The What, Where, How and Why of the Indo-Pacific Economic Framework
On May 23, U.S. President Joe Biden officially launched the Indo-Pacific Economic Framework for Prosperity (IPEF) in Tokyo. Conceived and led by the United States, the IPEF has 13 founding members, including Australia, Brunei, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. “The future of 21st century economy is going to largely be written in the Indo-Pacific…We are writing the new rules for 21st economy”, said Mr Biden at the launch event attended in person by Japanese Prime Minister Fumio Kishida and his Indian counterpart Narendra Modi, while representatives from 10 other participating countries attended online.
In a joint statement, the participating countries said that the purpose of the IPEF is to “advance resilience, sustainability, inclusiveness, economic growth, fairness, and competitiveness for our economies. Through this initiative, we aim to contribute to cooperation, stability, prosperity, development, and peace within the region”.
During the East Asia Summit in October 2021, President Biden announced plans to launch a U.S.-led IPEF. Subsequently, U.S. officials conducted exploratory discussions with their traditional allies in the region. In February 2022, an Indo-Pacific strategy was revealed, which mentioned the formal launch of the IPEF in early 2022.
Not surprisingly, the United States has not invited China to join the IPEF despite China belonging to the Indo-Pacific region and holding significant regional economic influence. China has also not shown any interest in joining this framework, interpreting Indo-Pacific initiatives as a U.S.-led containment strategy directed against it. Although Taiwan is eager to join the IPEF, the U.S. would only pursue a bilateral engagement with it. Three ASEAN countries (Cambodia, Laos, and Myanmar) are also not part of the IPEF.
The Rise of “Indo-Pacific”
With the shift of the centre of gravity from the Atlantic to Asia, a new concept of the “Indo-Pacific” has entered the geopolitical discourse, replacing the hitherto dominant “Asia-Pacific” construct, even though its geographic boundaries are not well defined.
Based on maritime geography, the “Indo-Pacific” refers to a contiguous zone encompassing the Pacific and Indian Oceans. The geographic boundaries of the Indo-Pacific could stretch from East Africa to the west coast of the U.S. and encompass a large number of countries at varying stages of development, with distinct policy agendas and divergent interests. Bringing together highly heterogeneous countries through high standard commitments on the digital economy, green infrastructure, clean energy, and social and environmental standards under the rubric of IPEF is a herculean effort.
The term “Indo-Pacific” started to be discussed in strategic circles about a decade ago, but it has rapidly gained importance in recent years. The economic rise of India and the massive increase in maritime trade passing through the Indian Ocean have helped make the Indo-Pacific a geopolitical and geoeconomic construct. Currently, the Indo-Pacific is the most contested maritime zone in the world because of the growing strategic rivalry between the U.S. and China and the security interests of other key players in the region.
In the economic realm, the Indo-Pacific is one of the world’s most dynamic regions. The region accounts for more than 60 percent of the global GDP, and almost 50 percent of the global merchandise trade passes through its waters. The region includes the world’s four big economies: the USA, China, Japan, and India. With the engine of global economic growth shifting eastwards, the Indo-Pacific region will gain greater importance in the coming years.
Biden’s Asia Pivot
Since the launch of the “Pivot to Asia” strategy (the rebalancing towards Asia-Pacific) by the Obama administration in 2011, the U.S. has intensified its engagement with the wider Asia-Pacific region to advance its economic and geopolitical interests. The Trans-Pacific Partnership (TPP) was the centrepiece of Obama’s strategic pivot to Asia. The Indo-Pacific Economic Corridor was also part of the “Pivot to Asia” strategy.
In their foreign policy calculations, successive U.S. administrations have given greater prominence to the Indo-Pacific region, pushing to connect the Indian and Pacific Oceans as a single maritime entity, which also enables India to play a more proactive role in the region.
