On May 23, during a visit to Japan, U.S. President Joe Biden launched the Indo-Pacific Economic Framework, or IPEF. According to Japanese media, the framework “aims to contain China’s growing economic influence in the region through economic cooperation among democratic countries.”
The IPEF currently has 14 members but falls short on two fronts for the United States: First, the 14 members do not necessarily “share the same values,” as evidenced by India’s abstention from votes on three recent UN resolutions against Russia, as well as Vietnam’s vote against the Human Rights Council resolution and the abstentions of Singapore, Malaysia and Thailand. Second, according to Japanese media, the United States intended to invite Taiwan to join, but dropped the plan because of pushback from ASEAN countries.
On top of these signals, the lack of a regional trade agenda is what spurred the U.S. government to create the IPEF — a new set of measures to counter China’s economic influence. It will impact the current regional economic cooperation structure. As Trade Representative Catherine Tai put it in a thinly veiled comment, the IPEF is an arrangement independent of China.
The purpose of the IPEF is clearly expressed in America’s Indo-Pacific Strategy, which was released this year and states that the U.S. can only advance its interests by anchoring itself firmly in the Indo-Pacific region and strengthening regional cooperation with its closest allies and partners. Moreover, the prosperity of everyday Americans is linked to the Indo-Pacific, and so the U.S. put forward an innovative new framework to equip the U.S. economy for this moment. In other words, the defining feature of the IPEF is America first.
The IPEF is not an FTA but a political arrangement.
There is no shortage of ready-to-launch regional trade agreements in the Asia-Pacific. In January, the Regional Comprehensive Economic Partnership, or RCEP, came into force. It integrates previously fragmented FTAs comprising ASEAN-China, ASEAN-Japan, ASEAN-Korea, and ASEAN-Australia-New Zealand into a mega FTA covering the major economies of the Asia-Pacific region. In addition, after the Trump administration withdrew from the Trans-Pacific Partnership, or TPP, the Japan-led Comprehensive and Progressive Trans-Pacific Partnership, or CPTPP, came into force, and China announced it was applying to join. Again, the IPEF is not an FTA, either in form or content.
The RCEP finally took effect earlier this year after 28 rounds of negotiations over a span of eight years. The TPP was first put forward in 2005, but because of a series of twists and turns and the withdrawal of the United States in 2017, a new version known as the CPTPP finally took effect in late 2018.
By contrast, the IPEF, was proposed by President Biden at the East Asia Summit only in late October last year. Much to those countries’ disappointment, the IPEF falls short on hoped-for substance that had been highly anticipated, such as market access and tariff reductions.
India’s accession reinforces the non-FTA nature of the IPEF, as it withdrew from the RCEP negotiations mainly because it believed a gradual tariff elimination, as envisioned by the agreement, would work against its domestic market, whereas the IPEF does not involve issues of market access, and the threshold for participation is low and optional.
Japan has a significant advantage in the current Asia-Pacific regional trading system, as it is not only leading the CPTPP but is also the biggest beneficiary of tariff reductions among the 15 RCEP countries, with about $20 billion, or 48 percent, of the expected $42 billion in new trade expected to happen in the region. Therefore, Japan joined the IPEF only to comply with the political needs of the United States. Japanese Prime Minister Fumio Kishida told President Biden that Japan had agreed to join, but from a strategic point of view, it would prefer that the U.S. return to the CPTPP.
But the Biden administration’s hands are tied, as there is strong antipathy within the U.S. to free trade agreements in the Asia-Pacific region, such as the CPTPP. While Donald Trump is gone, his dubious claim that “free trade takes away American jobs” has had a profound effect. For both political parties, providing more market access to Asian countries may appear to mean more job losses in the U.S., which is politically unacceptable.
But the lack of U.S. economic leadership in the Indo-Pacific region is also politically unacceptable. The Biden administration rushed the IPEF process because it was not a trade agreement, but rather driven by executive order, so it required only the president’s signature, without the need for congressional approval. According to the Congressional Research Service, the IPEF is more of an executive arrangement, while U.S. National Security Adviser Jake Sullivan explained that the IPEF is a 21st century economic arrangement. Given the IPEF’s focus on national security and exclusive competition, I think its fair to call it is a political arrangement by the United States for the Indo-Pacific economy in the 21st century.
IPEF founders question effectiveness of U.S. “arrangement.”
