Twelve countries, seven of them from Southeast Asia, signed up for President Joe Biden's Indo-Pacific Economic Framework (IPEF) last month. IPEF rounds America's Indo-Pacific Strategy and allays criticisms that Washington's game plan in its priority region is all arms and no butter. The deal is the latest demonstration of the region’s pragmaism and openness to potentially beneficial economic constellations. Keen to hit the ground running, U.S. Trade Representative Katherine Tai and counterpart ministers from other participating countries gathered for an informal meeting last June 11 in Paris to discuss the framework’s trade pillar.
As a theater for geopolitical competition, Southeast Asia gets regularly courted by major and middle powers bearing investment and connectivity pitches in their strategic outreach. China's Belt and Road, Japan's Partnership for Quality Infrastructure, India's Act East Policy, Korea's New Southern Policy, and even Taiwan's New Southbound Policy fit into this. IPEF, thus, represents the much-awaited U.S. economic game for the region. The announcement was an instant hit. Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam closed ranks with the U.S., Japan, India, South Korea, and New Zealand in the recently launched undertaking. Three days later, Fiji became the first in Oceania to join the pact. Thus, the deal began on a high note, although the road ahead is long and arduous.
While not a free trade agreement (FTA) that offers tariff cuts and market access, the lure of attracting companies spreading their supply chains and cornering investments in infrastructure, clean energy, and technology sectors constitute strong incentives themselves. The warm reception towards IPEF stands in stark contrast to the reluctance and even concern raised by some Southeast Asian countries towards U.S.-led security arrangements like Quad and AUKUS. Many regional countries have China as their largest trade partner and thus have misgivings about taking part in groupings seen adversely or with great suspicion by Beijing. That IPEF was rolled out in Tokyo during Biden's debut Asia tour speaks volumes of the importance of Japan as a crucial U.S. ally and partner in countering China's burgeoning influence in the Asia-Pacific.
Meeting China's economic and rule-making challenge
The U.S. ceded much ground to China since it withdrew from the Trans-Pacific Partnership (TPP) in 2017. Beijing convened two Belt and Road Forums in 2017 and 2019. In 2020, it became the biggest member economy to join the Regional Comprehensive Economic Partnership, the world's largest FTA that includes all ten ASEAN members and five of its dialogue partners. Seven ASEAN countries and all five dialogue partners have already ratified the trade pact, which came into effect early this year. Last year, Beijing also expressed interest in joining the rebranded Comprehensive and Progressive TPP and the Digital Economy Partnership Agreement.
Beyond trade, Beijing has also made its presence felt in the field of development assistance. In 2018, it launched its own foreign aid outfit, the China International Development Cooperation Agency. In 2020, it proposed a Global Initiative on Data Security, a game-changing move that perturbed established technology powers. Last September, President Xi Jinping, in an address before the 76th session of the United Nations General Assembly, also proposed a Global Development Initiative to accelerate the realization of the 2030 UN Agenda for Sustainable Development. China's success in poverty alleviation and food security at home boosted its confidence to share its lessons and lend support to other developing countries.
While the U.S. turned more inward and alienated allies and partners during the previous Trump administration, China positioned itself as a champion of multilateralism and free trade. Hence, under Biden's watch, IPEF is expected to help the U.S. recover lost ground. It injects new vitality into US' Indo-Pacific strategy, enabling it to respond to China's growing economic clout in the region. Although IPEF may not supplant China's economic role in the region, it can mitigate growing reliance on Beijing for trade, investments, and infrastructure. It also asserts Washington's enduring role in updating rules and norms for cutting-edge technologies. The U.S.' countervailing presence may also offer some cushion for countries worried about Chinese punitive economic measures should relations turn sour over mishandled sea incidents or other foreign policy differences.
Low entry barriers and flexibility are key features of IPEF. Countries can join any of the four policy pillars: 1) trade; 2) supply chains; 3) clean energy, decarbonization and infrastructure; and 4) tax and anti-corruption. While there is no guarantee that all those who enlisted from the get-go will stick around to complete the process, providing four standalone areas can help potential members assess which one they would like to prioritize while limiting exposure to other areas they may feel unprepared for the time being. Packaging IPEF as an executive agreement instead of a treaty that would require congressional intervention may also hasten the process but may be seen as less binding.
