Inflation, supply chain resilience, RCEP and CPTPP

By Song Kyung-jin

The buzzword in the global economy at the moment is "inflation." The global economy is projected to grow 4.7 percent in 2022 from 6.1 percent (estimated) in 2021, according to the Morgan Stanley real gross domestic product (GDP) forecasts.

GDP growth outlook for 2022 of major economies is also set to moderate from 2021, with the U.S. slowing down to 4.6 percent from 5.5 percent, China to 5.5 percent from 7.8 percent and India to 7.5 percent from 8.9 percent. The Korea Development Institute forecasts the Korean economy to expand 3 percent in 2022, roughly 1 percentage point higher than its growth potential and down from an estimated 4 percent growth in 2021.

While the global economy is returning to normal, inflation will likely persist due to continued disruptions to the supply chain and higher energy prices due to the green energy transition with the aim of achieving carbon neutrality by 2050.

On concerns of high inflation that remained far above the 2 percent target from April 2021, recording 3.7 percent in December year-on-year, the Bank of Korea raised its policy rates twice by 25 basis points each in the second half of the year. It is likely to increase the interest rate by 25 basis points again this month.

Many economies are experiencing the highest inflation in recent decades. It is the highest in the United States since the 1970s, since 1997 in the Eurozone, and in a decade in the United Kingdom.

Supply chain disruptions, the main driver of high inflation around the world, are happening across the board, from semiconductors to even chocolate cookies. It does not look likely to vanish soon. Countries are trying to shore up supply chains domestically to reduce supply constraints from outside. This trend can cause trade disruptions in key trading nations like Korea whose businesses are deeply embedded in global supply chains.

Supply chain disruptions add one strong argument for Korea to be more proactive in global and regional free trade agreements (FTAs). The Regional Comprehensive Economic Partnership (RCEP) joined by 15 countries including Korea, China and Japan took effect in 10 signatories as of Jan. 1. It will come into effect in February in Korea.

Accounting for 30.5 percent of global GDP, RCEP aims at tariff concessions of 90 percent of traded goods. A study by the United Nations Conference on Trade and Development estimated that RCEP will increase intraregional trade by 2 percent ($41.8 billion) from $2.3 trillion in 2019. Korea's exports to RCEP members are projected to increase to $6.7 billion from $4.4 billion in 2019.

RCEP is particularly significant for Korea, China and Japan that often clash over historical and security issues. It is the first FTA that the three countries have joined together. Stronger economic integration is expected. For example, the share of tariff-free goods between Korea and Japan standing at a meager 19 percent is poised to surge to 90 percent.

It may help alleviate tensions and prevent trade and economic retaliatory measures imposed against one another. THAAD retaliatory measures imposed by China in 2017 and thereafter are still not fully removed are a good example. Japan's export controls imposed against Korea in 2019 on critical chemicals ― fluorinated polyimide, photoresist and hydrogen fluoride ― caused great pain for Korean businesses in bilateral and global supply chains.

This agreement, therefore, can help the three countries prevent further divisions and more animosity. The three can and should help upgrade the rules-based trade and economic order within RCEP by sending or seconding competent bureaucrats and experts to the secretariat to make clearer rules for digital trade, state-owned enterprises, labor and the environment.

They should also help to reduce U.S.-China tensions likely to escalate in the face of the U.S. midterm elections and China's 20th National Congress where Xi Jinping is expected to revive the post of party chairman, famously held by Mao Zedong and Deng Xiaoping.

In the same vein, Korea should join, as quickly as possible, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a high-quality trade agreement with tariff liberalization of 95 percent to 100 percent. Korea's estimated benefit from joining the CPTPP will be $86 billion per year, much greater than that from joining RCEP, according to trade experts, Peter A. Petri and Michael G. Plummer. It will further consolidate Korea's position and role in regional and global supply chains, when two competing giants tend to create disruptions to supply chains more frequently than before.

The Korean government recently announced that it will submit its application in April after the March 9 presidential election, effectively passing the buck to the next administration. I strongly urge the policy team of the presidential candidates to start preparing for an accession process, so the new government can expedite it.

Trade agreements are no more just an outcome of economic calculations but more of an outcome of economic, strategic and climate calculations.

Dr. Song Kyung-jin (kj_song@hotmail.com) led the Institute for Global Economics (IGE), based in Seoul, and served as special adviser to the chairman of the Presidential Committee for the Seoul G20 Summit in the Office of the President. Now, she chairs the international cooperation committee called the Innovative Economy Forum.