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Indo-Pacific Economic Framework for Prosperity

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Indo-Pacific

Economic Framework

for Prosperity

There is no blinking at the fact that the Indo-Pacific region, owing to a host of geopolitical, geo-economic and geostrategic reasons, is of pivotal importance in international finance, trade and even politics. The spectacular rise of China and increasingly aggressive Chinese foreign policy under President Xi Jinping, particularly, has increased the strategic importance of this region. Successive US administrations have accorded topmost priority to Indo-Pacific and former President Barack H. Obama formalized this shift in US foreign policy by launching the ‘Pivot to Asia’ strategy to free up resources for containing the overriding Chinese ambitions. Like his predecessors, the incumbent President Joe Biden has continued the unannounced “containment” policy and has taken several initiatives – both bilateral and multilateral – to further this agenda. From the revitalization of the Quadrilateral Security Dialogue (QUAD) to signing of AUKUS, from strengthening bilateral engagements in this region to aggressive naval manoeuvring to assert freedom of navigation, Biden administration has demonstrated that Washington is not willing to cede space to China. Though the United States has long maintained its active presence in this region since the Spanish-American War of 1898, the economic engagement has nearly doubled in the last decade. The US’s direct investments in this region reached $969 billion in 2020, and it is the leading exporter of services to countries here. In return, the US-Indo Pacific trade supports three million American jobs and it is the source of $900 billion investment on American shores.
The creation of the Indo-Pacific Economic Framework for Prosperity or IPEF, on May 23, 2022, is the latest addition to the litany of US initiatives in this part of the world. In realization of the growing importance of the digital economy, anticipated threats to the critical supply chain and, most importantly, expanding Chinese economic and military footprints, the Biden administration has come up with an “unconventional” economic framework that touches on many issues that conventional trade agreements don’t deal with. IPEF includes the United States and 12 partners: Australia, Brunei, India, Indonesia, Japan, Malaysia, New Zealand, Philippines, Republic of Korea (South Korea), Singapore, Thailand and Vietnam – Fiji also announced to join the IPEF a few days later, raising the number of member states to 14. This multilateral framework is open to all countries but the criteria for membership are yet to be decided. On the face of it, IPEF claims to deal with supply chain resilience; anti-corruption and anti-money laundering measures; inclusiveness, clean energy and de-carbonization; and infrastructure development and regional economic connectivity, but many analysts are viewing it as a move to counter growing Chinese influence in the region. IPEF would have four pillars or modules: connected economy, green economy, fair economy, and resilient economy.
The connected economy is the first pillar. The IPEF countries have committed to undertake a host of steps to strengthen intra-IPEF trade. The high standard rules of the road (trade rules) would be implemented to further improve the regional economic connectivity. In the realization that the future success of governments would depend upon how well state institutions harness the potential of technology, this module is set to deal with measures to strengthen the digital economy and bring about transparency in the marketplace. In this regard, IPEF would ensure consensus-based implementation of rules on cross-border data flows and data localization. The rules governing e-commerce, or another aspect of the digital economy, are crucially, important because the digital economy does not cover just online sales and purchases; the smooth data flow also enables the operations of global chains and services from smart manufacturing to the development of applications. Collective measures to safeguard online privacy and curb discriminatory and unethical use of Artificial Intelligence would also be promoted. The strong labour and environmental laws would also be negotiated and incorporated into the final treaty. The underlying objectives of these measures are to counter the negative repercussions of globalization and overcome downstream costs (advertisement, transportation, etc.), strengthen transnational cybersecurity infrastructure, upscale the ability of the small- and medium-sized enterprises to fully benefit from the region’s rapidly growing e-commerce sector.
The widespread disruption in the global supply chain due to the Covid-19 outbreak and resultant unprecedented inflation across the world has exposed the vulnerable and fragile nature of the global supply chain. In this background, Biden administration has come up with the idea of incorporating supply chain resilience measures in the IPEF treaty so as to better anticipate and prevent future disruptions. In a first-of-its-kind commitment, the United States has proposed an early-warning system, mapping critical mineral supply chains, improving traceability of key sectors, and coordinating on diversification efforts. The measures, which are expected to be formally entered in the final version of the multilateral agreement, indicate the eagerness of the US administration to secure key raw and processed materials, semiconductors, and critical minerals (Rare-earth minerals required for semiconductors and other IT products. For instance, lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, etc.). While emphasizing the strategic importance of economic resilience, the US Commerce Secretary, Gina Raimondo commented during the launch of IPEC: “if we had more transparency, more communication, more data-sharing, and early alert system, that (disruption due to Covid-19) may not have happened.
