Lee Hsien Loong Is Telling Porkie Pies If He Pretends RCEP Is a Big Deal Without the US
On November 15, Lee Hsien Loong and Chan Chun Sing signed the Regional Comprehensive Economic Partnership (RCEP). For those who might not be aware what this is, the RCEP links the ten ASEAN countries (Singapore, Malaysia, Brunei, Indonesia, Thailand, Philippines, Vietnam, Cambodia, Laos and Myanmar) with Japan, China, Australia, New Zealand and South Korea. Since China, Japan and South Korea are the second and third largest economies in the world ranked by nominal GDP, they dwarf the ASEAN bloc, the biggest of whose members, Indonesia, only ranks sixteenth.
Originally Singapore was part of the Trans Pacific Partnership (TPP), which grouped many of the same nations, excluding Indonesia and many of the ASEAN countries, but also included the US, Canada, Mexico, Chile and Peru. After it was negotiated during Obama’s two terms and signed in 2016 as the crowning achievement of his administration’s trade policy, Trump abandoned it as one of his first acts on taking office.
China’s economy is already 70% of the size of the US in nominal terms, and has overtaken it in PPP terms (though I’m not really sure what that means since differing prices of non-traded goods and services between countries may reflect different quality and may not be comparable). However it is no substitute for the US. Since the end of WW2, the US has functioned as the importer of last resort and provider of liquidity to the world. It has been willing to tolerate growing current account deficits fuelling the rapid rise in global trade. After the US ended dollar convertibility into gold in 1971 the rest of the world has effectively agreed to accept the US dollar as a fiat currency and accumulate growing claims on the US which are ultimately uncashable. While the US has reaped huge seigniorage advantages from becoming accepted as the world’s central banker, globalisation of the supply chain has effectively meant writing off its own manufacturing industry.
This intensified after the US mistakenly allowed China to join the WTO, which is estimated to have cost the US some 5 million manufacturing jobs. While this lowered costs for consumers, it should have been accompanied by redistribution of the gains from trade to the losers, through more expansive fiscal and monetary policy and by more effective taxation of the winners and support measures for the losers.
I have frequently drawn the link in my blog between the growth in world trade and Singapore’s economic growth and thus, indirectly, the Lees’ grip on Singapore by allowing them to falsely claim credit as the architect of Singapore’s economic success. Goh Chok Tong’s attempt at a witty aphorism, when he said “The rooster goes around boasting that its crowing causes the sun to rise” about the Opposition, applies far more aptly to the PAP and to Singapore’s Trinity of rulers, Father, Son and Holy Goh.
China has no interest in bankrolling the rest of the world to prosperity like the US did in the past, though that changed under Trump and Biden will be wary of moving too far from US-centric policies. In fact the mindset of the Chinese leadership, like Singapore, Japan and South Korea (also Germany under Merkel) is solidly mercantilist and characterised by the belief that imports and domestic consumption is bad, investment is good and that a country’s virility is measured solely by the size of its current account surplus). China is only interested in imports as a source of inputs for its manufacturing machine or agricultural goods when its domestic production fails. While it still runs a significant trade deficit with South Korea (which is an important source of intermediate manufactured inputs going into Chinese end products, China’s objective has always been to substitute manufactured imports with domestic production and to bring its supply chains within its borders as much as possible.
Singapore, despite having only about 10% of the population of South Korea, runs a current account surplus of almost the same size. Our domestic consumption is only about 35% of GDP. Being in a group with much bigger countries with the same objectives of running a zero-sum trade policy and the same flawed economic model is not going to provide a kick-start to economic growth. Even the think tanks like the Peterson Institute with the most simplistic and biased models of the benefits of free trade (which start out by assuming full employment at all times) estimate the gains will go mostly to Japan and South Korea and that their gain will be less than 1% of GDP by 2030.
While Singapore runs a trade deficit with the US because of purchases of US military equipment, passenger aircraft and food, it runs an enormous surplus with the rest of the world which is enabled by the US deficit. The RCEP is basically an irrelevance and will not help our current economic problems. Chan Chun Sing and Lee Hsien Loong should wipe the stupid grins off their faces. They should not fool Singaporeans. The pandemic may be largely over by next year with the rollout of mass vaccination programmes but global and US trade is going to take a lot longer to recover. Singapore’s rulers need to give up their misplaced fixation on export-led growth and austerity for our people and start focusing on boosting domestic consumption instead. The reason they do not want to do so is because larger surpluses boost our stock of foreign assets managed by our two unnecessary sovereign wealth funds and indirectly Ho Ching’s earnings. It also gives Lee Hsien Loong and the PAP more state resources to control Singaporeans. The sooner we end this misplaced mercantilist mindset, the sooner we will be better off.