However, the Trump administration’s “Free and Open Indo-Pacific” strategy (FOIP) was a major departure from Obama’s policy of “rebalancing to Asia” and coalition-building in the region. Under the banner of the “America First” vision, the Trump administration took a transactional approach to trade matters that alienated some of its close allies in the region. It also developed a confrontational narrative under FOIP initiatives and narrowed its focus to containing China’s rise in the Indo-Pacific region. As expected, the FOIP strategy received a muted response in the region. Even America’s close partners, such as South Korea and ASEAN, were hesitant to endorse the FOIP strategy fully.
In contrast, the Biden administration wants to revive the “Pivot to Asia” strategy with a renewed focus on building partner coalitions and developing a collective response to curtail the rapidly growing influence of China in the region. The appointment of Kurt Campbell, former Assistant Secretary of State for East Asian and Pacific Affairs under the Obama administration, as the “Indo-Pacific Coordinator” is an indication of this.
Setting Standards and Shaping Rules
Last year, the Biden administration conceived the IPEF with two broad objectives: to reclaim the United States’ role as a standard-setting nation and to compete with Chinese economic dominance in the Indo-Pacific region.
For decades, the U.S. was Asia’s dominant rule-writer and standard-setter in the trade policy arena. This is no longer the case as the U.S. leadership role in decision-making processes in Asia has considerably reduced, partly due to its withdrawal or absence from major regional trade deals and partly because Asian growth is increasingly being driven by intra-Asian trade. As a result, the U.S. sits on the sidelines while China and other key regional players develop their preferred rules and standards in different sectors through trade deals, giving their companies an edge in the Asian markets.
The most likely outcome of these developments is the reduced ability of U.S. firms to enter and compete in the markets. The U.S. is equally concerned that the region (under Chinese economic leadership) will become key to shaping the international trade and economic order in the 21st century without her leadership.
Twenty years after accession to the WTO, China is well placed to use its economic heft in the region to revive the multilateral trade agenda for the post-pandemic era. Such a scenario was inconceivable just a decade ago.
Why Containing China is Easier Said Than Done
Without a return to the “Pax Americana” era, President Biden faced a dilemma about how to deepen economic ties in the region. One obvious choice was to return to a revised TPP or join its successor agreement — the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). However, he chose to bypass this mega-regional trade deal due to a lack of strong bipartisan congressional and public support. Instead, Biden opted for Indo-Pacific Economic Framework to reassert America’s economic leadership in the region by offering deals on new areas such as the digital economy, supply chain bottlenecks, and green infrastructure, where America enjoys a competitive advantage.
For the Biden administration, the IPEF is the new vehicle for economic re-engagement with East Asia and Southeast Asia after former President Donald Trump withdrew from the TPP in 2017. The Biden administration believes that IPEF lays down the economic pillar of its Indo-Pacific strategy and would emerge as a serious challenge to China’s attractiveness as a trade and investment partner.
Through the IPEF, the U.S. is attempting to counter China’s growing economic heft in the region, particularly at a time when China is already the leading trading partner of all IPEF participating countries. China is a member of the Regional Comprehensive Economic Partnership (RCEP) trade agreement, which came into force in early 2022. China has also formally requested to join the TPP’s successor agreement, the CPTPP.
China is further deepening its economic engagements in the region through various initiatives, from building infrastructure under the Belt and Road Initiative (BRI) to joining Digital Economy Partnership Agreement (DEPA) with New Zealand and Singapore. Inward and outward FDI flows between China and ASEAN have grown rapidly over the past decade, supercharging their respective economies by leveraging their strong interconnectivity and comparative advantages in the global value chain.
As a regional and global value chain leader, China has inseparable ties with most countries in the region. Over the years, China has evolved from a low-cost assembly site to a specialized manufacturing centre. It is challenging to replicate the same level of supply chain integration found in China elsewhere. Despite financial incentives offered by other countries in this region, not many MNCs are willing to relocate their manufacturing bases to these countries, as the costs of relocation outweigh the benefits. China’s huge domestic market is another reason for Asian companies to maintain a strong presence in the country.
