Biden’s Indo-Pacific Economic Framework Misses the Mark

Biden’s Indo-Pacific Economic Framework Misses the Mark
Japanese Prime Minister Fumio Kishida, U.S. President Joe Biden and Indian Prime Minister Narendra Modi attend the launch event for the Indo-Pacific Economic Framework, in Tokyo, May 23, 2022 (AP photo by Evan Vucci).
Just before the White House launched the Indo-Pacific Economic Framework, or IPEF, in Tokyo last month, Taro Kono, the former Japanese foreign and defense minister, offered a blunt recommendation: Deriding the IPEF as the “Indo-Pacific Economic whatever,” Kono urged the U.S. to “forget” it and rejoin the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP. During his press conference with U.S. President Joe Biden, Prime Minister Fumio Kishida welcomed the IPEF but echoed Kono’s advice, stressing the strategic significance of a U.S. return to the CPTPP, which is essentially the Trans-Pacific Partnership trade pact that then-President Barack Obama effectively launched in 2009 and from which former President Donald Trump withdrew in 2017 as one of his first official acts in office. Most in the Asia-Pacific region would agree. As an incipient agreement, it is not fair to compare the IPEF with a completed trade pact like the CPTPP. But from the perspective of the U.S., both share the same underlying goals: to counter China by restoring U.S. economic leadership to the world’s fastest-growing region and future center of gravity, thereby guaranteeing that Washington will write the rules of the 21st century international economic order. Over a dozen countries representing 40 percent of global production have lined up for exploratory talks, though whether they will continue beyond “launching the process to establish” the framework and participate in negotiations on an actual agreement remains to be seen. Attracting their interest required lowering the price of admission from a commitment to talks to a commitment to preliminary talks on the initiative’s potential scope, according to credible reports denied by the administration. The IPEF’s appeal is grounded less in what it may offer and more in the region’s hunger for U.S. economic engagement as a credible counterweight to China. Though still a work-in-progress, however, the Biden administration’s characterization of how the framework would achieve its goals illustrates at least three ways in which it misses the mark. First, competing with the Asia-Pacific’s two multilateral trade agreements—the 11-member CPTPP and the 15-member Regional Comprehensive Economic Partnership, or RCEP—will be hard. Both contain significant market access benefits essential for businesses to capitalize on the region’s fast-growing middle class. The CPTPP is enforceable, with binding commitments ratified by law in member states. It eliminates almost 98 percent of tariffs, making it easier to sell products across borders, and it has generous rules of origin, incentivizing businesses to integrate production and supply chains within the CPTPP zone. That means more jobs, lower consumer prices and, potentially, supply chain resiliency. The pact is comprehensive: Members sign onto all 30 chapters of rules governing critical areas like digital trade, investment, supply chains, intellectual property rights and dispute resolution. And its binding rules help ensure sufficient predictability for businesses to make long-term investments and expand and diversify operations. Another measure of the CPTPP’s value is that others want in, including China, Taiwan and the U.K. By contrast, the RCEP is a weaker agreement, containing many exceptions and poor enforcement mechanisms, but it establishes common rules of origin and harmonizes customs processes for preferential treatment of RCEP-member products. Tariff cuts are also included. For example, as RCEP members, China and Japan—the world’s second- and third-largest economies, respectively—are slated to reciprocally cut tariffs down to zero on about 90 percent of one another’s goods. In short, both the CPTPP and the RCEP agreements build interdependence among member states and create a solid platform for establishing closer political relationships and for collective bargaining on global rules and standards.

The most important shortcoming of the IPEF is that it exposes the strategic dissonance on free trade between the U.S. and its Asia-Pacific allies and partners.