Cynicism towards tedious long-drawn multilateral negotiations and worries about drawing legislative and public flak at home may be driving the U.S. to settle for IPEF instead of a regular FTA. But a step less may raise questions about the commitment of contracting parties and the strength of enforcement mechanisms. This said, while details are sparse and much work remains ahead, the message is not lost. The Indo-Pacific is now the world's center of gravity, and the U.S. will not relinquish its seat in writing the rules of the road for trade, commerce, and innovation in this vital geography.
Playing the economic game right
IPEF signaled that the U.S. is willing and able to compete with China in a field that the latter came to dominate due to US retreat from multilateral FTAs and the short shelf-life of its economic initiatives towards the region. The U.S. remains the biggest investor in Southeast Asia, and Washington can build on this anchor to deepen economic ties with the vibrant region on China's periphery. Several factors are bound to increase the likelihood of the region receiving more FDI, including from the U.S. This includes the growing attraction of ASEAN's market, uncertainties brought about by Beijing's zero Covid-19 policy and a crackdown on Big Tech, and the carrots and sticks that the U.S. government may put to bear to encourage firms to diversify away from its rival. As Chinese companies get delisted in U.S. capital markets in the context of intensifying rivalry spilling into the economic and technology spheres, more spaces are being opened up for ASEAN firms. For instance, Vietnamese electric vehicle maker VinFast is raring to have its initial public offering on the New York Stock Exchange soon. If successful, VinFast can blaze the trail for other Southeast Asian unicorns.
But for IPEF to stay in the game, it must demonstrate survivability. Insulating trade deals from the vicissitudes of US domestic politics will signal to regional partners that successive US administrations - regardless of who sits in the White House or the majority party in Congress - will honor prior international commitments. The 2017 TPP withdrawal undermined confidence in the US on trade issues. With midterm elections in November and presidential elections in 2024, regional leaders are hoping IPEF will be spared from major disruptions. Moreover, while setting a deadline for negotiations is good, Washington has to make allowances for possible delays should talks bog down. A substantial IPEF beneficial to all parties cannot be substituted for a watered-down version rushed to score domestic points as the US hosts the Asia-Pacific Economic Cooperation (APEC) meeting next year or ahead of the 2024 elections.
The U.S. also has to allay regional concerns that supply chain resilience is not a facade for upsetting highly-integrated supply chains or accelerating global technological decoupling. Such fears prompted leaders like former Malaysian Prime Minister Mahathir Mohamad to encourage the U.S. to invite China into the IPEF if the grouping is not set in isolating Beijing. For many countries in the region, China is a top source of raw materials and intermediate inputs, an assembly line, an end market, and a key investor. Hence, removing China from the equation will create risks and losses on multiple fronts in the immediate and foreseeable term.
Finally, the U.S. should distill lessons from its past economic overtures to the region and find synergies with relevant initiatives by partners. For instance, Japan's long experience in infrastructure and aid in the region, the India-led Coalition for Disaster Resilient Infrastructure and International Solar Alliance, and the infrastructure facet of the Quad have plenty of overlaps with pertinent IPEF pillars. So too Quad's other dimensions, notably on climate, cybersecurity, and critical and emerging technologies. IPEF’s infrastructure pillar can also converge with Partnership for Global Infrastructure and Investment (PGII) announced in the recent G7 summit in Germany. Such diversification away from a long fixation with security can respond to China's evolving Belt and Road, which now features health, green and digital strands.
Regional countries are always on the lookout for gainful opportunities and would prefer great powers to compete in economics rather than security flashpoints any day. While many of them have disputes with China and appreciate U.S. support for their defense capacity building, they fear losing agency as great power contest intensifies with their home region as a battleground. As such, they eschew taking sides and greet win-win initiatives from all partners. IPEF is, therefore, a welcome addition to the region’s overlapping tapestry of international economic engagements.