Therefore, reducing dependency on China in global value chains through diversification of supply networks, or “onshoring” or “friend-shoring”, is easier said than done. Even if some U.S. firms shift production from China to other countries in the region or back home, they will still need raw materials and equipment from China.
The Biden administration must recognize that containing China’s economic clout in the region is not a walkover, as most countries in Asia are keen to expand economic ties with China further. This is despite the fact that these countries feel intimidated by China’s growing military weight and recognize that China will use its economic clout for diplomatic and security purposes.
No country in the region wishes to become a pawn in a geopolitical tussle between two giant superpowers. Nor do they prefer to choose sides if the U.S.-China rivalry escalates. Even the U.S.’s traditional allies in the region (such as Australia, Japan, and South Korea) — who view China’s rise as a threat to their security and territorial integrity and look to the U.S. as a counterbalancing force — wish to maintain closer economic ties with China due to the benefits they derive from trading with China and China’s pivotal role in the regional value chains. Indeed, most countries in the region want to derive benefits from both the cooperation and the competition between the U.S. and China.
Given these considerations, the U.S. needs to develop the IPEF into a credible alternative that offers incentives and tangible benefits for countries in the region to join the initiative. An overtly anti-China strategy is unworkable and may prove counterproductive.
Four Negotiating Pillars of IPEF
Beyond the joint statement and a brief factsheet issued by the White House, little is known about the Indo-Pacific Economic Framework. As outlined in these documents, the IPEF consists of the following four negotiating pillars:
- Trade: The IPEF seeks to build “high-standard, inclusive, free, and fair trade commitments and develop new and creative approaches in trade and technology policy that advance a broad set of objectives that fuels economic activity and investment, promotes sustainable and inclusive economic growth, and benefits workers and consumers”.
- Supply Chains: The IPEF will seek “first-of-their-kind supply chain commitments that better anticipate and prevent disruptions in supply chains to create a more resilient economy”. It also intends to establish an early warning system and coordinate crisis response actions.
- Clean Energy, Decarbonization, and Infrastructure: The framework will seek “first-of-their-kind commitments on clean energy, decarbonization, and infrastructure that promote good-paying jobs.” “We plan to accelerate the development and deployment of clean energy technologies to decarbonize our economies and build resilience to climate impacts”, says the joint statement.
- Tax and Anti-Corruption: The IPEF will seek new commitments to enact and enforce “effective and robust tax, anti-money laundering, and anti-bribery regimes in line with existing multilateral obligations, standards, and agreements to curb tax evasion and corruption in the Indo-Pacific region”.
Not a Traditional FTA
Both the content and process of the IPEF suggest that the proposed framework is not a traditional free trade agreement. Unlike other regional FTAs such as RCEP or CPTPP, the IPEF does not offer increased market access (especially to the U.S. market) through tariff liberalization and non-tariff concessions.
The Biden administration defines the IPEF as “a 21st century economic arrangement designed to tackle 21st century economic challenges, ranging from setting the rules of the road for the digital economy, to ensuring secure and resilient supply chains, to helping make the kinds of major investments necessary in clean energy infrastructure and the clean energy transition, to raising standards for transparency, fair taxation, and anti-corruption”. Committing to such lofty goals is easy but translating them into concrete proposals and tangible gains is a complicated matter.
Without offering market access concessions to signatory countries, how will the U.S. attract a sufficient critical mass of countries to sign up to IPEF and make significant commitments? Without broader buy-in from the Indo-Pacific region, the IPEF would lack credibility and could discourage others from joining over time. To obtain commitments from countries that are signatories to existing regional free trade agreements such as the CPTPP and RCEP, the U.S. needs to offer incentives to make joining IPEF more attractive. Why else would countries in the region be willing to risk their economic ties with China in exchange for nothing tangible?
