growth sectors like information and communications technology and financial services. Here more collaboration with Western firms and better protections of their intellectual property are essential, to China as well as America.

To join the TPP negotiations, China would have to commit to domestic concessions that would create short term frictions but are also in its longer run interests. In return, America and Australia would have to be give something back, probably by being more open to Chinese investment. National security considerations must sometimes trump commercial ones, but the bar should be held high.

This give and take could make possible Chinese participation in the TPP talks, the conclusion of which is a high priority both for the Obama administration and for Prime Minister Tony Abbott's new Australian government.

Nearly 15 years after China joined the World Trade Organization with Bill Clinton's support, the benefits to China and the world are large and unambiguous — in terms not only of economic gains but also geopolitical stability.

Now is the time to think about another bold move where China and free trade are concerned.

This article was originally published at the The US News & World Report