The challenges of the Indo-Pacific economic framework

Author: Joshua P Meltzer, Brookings

US President Joe Biden will launch the Indo-Pacific Economic Framework (IPEF), his administration’s key initiative for economic engagement with the Indo-Pacific, in April 2022. Since former President Donald Trump withdrawn from the Trans-Pacific Partnership — now the Comprehensive Partnership and Progressive Agreement for Trans-Pacific Partnership (CPTPP) — China has, in part through its membership in RCEP, strengthened its economic ties across the region. As Beijing now seeks to join the CPTPP, US economic leadership and credibility are at stake in the Indo-Pacific.

While the Biden administration recognizes the urgency of a positive economic strategy in the region, its approach reflects US political constraints. It’s unclear where the Republican Party stands after its abandonment of free trade since 2016. The Biden administration also seems determined to involve unions in new trade initiatives, thus avoiding the agreement becoming a treaty requiring the Congressional approval. Instead, he hopes to strike an executive deal by the end of 2023 when the United States hosts APEC and before the U.S. presidential election heats up.

The IPEF will not produce a traditional free trade agreement (FTA). More importantly, it will not improve market access through the elimination of tariffs, a key reason countries sign FTAs ​​with the United States. Washington instead proposes four IPEF pillars.

The first concerns fair and resilient trade rules in areas such as digital trade, labor and the environment. The second is supply chain resilience. The third is infrastructure and green technology. The fourth is taxation and the fight against corruption. While the United States will encourage countries to participate in all four pillars, they can participate in IPEF if they join at least one.

A major challenge for Washington will be to convince other countries to agree to binding, high-level trade rules without benefiting from market access. As in previous trade deals, the United States will most likely seek high labor standards, but the significant TPP labor market reforms to which Vietnam, for example, agreed were made politically possible by the promise of a better access to the American market.

Washington will also make demands amid uncertainty over whether the next president will seek to pull the United States out of IPEF — a feat easier to achieve with an executive accord rather than a Senate-ratified treaty.

If the United States can address these challenges, the initiative could generate significant economic gains for COVID-19 recovery, digital transformation, and environmental transition — all priority areas for Washington and its partners. Digital trade engagements that facilitate trusted data flows should promote digital trade and business among IPEF members. The IPEF could also provide increased investments in more resilient and secure supply chains, as well as in infrastructure, clean energy and capacity building.

The United States-Mexico-Canada Agreement (USMCA) provides useful insight into the potential gains of agreeing to new rules. The USMCA was a renegotiation of NAFTA, under which tariffs were already zero, which mainly concerned new trade rules in areas such as digital trade and labor regulations. According to the United States International Trade Commission, the USMCA increase exports in Canada and Mexico by 5.9 and 6.7%, respectively. Much of these projected economic gains come from the trade policy certainty gained through USMCA rules in areas such as digital trade.

IPEF is an opportunity to build on bipartisan support for the USMCA – the first major union-backed free trade agreement AFL-CIO, which passed the US Senate 89-10 in 2020, against 60-38 in favor of NAFTA in 1993. The agreement’s strengthened and binding provisions on labor and the environment, the reduction of investors’ access to arbitration tribunals and stricter rules of origin have all made the political coalition possible.

The IPEF will not require Congressional approval, but the USMCA will still inform the administration’s approach because bipartisan political support is needed to reduce the political risk of a future administration stepping down. The geostrategic countervailing role of the agreement vis-à-vis China should also strengthen its attractiveness.

This leads to membership. The U.S. could broadly invite Indo-Pacific governments to IPEF as a sign of U.S. support and commitment. But the challenge of negotiating meaningful commitments with a large number of countries, and the American imperative to conclude an IPEF agreement in 2023, point to a more limited set of initial participants. This would likely include pro-free trade governments like Australia, New Zealand, Singapore, Japan, South Korea, as well as key ASEAN countries like Vietnam, Malaysia and Indonesia.

India should also be invited to join IPEF. The strategic rationale is clear – the very notion of an Indo-Pacific is hollow without Indian participation. While India is generally protectionist when it comes to trade, IPEF makes no demands for tariff reductions. The IPEF also comes at a time when India has clarified its strategic concerns vis-à-vis China. The growing alignment of China and Russia could also lead India to seek even closer relations with the United States.

The IPEF is an opportunity to promote American leadership and deepen American ties with Indo-Pacific countries at a critical geopolitical time. Although the search for an economic agreement is controversial at the national level, the importance of the IPEF is clear. The challenge will be to find a path to reach a high-level IPEF agreement that is compatible with US domestic constraints, while providing sufficient benefits to attract US Indo-Pacific partners.

Joshua P Meltzer is a Senior Fellow in the Global Economy and Development program at the Brookings Institution. He is also a member of the Australian National Data Advisory Council and a Senior Fellow at Melbourne Law School, University of Melbourne.

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