The Biden administration must recognize that in the absence of meaningful market access to the U.S., not many countries (other than traditional allies) from the region would prefer to engage with the proposed framework.
More importantly, the IPEF intends to incorporate “first-of-their-kind commitments” in new areas such as the digital economy, clean energy and decarbonization. It also seeks commitments to labour and environmental standards, which are highly unpopular in the region.
Not many countries in the region would be willing to make strong commitments in these areas, as their policies and stated positions are vastly different from those of the U.S. For instance, countries from India to Vietnam follow their distinct policy frameworks on cross-border data flows, data localization, and data privacy. They may not be willing to abandon their existing frameworks and adopt U.S. standards on digital trade. Countries like India and Indonesia may not accept highly ambitious decarbonization targets that might run counter to their Paris Agreement goals. Similarly, India has consistently opposed the inclusion of labour and environmental standards in trade agreements.
It remains to be seen how the Biden administration would persuade partner countries at different stages of development to sign up to high-standard provisions on digital trade, labour and environmental standards proposed under the IPEF.
Another critical question is what kind of dispute settlement mechanism would be incorporated in the IPEF to avoid unilateral actions by signatory countries.
Going forward, the U.S. and the founding partners need to develop the process and criteria by which other countries from the region will be invited to join the negotiations on IPEF.
A Questionable Process
Unlike traditional FTAs, the IPEF does not subscribe to the single undertaking principle, where all items on the agenda are negotiated simultaneously, with countries expected to sign the final agreement in its entirety or withdraw.
Rather, the IPEF employs a menu-based approach in which countries would launch separate negotiations under four pillars. A country would be required to sign up for all components within a pillar, but participation in all pillars is optional. This indicates that negotiations on various pillars will be handled at variable speeds with different groups of countries. The outcome would be a matrix, with some countries making commitments in all areas and others making in only a few. Commitments might also vary, from sharing information to binding obligations.
The U.S. Trade Representative will lead the negotiations on the trade pillar, while the Commerce Department will oversee negotiations on the remaining three pillars of the proposed agreement. The Biden administration has announced that it will proactively consult labor unions, environmental organizations, and other civil society groups during the IPEF negotiations. This stance departs from previous U.S. trade negotiations and therefore needs to be welcomed.
But what is worrisome is that initial official statements suggest that the Biden administration may not be seeking congressional approval for the IPEF, which is a must for all trade agreements that involve market access commitments and changes in U.S. laws and regulations. Instead, it considers the proposed agreement as an administrative arrangement, and its outcomes may not be submitted to the U.S. Congress for approval. No wonder, the U.S.’s scope of commitments under the proposed IPEF would be minimal.
As rightly pointed out by Matthew P. Goodman and William Reinsch: “That in turn tells partners from the beginning that they have little to gain from the United States by negotiating any agreements under the IPEF. In other words, the Biden administration is suggesting a process in which other nations are expected to commit to do only what the United States is already doing or is seeking. That is a myopic approach that does not take into account the likelihood that other nations will have expectations for the United States, just as Washington has for them.” The IPEF is doomed to irrelevance if it becomes an instrument to serve U.S. economic interests at the expense of regional economies.
While it is understood that FTAs do not enjoy widespread political support in the United States, the outcome document must be submitted to Congress for formal legislative approval to ensure that the negotiated rules are binding and that all stakeholders’ concerns are taken into account.
Without ratification by Congress, the IPEF’s fortunes will remain in limbo. Given the divisive nature of American politics, it is unclear whether the IPEF will survive past the Biden administration. What would be the fate of the IPEF if a Republican — possibly Donald Trump — wins the U.S. presidential elections in 2024?
IPEF’s launch in Tokyo was symbolic in nature; bringing the IPEF to fruition encounters significant domestic and international challenges.
Image courtesy of Narendra Modi (Twitter)