As Washington ramps up efforts to restore the United States’ “economic leadership” in the Indo-Pacific region, U.S. President Joe Biden launched the Indo-Pacific Economic Framework for Prosperity (IPEF) in Tokyo on May 23, with 13 member countries signing up for the framework.
Apart from the U.S., the other participants in the framework include Australia, Brunei, India, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. Together, these countries represent around 40% of the world’s gross domestic product (GDP). However, the framework excludes China and some ASEAN countries such as Myanmar, Laos, and Cambodia.
The U.S. has always been accused of pursuing an “all guns and no butter” strategy in its policy towards the region in the past. The newly launched IPEF is seen as the economic pillar of the U.S. Indo-Pacific strategy to increase the U.S. economic presence in the region after the Trump administration withdrew from the Trans-Pacific Partnership (TPP) in 2017, which paved the way for China to grow its economic footprint in the region unhindered.
Instead of just rejoining the TPP, which later became the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Biden opted for the new economic framework to compete for influence with the Regional Comprehensive Economic Partnership (RCEP) that links China and the other 14 Asia-Pacific economies in the world’s largest trade bloc.
Seen as a means to counter China’s growing economic influence in the region, the IPEF will focus on four key pillars: supply-chain resilience; clean energy, decarbonization and infrastructure; taxation and anti-corruption; and fair and resilient trade. However, the Biden administration might face certain challenges in implementing the framework due to the lack of clear trade incentives and attractiveness it brings to the region.
Lack of market access and tariff reduction
Unlike the CPTPP and RCEP, the U.S.-led IPEF is not a free-trade agreement (FTA) as it offers neither the expanded market access nor the tariff reduction, which lacks trade incentives for regional countries. Some analysts and observers say the deal lacks “teeth” and is “more symbolic than it is effective or real policy.”
International trade expert and professor of law at the Chinese University of Hong Kong, Bryan Mercurio, said the U.S. may bring money to the IPEF, “particularly for clean energy, maybe even some for supply chain resilience, and anti-corruption.”
“But of course, what Asian partners really want is trade. I think they want market access. And the trade component of the IPEF is really lacking,” he added.
In the absence of greater U.S. market access and tariff reduction commitments, it would be difficult for Washington to reduce some regional countries’ economic dependency on China. However, Biden faces political pressure from both the left and right in the U.S. to avoid free-trade deals, which have led to “considerable backlash” from the American people who are concerned about the offshoring and outsourcing of American jobs and opportunities. The Biden administration is unlikely to give Asian countries more access to the U.S. market given the strong protectionist sentiments at home.
High-standard provisions on digital trade, labour and environmental standards
It is important to note that Washington intends to seek “first-of-their-kind commitments” in new areas such as the digital economy, clean energy and decarbonisation in the framework. It also seeks strong commitments to labour and environmental standards, which are highly unpopular in the region.
The Biden administration will face headwinds trying to persuade some regional countries to make strong commitments in these areas as they do not share the same policies and standards with those of the U.S.. For instance, Southeast Asia is not a monolith when it comes to digital trade, and each country in the region is at different stages of digital development. Some developing countries in the region may not be able to meet the so-called high standards of the IPEF on digital trade, labour and environment.
The U.S. and India also have contrasting views on digital commerce, labour, and environmental standards in the framework. India has consistently opposed the inclusion of such standards in any of the free-trade agreements it enters into.
According to Prabir De, a professor at the Research and Information System for Developing Countries (RIS), “some areas proposed in the IPEF do not appear to serve India’s interests.” He also argues that the IPEF formulation contains issues that directly conflict with India’s stated position, such as the prohibition / restrictions on cross-border data flows and data localization requirements, including for financial services. Similarly, on trade resilience, as Pranab Dhal Samanta argues in The Economic Times, “politically sensitive labour and environment standards could prove to be a challenge for India.”
Decoupling regional countries from the Chinese economy
One of the biggest challenges for the U.S. is to decouple IPEF members from the Chinese economy, which would be destructive to some economies in the region. Beijing said the U.S.-proposed economic framework is an attempt by Washington to decouple regional countries from the Chinese economy, but many countries in the region are worried about the “huge cost” of doing so. Aside from the U.S. and India, the other IPEF members have previously joined China in signing the RCEP, which is the world’s largest binding FTA with regional market access and tariff reduction.
Without trade incentives such as access to the U.S. market, it would be difficult for the Biden administration to obtain significant commitments from the IPEF members to the new economic framework as compared to the RCEP. It remains to be seen if and why IPEF members would be willing to risk their economic ties with China in exchange for non-tangible gains from the IPEF.
At this stage, the IPEF is more symbolic than effective as it lacks the teeth to actually transform itself into meaningful action due to the absence of clear trade incentives and tariff concessions. While the IPEF may help Washington increase its economic presence and strengthen ties with its Asian partners in the region, its implementation involves significant domestic and international challenges.