Japanese economic circles are highly skeptical of the potential effectiveness of the IPEF “economic arrangement” and have been nudging the Japanese government to distance itself from the U.S. strategy of encircling China. The argument is that Japan’s position is not fully aligned with the United States. While Japan should reduce excessive dependence on China in some areas, it should continue close relations as two economies. South Korea’s Foreign Ministry stated on May 24 that the ROK does not see that the IPEF aims to contain China and that many member countries, including itself, have inseparable economic ties with China. It added that the ROK will continue to work closely with China in the future. ASEAN’s location at the crossroads of the Pacific and Indian oceans and its tenet of “political neutrality but not silence” makes the preferred approach for the U.S., China and Japan one that advances trade transformations and adjusts production outlays. With the further regional integration brought forward by the RCEP, the ASEAN group will grow in standing and importance.
The IPEF underwhelmed ASEAN countries at its launch because it didn’t offer any benefits to them on free trade.
The key difference between the IPEF and either the RCEP or the CPTPP is that the U.S. did not facilitate market access for other member countries through reduced tariffs and non-tariff rules. The Biden administration’s base of U.S. labor unions and the Democratic Part on the political left are wary of any free trade initiatives, which prompted the administration to clearly state that it will not cut tariffs. Domestic interests come first; hence the reshoring policy under the Biden administration across sectors such as manufacturing, capital and technology, rather than welcoming goods from IPEF member countries. The same applies to ASEAN countries.
IPEF has the potential to contain China in four key areas.
The IPEF is currently a framework that covers four major areas: trade, supply chains, infrastructure/decarbonization and tax/corruption, the details of which have yet to be hammered out. But as a U.S. political arrangement for the Indo-Pacific economy in the 21st century, the IPEF emphasizes order and rule-setting with a view toward all-around containment of China.
First of all, the IPEF begins by setting trade rules, including the digital economy. At present, China is the largest trading partner of 124 countries and regions worldwide. At the end of 2021 its trade volume had topped $6 trillion, up by about 30 percent in both imports and exports. China is also the biggest trading partner for most of the 14 IPEF member countries, so the IPEF’s underlying attempt to encircle China on trade is tantamount to encircling its own members. The digital economy is reshaping the world economic order, and China is the second-largest digital economy in the world. On Nov. 1, 2021, it officially applied to join the Digital Economy Partnership Agreement (DEPA).
Second, the IPEF puts a premium on supply chain diversification of key raw materials, semiconductors and certain minerals and attempts to galvanize allies to make common rules. U.S. Commerce Secretary Gina Raimondo said the United States will offer alternatives to replace China in important areas.
Against the backdrop of the U.S. teaming up with “like-minded countries” to build technology and supply chain alliances that exclude China, the Japanese Diet passed the Economic Security Promotion Act on May 11 this year, tightening the screws on cooperation with China in high-tech and readjusting China-dependent supply chains. In the area of critical minerals, the security and resilience of the supply chain will be enhanced.
Currently, the U.S. and Japan are trying to reduce the Chinese presence along the industrial chains of ASEAN and East Asia, explicitly proposing to make ASEAN the hub, or nexus, of a high-quality industrial chain in the region. Although China and ASEAN have been trading at record highs for two consecutive years, the trade integration index (TI) between China and ASEAN is quite low in some key areas. China’s current labor costs do not compete favorably with low-income ASEAN countries, while the added-value of technological goods is lower than developed countries such as the United States and Japan. Technological innovation requires long-term accumulation, as breakthroughs cannot be achieved overnight.
Third, the IPEF follows the cut-and-dried approach of excluding China from the infrastructure arena through alleged high-standard rules. The Biden administration tried to use “high standards” to ease domestic opposition and claim enhancement of regional economic competitiveness and influence. Japan’s former prime minister, Shinzo Abe, proposed “high-quality infrastructure development” as a means of counterbalancing China immediately after China put forward the Belt and Road Initiative in 2013. To Japan’s dismay, China quickly incorporated “high quality” into the initiative.
The make-or-break flaw in both the U.S. Indo-Pacific Strategy and the Indo-Pacific Economic Framework is that the core concept is stated as a shared vision with the nations and peoples of the region — an Indo-Pacific region that is free and open, as touted by Secretary of State Antony Blinken. But the core goal is excluding China, the world’s second-largest economy. It has 1.4 billion people, so exclusion constitutes a huge contradiction and hence a major flaw. A strategy with major theoretical and logical flaws will not likely deliver in reality.
China has been a part of the Asia-Pacific region for 5,000 years and is deeply rooted in the region. Its commerce with Northeast and Southeast Asia has geographical and historical continuity and a strong cultural tradition. From a historical perspective, it is no coincidence that the Asia-Pacific region has become the world’s center of growth. In this vein, countries in the region should cherish where we are today, and countries outside the region should respect what we have achieved.
(The foregoing article was excerpted from Peking University’s International Strategic Studies Report)