The story so far: On Monday, India agreed to be a part of the Indo-Pacific Economic Framework for Prosperity (IPEF), a U.S.-led economic grouping comprising 12 countries. Prime Minister Narendra Modi, who was in Japan for the Quad Summit, joined U.S. President Joe Biden, Japanese Prime Minister Fumio Kishida and leaders of ten countries at the launch of the framework in Tokyo, initiating the path for negotiations among the ‘founding members.’ These include Australia, Brunei, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand and Vietnam. Together, these countries account for 40 per cent of the global GDP.
The economic framework broadly rests on four pillars: trade, supply chain resilience, clean energy and decarbonisation, and taxes and anti-corruption measures. A joint statement suggests the framework intends to “advance resilience, sustainability, inclusiveness, economic growth, fairness, and competitiveness” in these economies.
Mr. Modi described the grouping as born from a collective desire to make the Indo-Pacific region an engine of global economic growth, calling for common and creative solutions to tackle economic challenges in the region. “India is keen to collaborate with partner countries under the IPEF and work towards advancing regional economic connectivity, integration and boosting trade and investment within the region,” a government statement read.
Analysts at the East Asia Forum however suggest it would be security, and not economics, that will drive U.S. trade engagement in the region. “The United States continues to dominate world finance, but China will soon have the world’s largest economy,” it argued in a separate context.
What does the framework entail?
The U.S. Trade Representative (USTR) will be spearheading the trade pillar, while the others (I.e., supply chain resilience, clean energy and decarbonisation, and taxes and anti-corruption measures) will fall under the purview of the U.S. Department of Commerce.
On the trade front, the endeavour is to establish “high-standard, inclusive, free, and fair-trade commitments” to fuel economic activity and investments benefitting both workers and consumers. What stands out, however, is U.S’s willingness to extend cooperation for enhancing digital economy and trade.
Digital trade incorporates not just the purchase and sale of goods online but also data flows that enable the operation of global value chains and services, like smart manufacturing, platforms and applications. The idea here is to overcome downstream costs for businesses as well as upscale the ability to utilise data processing and analysis, and enhance cybersecurity outside their geographies.
As for supply chain resilience, the framework aspires to secure access to key raw and processed materials, semiconductors, critical minerals and clean energy tech, particularly for crisis response measures and ensuring business continuity. U.S. Commerce Secretary Gina Raimondo, in a press briefing, explained how workers at auto-manufacturing plants in Michigan experienced massive furloughs when semiconductor packaging operations were closed in Malaysia because of a COVID outbreak. “If we had had more transparency, more communication, more data-sharing and an early alert system, that may not have happened,” she said.
In line with the Paris Agreement, the clean energy, decarbonisation and infrastructure pillar would provide technical assistance and help mobilise finance, including concessional finance, to improve competitiveness and enhance connectivity by supporting countries in the development of sustainable and durable infrastructure for adopting renewable energy.
Renewable energy is cheaper than fossil fuels, however, its high start-up costs when compared to using existing infrastructure stave off its adoption by the mainstream. Public policy analysts at the Centre for Strategic and International Studies (CSIS) suggest that regional partners would like the U.S. to help close the gap through climate financing and expertise sharing.
Lastly, the pillar on tax and anti-corruption is aimed at promoting fair competition by enforcing 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 region.
How do members participate?
Countries are free to join (or not join) initiatives under any of the stipulated pillars but are expected to adhere to all commitments once they enrol. Negotiations slated to begin after the launch are meant to determine and list the provisions under each pillar and open the floor for countries to choose their ‘commitments’. CSIS suggests that the agreements would be finalised within 18 months, possibly ahead of the Asia-Pacific Economic Cooperation (APEC) to be hosted by the U.S. in November 2023.
Additionally, the framework would be open to other countries willing to join in the future provided they are willing to adhere to the stipulated goals and other necessary obligations.
What does it have to do with China?
A recent U.S. Congressional Research Service report claimed that observers believe that the U.S. lacks an economic and trade strategy to counter China’s increasing economic influence in the region after former President Donald Trump withdrew from the Trans-Pacific Partnership (TPP) in 2017. TPP had been signed into existence by his predecessor Barack Obama in a bid to curb China’s influence in the region. Former President Trump had indicated that the U.S. would sign trade deals only with individual allies.
China, on the other hand, is part of the Regional Comprehensive Economic Partnership (RCEP) grouping with Australia, Brunei Darussalam, Cambodia, China, Japan, Lao PDR, New Zealand, Singapore, Thailand and Vietnam. It has also expressed its desire to join TPP’s successor arrangement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Digital Economic Partnership (DEPA) with Chile, New Zealand and Singapore. The U.S. participates in neither of these arrangements.
Secretary Raimondo recently said that many U.S. companies are looking to move away from manufacturing in China. The IPEF would therefore offer an advantage to participating countries, allowing them to bring those businesses into their territory.
Observers argue that the exclusion of U.S. ally Taiwan from the arrangement, despite its willingness to join, exhibits Washington’s geopolitical caution. “Despite recognition that Taiwan might be eligible on economic merit, there is a clear concern that its inclusion would further politicise the framework and heighten China’s opposition to the effort, thus forcing an unwelcome choice for regional partners between respecting either Washington or Beijing imperatives,” CSIS said. Washington defended its stance by indicating that it intends to pursue a “deeper bilateral engagement with Taiwan” that would help strengthen both their economies.
What broad challenges are we looking at?
Critics have raised their concerns on the feasibility of a grouping which U.S. officials have made clear would neither constitute a ‘free trade agreement,’ nor a forum to discuss tariff reductions or increasing market access.
Unlike a traditional trade agreement, the U.S. administration will not need congressional approval to act under the IPEF, thereby avoiding a politicised battle about domestic ramifications, per CSIS. This also raises doubts among potential participants about its willingness to offer significant concessions under the agreement.
Washington, however, says that countries will get to work closely with the U.S. under the IPEF, facilitating greater transparency, coordinated supply chains, and shared technical expertise. This is also expected to spur the digital economy, infrastructure enhancement and acquisition of investments. “...United States is going to be a partner of choice on all of the elements of this framework, even setting aside the question of traditional tariff liberalization,” National Security Advisor Jake Sullivan said.
The volatility of domestic politics has raised concerns about IPEF’s durability. According to CSIS, “The memory of strong U.S. leadership on the TPP, followed by an abrupt withdrawal from the agreement after presidential candidates Hillary Clinton and Donald Trump distanced themselves from it for domestic political purposes, still haunts many regional partners, as do the Trump administration’s tariffs and general mercantilist stance.” It adds the Biden administration would therefore have to create and sustain strong bipartisan support for the IPEF.