The signing of the Regional Comprehensive Economic Partnership (RCEP) last week is a remarkable feat, for it brings together 15 diverse economies from across the Asia-Pacific region into what is, by some measures, the largest trade pact the world has seen. It covers almost a third of the world’s population and 30% of its total output.
The agreement, which brings together the 10 ASEAN member states—Brunei-Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam—and Australia, China, Japan, South Korea and New Zealand, will lower tariffs and other trade barriers further and accelerate economic integration.
We speak with Robert Subbaraman, managing director and head of global macro research at Nomura, about the importance of this landmark deal, how it will impact Asia’s position in global value chains, and possible implications on US policy towards free trade and integration. Mr Subbaraman also speaks about the impact of India’s withdrawal from the pact on its long-term economic prospects.
Unravel: Why is the RCEP important?
Robert Subbaraman: The RCEP is important as it comprises most of Asia and a large share of world GDP. It could also be an important launch pad for Asia as a region to increase cooperation, and rely more on regional demand than Western demand for growth.
Unravel: Is India’s withdrawal a big blow for the RCEP? Why did India pull out?
Mr Subbaraman: India’s inclusion would have added more heft to the RCEP, but many negotiation sticking points would have delayed the agreement. India’s weak economy and geopolitics may also explain why India pulled out. I hope that India stays on the path of trade liberalisation, and does not get left behind. For developing economies, breaking down trade barriers brings many structural benefits, such as access to larger markets, increased competition (which helps boost productivity) and greater foreign direct investment (which brings new skills and technology).
Unravel: How do you think the RCEP will impact Asia’s position in global trade/ global value chains?
Mr Subbaraman: The RCEP is not as comprehensive as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), but it is a good framework for further advances in trade liberalisation in areas such as agriculture, non-tariff barriers and the liberalisation of trade in services. Over time, RCEP’s agreement on rules of origin could be a shot in the arm for ASEAN’s supply chains, which has lagged those in Northeast Asia.
The economies in RCEP are so diverse that it would be difficult at this point to have a more comprehensive agreement than the one just signed.
Unravel: Given the state of the global economy and a retreat from free trade in many quarters, is RCEP’s significance amplified?
Mr Subbaraman: I think in the short run, the significance of RCEP is larger geopolitically than economically. Fifteen nations in Asia have managed to sign a free trade agreement in the midst of a pandemic and when globalisation is in retreat and economic nationalism is on the rise. From that perspective, it is a significant achievement.
Unravel: Many believe the RCEP is a “shallow” trade pact. What are your thoughts?
Mr Subbaraman: It had some important elements like rules of origin but as I said earlier, it would be hard to achieve much more when economies in the pact are so diverse. Additionally, globalisation is in retreat, and economies are in deep recession. From that perspective, the signing of the RCEP is quite an achievement. Moreover, it could also open the door for more bilateral free trade agreements, for instance between Japan and South Korea.
Unravel: Do you expect the RCEP to have a material impact on the region’s economies? Which are the economies that stand to gain most?
Mr Subbaraman: Not in the near term. All economies should benefit in the longer run as RCEP allows countries to utilise their comparative advantages.
Unravel: Under the new Biden presidency, would you expect the US to re-join the TPP to counter the RCEP?
Mr Subbaraman: It is unclear what the US response will be. On the one hand, trade liberalisation has likely contributed to the rising income inequality in the US, and Mr Biden has supported US companies’ reshoring. On the other hand, there is strong US bipartisan support against China’s adventurism in the Asia-Pacific, and so it is possible that the signing of the RCEP puts more pressure on the US to join the CPTPP to make that a counterweight.
Rob Subbaraman joined Nomura in 2008 and is Head of Global Macro Research and Co-Head of GM Research. He manages a team of over 30 economists and macro strategists that forecast the global economic outlook and make financial market trade recommendations. Rob is also on the Nomura Executive Committee for AEJ Global Markets. Prior to joining Nomura, Rob was at Lehman Brothers for 12 years and was Chief Economist, AEJ. Rob is based in Singapore and has a central banking background, having worked at the Reserve Bank of Australia in the Economic Analysis Department for seven years prior to joining Lehman Brothers.