First published: 12/02/2020
Projections for world trade took a major knock after the financial crisis. After growing twice as fast world GDP in the previous quarter century, trade settled on to a much more modest path, growing no better than in line with GDP. Then came the so-called trade war between the US and China, and the pandemic.
Trade crashed again in 2020 and is now again appreciable lower than the previous lower trend line would have put it. Economists are hoping that somewhere between a vaccine-facilitated bounce back and economic scarring, trade will recover in 2021 and 2022. We should hope it does, but also be wary of the cheerleading of solutions that are unlikely to reflect the way they are pitched. One of these is the Regional Comprehensive Economic Partnership (RCEP) trade agreement signed late last year after 8 years of negotiations with a massive expectation laid at its doorstep.
First there wasn’t that much new in it, other than an agreement after 8 long years of talks, and without India as a member. Second, every country in RCEP bar 5, and all of the biggest ones run balance of payments surpluses. If they succeed in boosting exports to one another, they’ll probably also boost imports from one another, simply shifting the distribution of surpluses. The net effect inside the group, let alone the rest of the world, isn;’t likely to about to much.
Here’s what the Asia-Pacitic head of commercial banking at a major global bank said on the company’s website:
‘The signing of the landmark Regional Comprehensive Economic Partnership last weekend signals the beginning of a new era in global trade: an era when Asian countries start to play a major role in setting the standards that will enable the next round of global growth’.
In his effusiveness, he was by no means alone. ASEAN leaders, who had been in the driving seat for the agreement were especially optimistic about the benefits that RCEP will bring. China’s Premier Li Keqiang called RCEP ‘a victory of multilateralism and free trade’, while the Foreign Ministry spokesman Zhao Lijian told a media briefing in Beijing that this ‘most promising agreement covering the largest population and economic volume’ was ‘a milestone of great significance’.
It would be great if it were, once it is ratified during this year or possibly next year, particularly as large swathes of the world economy are in the doldrums again thanks to pandemic-related restrictions introduced late in 2020 and subsequently. Even when these restrictions are eased, we could still do with a major region that was prepared to boost domestic demand and suck in imports from the rest of the world to help drive global recovery. Unfortunately, RCEP is not going to do it this year, or probably at all.
RCEP comes up short on 2 counts
At the moment, RCEP is little more than a group of countries in the Asia-Pacific, mostly listed alphabetically in Wikipedia, as I recall from a tweet by Michael Pettis a couple of months ago. They are Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, Philippines. Singapore, South Korea, Thailand, and Vietnam. In the standard nomenclature, they account for about a third of world population, and about 31 per cent of world GDP.
Several points have been made about RCEP that can be summarised pretty simply. Is it a game changer? No, not really, because of the $2.25 trillion or so of goods that changed hands among members in 2019, 83 per cent were already covered under existing trade agreements between them. The significant new tariff removals are in trade between China, Japan, and South Korea., and so there could be some interesting developments in industrial trade among this trio. RCEP is also expected to promote trade through rules of origin provisions stipulating eligibility for lower tariffs, with intra-Asian trade potentially getting a boost as a result.
The scale and extent of tariff reductions though is not ground breaking overall. RCEP doesn’t really reach into non-tariff barriers a great deal, it doesn’t add much to IP that isn’t already covered in the WTO. It has little if anything to say about labour standards, the environment, government subsidies and state enterprises, services, or agricultural goods. And nothing to say about economic governance.
The other problem with RCEP is that, it’s basically a balance of payment surplus club. The 15 members recorded an aggregate $790 billion current account surplus in 2019, or 3 per cent of their GDP, with only Cambodia, Indonesia, Laos, Myanmar and New Zealand running deficits.These 5 countries’ aggregate deficit amounted to only 0.16 per cent of RCEP GDP. Singapore ran the biggest surplus by far at 15 per cent of GDP, but Thailand, South Korea, Japan, S. Korea, China and Australia all run surpluses.
Few of the members run significant trade deficits with one another, except for Australia and China, China with both S. Korea and Vietnam. Much of the group’s trade then depends on exports to the rest of the world, but who is going to buy the additional exports that will drive trade creation? The EU runs a current account surplus of around 2-2.5 per cent of GDP, and while the US remains a deficit nation, it seems implausible that US demand and imports are likely to be fertile ground for an RCEP export boost.
At the same time, while it’s reasonable to think about, for example, Australia and Korea absorbing higher imports, most of the other countries are characterised by structural savings surpluses which mean their demand and import behaviour is unlikely to change much in the absence of meaningful policy changes to change savings and investment behaviour.
China, moreover, is about to embark on and outline more in due course about its dual circulation strategy, which is code for a focus on boosting domestic consumption by domestic producers, higher import substitution, and a shift away from reliance on imported goods, if possible, in key areas such as technology. I have discussed this here.
The world has enough balance of payments surplus nations with savings excesses. It needs more large nations to act on boosting demand. RCEP may do a lot of things for intra-Asian trade, but it won’t be the dawn of a new era of Asian growth and world trade.