Five to 10 Years From Now Asia Won't Need America: Nomura Q&A

(Bloomberg) -- The remaining 11 members of the Trans-Pacific Partnership are trying to work out how to move the trade agreement forward after the withdrawal of the U.S. TPP ministers met in Hanoi last month, and trade officials are due to put forward plans on how to proceed by November.

Rob Subbaraman, chief economist for Asia ex-Japan at Nomura Holdings Inc. in Singapore, believes the rapid growth of Asia’s consumer markets will make up for the U.S.’s absence.

Here’s excerpts of a recent conversation:

Question

How big a blow to the Trans-Pacific Partnership is the withdrawal of the U.S.?

Answer

It’s the world’s biggest economy, and certainly that would have added oomph to the TPP. But if you’re far-sighted you realize consumer markets are growing fastest here in Asia. Over five or 10 years, many of these Asian markets are going to be much bigger. People say, without the U.S., the TPP is not important, but five to 10 years from now Asia won’t really need the U.S. The U.S. is still by far the biggest consumer market, but it’s a very light economy in the sense that it’s predominantly services. Close to two-thirds of U.S. consumption is services and much of that is not traded, it’s produced in the U.S. Once that’s taken into account the U.S. consumer market isn’t as big as it looks at face value. It’s quite different in Asia, where services don’t make up such a large proportion.

Question

The TPP is seen by some as a rival to another proposed free trade agreement, the Regional Comprehensive Economic Partnership. Is that your view?

Answer

Rather than seeing the TPP and the RCEP as independent, I see them more as complementary. There’s so much interest for Asia to get one of these agreements, or hopefully both, in place. The TPP does not at this stage include China or India, and the RCEP including China and India is a much bigger agreement in terms of the population size of the members and also the size of the consumer markets. Once you take into account how fast these consumer markets are growing, particularly China and India, it makes a lot of sense to keep persevering with these agreements, even without the U.S.

Question

How do the number stack up on the growth of Asia’s consumer markets?

Answer

We’ve done some calculations comparing the nominal consumption in Asia’s top 12 consuming economies with the U.S.’s top 12 consuming states and how it changed between 2007 and 2015. In 2007, California consumed almost as much as the whole of China, and Texas and New York each consumed more than India. Fast forward to 2015 and the changes are striking. China now consumes more than twice as much as California, and India consumes more than Texas and more than New York. And the Asean consumer market is becoming a force in its own right.

Question

Is there any upside for Asia from the U.S. stance on trade?

Answer

In some ways it’s going to provide more impetus for this process over the next year or so. I think there is a non-trivial risk that the U.S. will increase trade protectionism against China and other Asian countries, and I think that will provide further incentives for the region to work out how better to trade with each other on terms that all see as fairer. Asia needs to take more control of where it will be going in the future with regards to trade. There’s a lot of uncertainty about the U.S.’s approach going forward, and I don’t think there’s any benefit in Asia taking a wait-and-see attitude. Given how important the region’s own markets are going to be, the region should focus on inter-Asia trade and move now to try to strengthen and improve trade relationships.

Question

Apart from trade, how else would the TPP benefit Asia?

Answer

The thing about TPP is it’s a very comprehensive agreement covering not just tariff reductions but a lot of non-tariff trade barriers, including intellectual property rights, labor conditions, environmental standards, state-owned enterprise subsidies and product quality. As countries become more developed it is areas such as these that start to matter more and more. There’s a wide variation in standards across the region, which is not surprising as the economies are at different stages of development. If Asia can start to reach agreement on these often prickly areas then it would be hugely beneficial.

Question

Will China gain from the U.S. withdrawal?

Answer

It will if it can form strong trade agreements with its Asian partners and Europe. China is rapidly emerging on the global scene, and to me it’s encouraging to see it stressing the virtues of globalization at a time when the U.S. is maybe stepping back a bit. I would have been more concerned in the coming two or three years if the U.S. and China both pulled back and started to look inward.

To contact the reporter on this story: Colin Simpson in Hong Kong at csimpson42@bloomberg.net.

To contact the editors responsible for this story: Nathaniel E. Baker at nbaker14@bloomberg.net, Malcolm Scott