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China waits for Nafta impasse

Uncertainty over Nafta, the TPP and Trump's trade policies could create political vacuum, which Beijing can exploit

The first round of long-awaited talks on modernising the North American Free Trade Agreement (Nafta) ended on Sunday, with Canada, Mexico and the United States issuing a statement that they had made "detailed conceptual presentations" of their positions.

Negotiators from the three countries will meet again in Mexico on Sept 1 to continue trying to revise the trade pact.

While all say they are keen to see a new deal emerge, they still have to navigate the political risks attached to any commercial agreement.

US President Donald Trump's promise to renegotiate trade deals was a key plank of his America First campaign platform.

One of his first acts in the White House was to withdraw the US from the Trans-Pacific Partnership (TPP) with countries in the Asia Pacific and the Americas, including Singapore, Australia, Chile, Japan, New Zealand, Peru and Vietnam.

Speculation now centres on the future of Nafta, typically seen by many economists as at least a qualified success story.

Since 1994, trade between the US, Mexico and Canada has more than tripled, forming a trading bloc with a combined gross domestic product (GDP) of around US$20 trillion (S$27 trillion).

However, prominent representatives of both the left and right in the US have long criticised the agreement for contributing to a hollowing out of the country's manufacturing industry and lost jobs, partly because of increased trade deficits with Mexico and Canada.

Right-wingers have accused Nafta of undermining US sovereignty and opening the US up to what they see is an increasing threat from drugs, crime and immigration from Mexico.

Mr Trump jumped into this cauldron of criticism in the election campaign last year by calling Nafta "the worst trade deal maybe ever signed anywhere, but certainly ever signed in this country".

In key electoral states such as Ohio and Pennsylvania, his championing of an anti-international trade agenda helped win him significant support last November.

Many US businesses have urged that forthcoming negotiations should not jeopardise existing market access and that the key negotiating principle should be to "do no harm".

Uncertainty over Nafta, the TPP and Mr Trump's trade policies in general could create a significant political vacuum. That, in turn, could give China a gap to exploit, which Beijing is eager for.

Chinese Vice-Foreign Minister Li Baodong said last year that "protectionism is rearing its ugly head. China believes we should set up a new plan to… sustain momentum for the early establishment of (new) free trade areas".

Beijing's alternative vision includes a Free Trade Area of Asia Pacific (FTAAP), a long-term goal to link Pacific Rim economies from China to Chile that has been debated since 2004.

RCEP

In the shorter term, Beijing is also pushing a free trade pact - for which discussions have been underway since 2012 - known as the Regional Comprehensive Economic Partnership (RCEP). That would include the 10 Asean members plus India, Australia, Japan, South Korea and New Zealand, but not the US.

The RCEP, which is smaller in scope to the FTAAP, would create one of the largest free trade zones in the world. Collectively, RCEP countries account for around a quarter of global GDP, and some 46 per cent of the global population.

While Chinese President Xi Jinping has asserted that the RCEP and FTAAP do not "go against existing free trade arrangements", Beijing and Washington have, for years, had contrasting visions of shaping the regional order through formulation of the Nafta and TPP on one hand, and the RCEP and FTAAP on the other.

From China's perspective, the RCEP and FTAAP would be more conducive to its national interests. Not least because, unlike the TPP, Beijing would be explicitly part of the new economic agreements and able to shape their design by creating trade deals with China at the centre.

Continued uncertainty over Mr Trump's trade stance will only increase the prospects of China taking the lead in the competition for regional trade integration.

This will potentially not just consolidate Beijing's regional power and its global political and economic influence, but it will also damage hard-won US credibility with its local and international trading allies.

It is no wonder many in Washington recognise a lot is at stake in the Nafta talks, and that a great deal of effort will be required in coming months to see a breakthrough. - REUTERS

The writer is an associate at LSE Ideas at the London School of Economics.

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