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Foreign Policy

Excluding China from IPEF Is Impractical

Feb 25, 2022
  • He Weiwen

    Senior Fellow, Chongyang Institute for Financial Studies

U.S. Commerce Secretary Gina Raimondo recently said the United States is launching discussions with Indo-Pacific countries regarding its Indo-Pacific Economic Framework, or IPEF. She made it clear that U.S. will not be joining the CPTPP or other regional free trade arrangements.

Raimondo said there are two essential elements in the IPEF concept. 

Essential Element 1:

The IPEF deals with the economic relationships of nations but is not a regional trade agreement. How will it work? Postwar experience has proved repeatedly that the basic mechanisms for cross-border economic cooperation are free trade agreements and regional economic communities. The world is already intensively covered by 353 RTAs. If it stays away from relevant RTAs in the Indo-Pacific area, the U.S. will be sidelined there, instead of seeking dominance.

The IPEF contemplates activity in various areas: trade facilitation, digital economy, technology standards, supply chains, export controls, labor standards, decarbonization, clean energy, taxation and counter-corruption. With that coverage, it would overlap with existing multilateral and regional governance frameworks, which have all those topics under regulation:

• The WTO has a trade facilitation agreement in force and is engaged in negotiations for digital trade standards.

• The RCEP and CPTPP have clauses on supply chains, labor standards and export controls.

• The UN Conference on Climate Change leads the global effort in decarbonization and clean energy.

• The G20 already has resolutions on low global corporate taxes and fighting corruption.

One can hardly see the need for additional coverage by the IPEF. Most Indo-Pacific countries are already UN and WTO members, and many of them are also RCEP and CPTPP signatories. They do not need to repeat, much less violate, their rights and obligations in those mechanisms. There is little room left for the IPEF.

The IPEF makes ASEAN a central element. However, the U.S. is not a member of the ASEAN-led RCEP.

The RCEP took effect in early 2022 and covers 15 East Asian and Pacific countries, accounting for 30 percent of world’s GDP and exports. The CPTPP covers 11 countries and accounts for 13.5 percent of global GDP — and will account for 30 percent if China joins. The U.S., again, is not a member. While 55 percent of the external trade of East Asia and Pacific economies happens within the region, and another 20 percent with Europe and Central Asia, only 12 percent is conducted with North America. Not being a member of either the RCEP or CPTPP, the U.S. is not a major economic and trade player in this part of the globe. And so the role of the IPEF remains unclear. 

Essential Element 2:

The IPEF is a tool for excluding and containing China. It sounds ridiculous that a regional economic arrangement for cooperation would exclude the largest economy and the nexus of the region’s supply chain. One can hardly imagine, say, European economic cooperation excluding Germany. What would be the point?

And yet the IPEF contemplates ASEAN as a central player, while ASEAN’s largest trading partner is China, not the U.S.. Two-way China-ASEAN trade volume last year hit $878.21 billion, while U.S.-ASEAN trade volume was just $ 383.73 billion — 43.7 percent of the former. Total U.S.-RCEP 14 (excluding China) trade volume was $802.14 billion, or 42.9 percent of U.S. trade with China, which stood at $1.87 trillion. In other words, China maintains a more than 2-to-1 superiority over the U.S. in trade with both ASEAN and RCEP.

China is also the largest trading partner of Japan, South Korea, Australia and New Zealand. In 2021, trade volume with China was 77 percent greater than with the U.S. in the case of Japan, 125 percent greater in the case of South Korea and 184.8 percent greater in the case of New Zealand.

The most striking case is Australia. As a firm ally of the U.S. both in the AUKUS and QUAD, Australia had six times the trade volume with China than it had with the U.S. in 2021.  Its two-way trade with China was $231.2 billion, while its trade with the U.S. was $ 38.9 billion. Australian exports to China, at $164.8 billion, was 13.2 times that of its exports to the U.S., a relatively meager $12.47 billion. How can all these countries benefit by excluding China?

Inclusion of China is necessary to achieve supply chain resilience in the Indo-Pacific. In designing the supply chain of chips, for example, can the IPEF exclude China? Both Japan and South Korea are bound by a WTO and RCEP non-discrimination clause that prohibits unilateral export bans by one member against another. Moreover, if Japan and South Korea were really to do that, their semiconductor industries would face an existential crisis, as China is the world largest market. Vietnam might be regarded as a good substitute for China in supplying the U.S. market. After all, the U.S. more than doubled its imports from Vietnam over the past five years, from $42.1 billion in 2016 to $101.9 billion in 2021, a net increase of $59.82 billion. During the same period, however, Vietnam’s imports from China saw a net increase of $76.83 billion, from $61.1 billion to $ 137.93 billion. Apparently, China-Vietnam-U.S. is a perfect supply chain.

Excluding China? Apparently impossible. In fact, there is already a comprehensive supply chain in the RCEP region, with China as a key nexus, while the U.S. is not a part. Across the whole Asia-Pacific region, the U.S. itself depends heavily on supply from China. In 2021, total U.S. imports of advanced technology products (ATP) hit $553.78 billion. The Asia-Pacific supplied more than half the total, accounting for $286.12 billion, or 51.7 percent. Among Asia-Pacific nations, China supplied more than half, at $151.02 billion, or 52.8 percent.

The IPEF is an economic arrangement in name, but its rhetoric and objectives are not economic. It serves Washington’s overall Indo-Pacific Strategy which is a geopolitical and military paradigm, based on U.S. values and ideology, for containing China and maintaining U.S. hegemony in the region, which runs in exactly the opposite direction of regional economic integration.

IPEF negotiations will last for years. During the process, the U.S. will find that it can do little to change the existing RTA landscape in the region, and still less to cut China off. On the contrary, it will find itself increasingly marginalized economically. The IPEF, to be meaningful, should target overall cooperation with the RCEP and China, as well as joining the CPTPP and other bilateral FTAs. All those efforts should be synergized with a mega free trade zone — Free Trade Area in Asia and Pacific (FTAAP) by 2040. Meanwhile, similar RTAs should be negotiated and concluded with India and other South Asian economies.

The mega free trade network will undoubtedly provide a strong engine for sustainable economic growth and prosperity for the whole mega region and an enormous, ever-expanding market for America as well.

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