Is Donald Trump right about China and the TPP?

Is It Possible Donald Trump Was Right About China and the TPP?

Is It Possible Donald Trump Was Right About China and the TPP?

Moneybox
A blog about business and economics.
Nov. 12 2015 7:42 AM

Is It Possible Donald Trump Was Right About China and the TPP?

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Trust me.

Photo by Spencer Platt/Getty Images

After Tuesday's Republican debate on Fox Business Network, I wrote up a squib with the headline "Donald Trump Claims the TPP Is a Nefarious Plot by China. Fact: China Is Not Part of the TPP." It highlighted an odd moment during the night's entertainment when the GOP's most beloved xenophobe seemed to inaccurately suggest that the Trans-Pacific Partnership, the ever-controversial free-trade deal championed by the Obama administration, was either written under China's shady influence or, if not that, at least crafted for the benefit of Beijing.

"The TPP is a horrible deal,” Trump said. "It is a deal that is going to lead to nothing but trouble. It's a deal that's designed for China to come in, as they always do, through the back door and totally take advantage of everyone."

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There are 12 countries involved in the TPP negotiations. China is not one of them. But to anyone who interpreted the man's remarks as plain English, it sounded as if Trump was suggesting that the People's Republic had some kind of direct hand in designing the pact. After all, the only other coherent reading of his actual words—that a dozen nations, including China’s regional rivals like Japan and Vietnam, had crafted a trade deal specifically "for" (i.e. for the purpose of) allowing China to "come in through the back door and totally take advantage of everyone" (italics mine)—seemed absurd. And so, after Trump went on for a bit, Kentucky Sen. Rand Paul issued a simple and stinging factual correction. “We might want to point out China is not part of this deal,” he said. I called it the most embarrassing moment of the night, since it so plainly showed that Trump, as usual, had no idea what he was talking about.

Since then, however, a number of people have risen to Trump's defense, and the candidate has attempted to explain his remarks.

It's a bit strange that Trump didn't respond this way after Paul rhetorically shanked him onstage. In fact, he was uncharacteristically silent. But I cannot look into the Donald's soul to tell whether he's just saving face now or sincerely trying to clarify his word salad (and, to be fair, the man has been known to prepare a fine word salad from time to time). So rather than harp on whether Trump was making a straightforward error, let's take him at his word and ask: Could he have a point about China and the TPP?

No, probably not.

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First, what might Trump mean when he says China will “come in through the back door at a later date”? If the TPP is ratified, it will be open to new signatories who can meet its requirements. And as I noted in my original piece, China's leaders are contemplating whether their country should one day ink the agreement. President Obama said so explicitly in a summer interview with Marketplace, explaining that, “They’ve already started putting out feelers about the possibilities of them participating at some point.” In order for such a thing to happen, however, China would need to dramatically reform its economy in order to conform to the TPP’s terms. That would probably mean clearing away tariffs, enforcing intellectual property laws, dealing with its overwhelming pollution problems, making room for independent labor unions, and reforming its powerful state-owned companies. All of this would take a very long while—likely a decade or more—and would hardly qualify as sneaking in through the rear. That, in the end, is half the point of TPP. The White House wants to set the terms of free trade in Asia and the Pacific before China can, so that Beijing will eventually need to agree to stricter standards

Now let’s suppose that China checked off all the necessary boxes and joined the TPP, giving it greater access to U.S. markets. Why does Trump think that would be a problem? In two words, currency manipulation. Let's go back to the debate transcript:

Moderator: The—the deal, as you say, the terms of the deal were published—were published just last week, the details, 5,000 pages of it, and 80 percent of U.S. trade with countries in the Pacific, these countries, these 11 countries, is actually tariff-free, and these—the trade deal only affects the other 20 percent. Which—are there particular parts of the deal that you think were badly negotiated?
Trump: Yes. Well, the currency manipulation they don’t discuss in the agreement, which is a disaster. If you look at the way China and India and almost everybody takes advantage of the United States—China in particular, because they’re so good. It’s the No. 1 abuser of this country. And if you look at the way they take advantage, it’s through currency manipulation. It’s not even discussed in the almost 6,000-page agreement. It’s not even discussed.
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Trump is not totally wrong here. The main TPP agreement does not contain any rules about currency manipulation. (How come, you ask? Well, getting two countries to agree on exactly what counts as manipulation versus straightforward monetary policy maneuvering isn't exactly easy. Plus, Japan, Vietnam, and Malaysia like their national currency fairly cheap.) Instead, the subject is dealt with in a legally unenforceable side declaration that, at best, might help the U.S. Treasury a bit in its ordinary efforts to deter countries from toying with the foreign-exchange markets. Trump seems to be concerned that if China ever joins Club TPP, it'll have a free hand to depress the yuan and flood our shores with cheap, tariff-free goods.

This isn’t especially realistic. For starters, China isn't really much of a currency manipulator these days, at least in the sense Trump claims. While the country kept the yuan artificially low in order to boost its exports and discourage imports during the 1990s and early 2000s, in 2005 it allowed the redback to start gradually rising in value against the dollar. By May of this year, the International Monetary Fund declared that the currency was no longer undervalued at all. Aside from a small surprise devaluation over the summer, China has mostly struggled as of late to keep the value of the yuan up, not down, in order to prevent investors from yanking their money out of the country as its economy weakens.

But say we were worried that Beijing might relapse into its old forex habits. What then? Well, the United States could always just block it from joining the TPP altogether. Or we could force China to sign its own extra-stringent side agreement on currency manipulation, with rules enforceable through sanctions, as a condition for membership. Given China's history, that might be necessary no matter what. “I think from the U.S. standpoint a currency provision would be required,” Gary Clyde Hufbauer, a senior fellow at the Peterson Institute for International Economics, told me. In other words, if China does ever try to join the TPP, which is at this point only a far-off hypothetical, it might not get quite the same deal as Japan or Vietnam.*

So contra Trump, there isn't really a "back door" into the TPP, China hasn't really been waging a currency war on America for years, and if we thought it might start again, we could keep it out of the trade deal, or make Beijing agree to tougher rules as the price of admission.

Of course, it's possible that China could benefit from the TPP through means that Trump didn't actually articulate. That's David Dayen's argument at the Intercept. He draws attention to the TPP's rules of origin, which govern how much of a product actually has to be produced in Japan, for example, in order for it to be officially considered "Made in Japan" and thus exempt from tariffs. These stipulations matter because products that are manufactured in one country often contain lots of raw materials and parts from abroad. And for some goods, like cars, the rules of origin are loose enough that you can imagine China using them to quietly circumvent some American trade restrictions. Dayen notes, for instance, that the U.S. slaps a tariff as high as 236 percent on Chinese steel. But China could potentially get around that issue by exporting its metal to Vietnam to be turned into car parts, which would then move to Japan to be installed in Toyotas sold, tariff-free, in the United States.

That sort of shell game could certainly help China a bit. But even so, Hufbauer thinks there's a strong chance the country will actually lose more in trade than it gains from the deal. “The TPP's immediate effect on China is that it will divert trade away from them,” he told me. “Our estimates are that over a decade, they will lose approximately $100 billion of exports. It’s not to their advantage, because other TPP countries will have access to each other’s markets on a tariff-free basis. Vietnam would be a more likely place for investment to go, especially in low-wage industries.”

So if the TPP is ratified, China could well end up a big loser—words even Donald Trump might understand. 

*Correction, Nov. 12, 2015: This post originally misidentified the Peterson Institute for International Economics as the Peterson Institute for Global Economics.

Jordan Weissmann is Slate’s senior business and economics correspondent.