Asia Economics Blog

Co-author:  Jose Adlai M. Tancangco
 
The Regional Comprehensive Economic Partnership (RCEP) was established in 2020, with effect in 2022, for the purpose of deepening regional economic integration among members of the Association of Southeast Asian Nations (ASEAN) and the association's free trade agreement partners (ASEAN.org). RCEP comprises 15 Asia-Pacific economies: Brunei (BRN), Cambodia (KHM), Indonesia (IDN), Laos (LAO), Malaysia (MYS), Myanmar (MMR), the Philippines (PHL), Singapore (SGP), Thailand (THA), Vietnam (VNM), Australia (AUS), China (CHN), Japan (JPN), Korea (KOR), and New Zealand (NZL). The world’s largest trading bloc, RCEP accounted for 11.9 percent of goods exports and 5.5 percent of services exports globally in 2021.

All good intentions notwithstanding, agreements to reduce trade barriers and harmonize regulation can go only so far in achieving economic integration as long as disparate monetary and exchange rate policies among members continue to generate uncertainty and impose costs on doing business. Advancing to a higher stage of integration would require binding economies together under a currency union. Short of that, fluctuations in exchange rates and interest rates cause perpetual disturbances to cross-border trade and capital flows with inhibiting effects on engagement.

China has long gotten a bad rap on currency manipulation. The fact is, however, that China is no different from other East Asian economies when it comes to exchange rate management.

The essence of the East Asian model is to steer the exchange rate along a steady long-run course, erring toward undervaluation in the face of uncertainties about the future. Any perception of overvaluation runs

Co-Author: Roberto Meurer

The conclusion of the previous post in this series is that East Asia has worked out a policy routine for managing exchange rates in service to macroeconomic stabilization. For Latin America, by contrast, such a routine is not in evidence.

As we stumble out of the global COVID-19 pandemic, we need to examine how our economies have changed. In East Asia, the pandemic may result in higher costs for travel. In addition, the well-publicized disruptions to supply chains may not prove transitory. As a result, the East Asian development model of manufacturing goods for export may be less reliable.

This suggests a need to review contemporary economic policy. This piece looks at the shortcomings of exchange rate policy in Southeast Asia. A longer paper is available that provides full references to the relevant literature.