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The end of TPP could herald a new era in US-China relations

Protesters hold placards against the Trans-Pacific Partnership (TPP) during a rally on the sidelines of the Asia-Pacific Economic Cooperation (APEC) Summit in Lima on November 18, 2016.
Rodrigo Buendia | AFP | Getty Images
Protesters hold placards against the Trans-Pacific Partnership (TPP) during a rally on the sidelines of the Asia-Pacific Economic Cooperation (APEC) Summit in Lima on November 18, 2016.

President-elect Donald Trump took to YouTube late Monday to announce his intention make the U.S. withdrawal from the Trans-Pacific Partnership (TPP) a priority for his 100 first days in office. The announcement raised concerns in Japan, Canada and Mexico, but made Chinese officials hopeful.

CNBC takes a look at some of the big issues surrounding the announcement.

What’s TPP?

The Trans-Pacific Partnership is a trade deal between 12 Pacific countries, including the U.S., Japan, Mexico, Canada and Australia. They concluded negotiations about a year ago and were supposed to ratify it by February of 2018. The announcement of President-elect on Monday means that the deal will not be implemented.

"It basically means that TPP is dead," Fredrik Erixon, director of the European Centre for International Political Economy, told CNBC via email.

"It was an initiative to coordinate all the existing U.S. Free Trade Agreements, and then with new additions like Japan. The entire economic rationale for TPP falls flat without the U.S. as participant," he added.


What does this mean for U.S.-foreign relations?

Apart from withdrawing from TPP, President-elect Trump wants to renegotiate the terms of a trade agreement with Mexico and Canada, which is already in implementation. The so-called NAFTA (North American Free Trade Agreement) has led to a four-fold increase in U.S. trade volume with Canada and Mexico since it was implemented in 1994.

"A Trump presidency looks set to anger a lot of countries in the world with its trade policy. There are no one-way gains in trade and good trade deals need to advance benefits for all sides. Trump's America first rhetoric is profoundly incompatible with good trade deals," Erixon added.

TPP was also the base for a trade deal which has been negotiated between the U.S. and the EU, the so-called Transatlantic Trade and Investment Partnership (TTIP). However, without TPP, the deal with the EU is going nowhere.

"TTIP is not going to happen," Alicia García-Herrero, senior fellow at the Bruegel think tank told CNBC over the phone.

She added that this will in turn make Europe more receptive to trade proposals from China to avoid being isolated.


Could a US-China deal be in the making?

Chinese officials have recently proposed their economy as the best replacement opportunity for the U.S. as it withdraws from TPP.

"China will not shut the door to the outside world but will open it even wider," President Xi Jinping of China told business leaders at an Asian-Pacific summit last weekend, the Financial Times reported.

"I hope the two sides will work together to focus on co-operation, manage our differences, and make sure there is a smooth transition in the relationship and that it will continue to grow," he added regarding the future relationship with the U.S.

According to Stephen Orlins, from the National Committee on United States-China Relations, it is easy to see how a trade deal with China could be an option for President-elect Donald Trump.

"I think what happens is bilateral negotiations between the United States and China," Orlins told CNBC.

He added that the potential appointment of Wilbur Ross "who is an investor in the steel industry" as secretary of commerce, would make steel "a very important part of U.S. China negotiations on the trade level."


What about Canada?

The past few weeks haven't given much good news to trade officials in Canada. Its trade deal with the European Union was perilously close to failure. The U.S. wants to withdraw from TPP and renegotiate NAFTA. This leads Prime Minister Justin Trudeau with few options.

"Canada has to stay close to the US because it is its biggest market. But then it should accelerate its policy to diversify its trade with other parts the world, including China," Erixon added.


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