The comparison to the IPEF is stark. At this stage the framework offers no market access. Nor does it have any obvious enforcement mechanism, although U.S. Trade Representative Katherine Tai said recently that it will, but offered no details. It is likely to be implemented by executive agreement, not congressional ratification. And it is à la carte, so members need not adopt the entire agreement. That is not to say it has no merit. The four “pillars” or categories of issues the IPEF seeks to tackle—trade; supply chains; clean energy, infrastructure and decarbonization; and tax and anti-corruption—are relevant in the Asia-Pacific and sure to inspire engagement. Similarly, the proposed early warning system on supply chain disruption would be welcome, uncontroversial and impactful. As Commerce Secretary Gina Raimondo has explained, it would help mitigate against scenarios like a COVID-19 outbreak in Malaysia, for instance, triggering job losses in Michigan. The infrastructure pillar also shows some potential, but would need to be linked to development finance from the U.S. and major Asia-Pacific donors, like Japan, to be effective. However, without cutting tariffs, the IPEF lacks incentives to encourage the desired shifts and resiliency in supply chains. Without U.S. market access, emerging Asia-Pacific economies are unlikely to pay the heavy political price to adapt their laws and regulations to high U.S. standards. Biden officials argue that U.S. engagement and funding for capacity-building, combined with more public and private sector capital directed into the region, will serve as substitutes for trade liberalization. But they fail to explain how. Such basic information should be available now, before preliminary talks begin. The level of enforcement, for instance, matters, because it defines the difference between a list of best practices and an agreement that offers real commercial value. Whether the IPEF is implemented by congressional vote or not matters, because potential signatories will not fight for it in the face of domestic opposition based on an executive order that can be easily reversed by the next occupant of the White House. For the IPEF to be a serious effort, how the U.S. will incentivize and lock in the institutional and rules-based reforms it seeks cannot be left to speculation. A second reason the IPEF is unlikely to meet its goals is that Biden officials overestimate their ability to mediate clashing domestic interests. U.S.-based labor and environmental groups, which will be central to shaping the IPEF, question the inclusion of some Southeast Asian nations, citing labor and human rights abuses documented in U.S. government reports. But including these countries is crucial, as competing with China requires integrating a broad swathe of the region into IPEF, not just the likeminded states. Southeast Asia is also a major manufacturing hub, key to the supply chain resiliency the IPEF seeks to achieve. Reconciling the participation question may involve securing enforceable worker and environmental provisions, but it is unclear what incentives the U.S. could offer in exchange and if they would suffice to convince potential IPEF signatory states. Having nixed rejoining CPTPP for domestic political reasons, Biden officials could make the IPEF more appealing by focusing on initiatives to reduce administrative barriers to trade that raise business costs, creating a “trusted country” category in exchange for adopting high U.S. standards and offering access to U.S. technology. Furthermore, given technology’s centrality in the global economy, a digital economy agreement is crucial. Rather than reinvent the wheel, however, the U.S. could simply join the region’s Digital Economy Partnership Agreement. Though the agreement is nonbinding, joining it could still generate opposition from labor, environmental groups and some Senate Democrats who might see it as a backdoor into the CPTPP, because it would entail endorsing similar rules and standards and set domestic precedents, which is their key concern. Nevertheless, the Biden administration’s willingness to take on a heavy political lift would show a serious U.S. economic commitment to the region. The third and most important shortcoming of the IPEF is that it exposes the strategic dissonance on free trade between the U.S. and its Asia-Pacific allies and partners. Trade agreements have historically favored the interests of capital over labor and the environment. The IPEF flips that script, instead seeking to rewrite global trade rules to prioritize higher wages and environmental protection over economic efficiency and cost-cutting. The problem is that the Asia-Pacific likes the old script, having experienced globalization and the free trade pacts driving it as a positive force that lifted millions out of poverty and transformed the region’s cities into modern metropolises teeming with new wealth and opportunity. As a result of globalization, the prospect of better days ahead became possible. Globalization also enriched the U.S in the aggregate, and polls show broad public support for trade deals. But there is no denying the fact that blue-collar workers suffered, as manufacturing migrated overseas, factory closures destroyed entire communities and income inequality grew. The result is that trade policy is increasingly hostage to domestic political calculations, as reflected in the TPP’s failure in Congress even before Trump formally withdrew from it. The anti-trade electoral shock of 2016, from Brexit to Trump’s election on a protectionist trade platform, coupled with recent supply chain vulnerability has only exacerbated this trend. Missing from the largely superficial political debate are essential facts regarding how trade increases overall well-being and how technology, as much as liberalized trade, has contributed to manufacturing job losses. Low-skilled workers bear the brunt of both globalization and automation; the solution is more investment in human capital and infrastructure, not wholesale rejection of free trade. Biden officials are betting that a “nontraditional” trade pact will be an easier sell domestically, but the negative reaction of many U.S.-based and overseas civil society groups to the IPEF—groups the administration had hoped to satisfy—should give them pause. While advanced Asia-Pacific economies will likely keep the IPEF alive to hold China in check, they will not wait forever. One thing is certain: The U.S. must think seriously about where it is headed on trade, as a strategic disconnect with the most vital region of the world is not in the country’s interest.

Ferial Ara Saeed is a nonresident senior fellow with the New American Engagement Initiative in the Atlantic Council’s Scowcroft Center for Strategy and Security. She is CEO of Telegraph Strategies LLC, a risk management firm providing strategic guidance on political and economic trends, and a former senior American diplomat. She can be found on Twitter at @TelStratLLC.

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