Decarbonization and infrastructure and clean energy is the third pillar of the IPEF. It is again a first-of-its-kind initiative that aims at meeting the targets set under Paris Agreement. Concrete and high-ambition targets to tackle the climate crisis including the adaptation of renewable energy, carbon removal or sequestration, energy efficiency standards, and measures to curb methane emissions have been added under this module. Climate finance including concessional finance would be provided to member countries of IPEF in order to have competitiveness, enhanced connectivity, and sustainable and financially viable pursuit of the green economy. The IPEF is eyeing durable and sustainable infrastructure development to give a better alternative to BRI.
The fair economy is the fourth and the last pillar of IPEF. The member countries would make a pledge to bring about fair competition. Effective tax, anti-money laundering, and the anti-bribery regime would be part of this module. Provisions on the exchange of tax information and criminalization of bribery in accordance with UN standards would also be incorporated to create binding obligations for participant countries. To discourage the formulation of shell companies, stashing of wealth in offshore companies, and shadowy business transactions, IPEF is set to adopt beneficial ownership recommendations to crack down on corruption more effectively.
One important point worth mentioning here is that IPEF is not a traditional trade pact. Biden administration is not in a mood to infuriate anti-globalist elements in the United States by offering lowered or zero-tariff treatment to imports from IPEF countries, neither would it commit removal of non-tariff barriers, instead, it is aiming at addressing those grievances long raised by Republicans and other segments. President Biden would not need any congressional nod for final ratification, as IPEF is exclusively an administrative initiative. The negotiations to finalize the provisions under each pillar would be painstaking and protracted. The agreement is expected to be finalized within 18 months, and Biden administration would go an extra mile to complete the negotiations before Asia-Pacific Economic Cooperation that would be hosted by the USA in November 2023. Participants would be free to choose, or not choose, any pillar, but after ratification, provisions under ratified pillar would be binding in nature.
Many international observers are terming IPEF as Pivot to Asia 2.0. In 2011, the then-US President Barack Obama decided to launch Pivot to Asia policy in order to fully tap the economic potential of the Indo-Pacific region. The pivot of Asia had both geoeconomic and geopolitical components. though geopolitical component remained well-implemented as the United States increased its military footprints with the signing of military accords such as QUAD and AUKUS. The geoeconomic pillar of Pivot to Asia remained a neglected part. Initially, Obama’s much-touted Transpacific Partnership (TPP) Agreement could not see the light until 2015 and that was also torpedoed by Donald Trump immediately after he took power. The anti-globalization Trump refused to enter into any agreement that could entail giving preferential tariff treatment. China, on the other hand, remained fully engaged with Indo-Pacific countries and it succeeded in convincing the countries to sign Regional Comprehensive Economic Partnership (RCEP) in 2021. RCEP, the largest free trade deal in the world, entered into force on January 1, 2022. RCEP includes not only the ASEAN countries but also close US allies such as Japan, New Zealand, Australia and South Korea. The willingness of US allies to enter into a trade deal with China speaks volumes about the urgency of economic engagement among regional countries. But the US remained aloof. Japan attempted to revive TPP and called it Comprehensive and Progressive Transpacific Partnership and ratified it in 2018 but Washington refused to join it as well. This reluctance created a gap in this region and now President Biden has decided to fill that gap because the US can ill-afford sitting outside of two trade blocs (RCEP and CPTTP). With the launch of this ambitious multilateral initiative, Washington has indicated that it would play an active role in regional trade and finance along with spearheading anti-China political and security alliances.
In the words of a US official, this most significant international engagement that the USA has ever had in Indo-Pacific is set to create major implications. The response of China is, therefore, important to fully grasp the future trajectory of this overly-ambitious initiative. China’s Commerce Ministry lambasted the launch of IPEF and maintained that IPEF had been designed to further the geopolitical agenda of Washington. The Ministry further added that participant countries were concerned that IPEF would decouple their economies from that of China and the US was attempting to restructure the supply chain. Despite issuing strict statements, analysts believe that China would not take any IPEF-specific measures. Being a pro-globalization country, China would capitalize on already agreed-upon trade pacts with ready-to-do tariffs and market access. Regional Comprehensive Economic Partnership is one such example. Days after President Biden launched IPEF with much fanfare, China silently organized an RCEP meeting on its southern island of Hainan. China would continue to promote the adoption of RCEP as the better alternative to IPEF as RCEP provides concrete and tangible advantages like access to Chinese markets and Chinese FDI in other countries. China is also expected to join other regional trade pacts such as CPTTP and Digital Economy Partnership Agreement (DEPA). In the coming months and years, China would deploy its economic resources to dominate the region and would attempt to deprive the US of any space to restore its economic leadership in this region.
Despite representing 40% of the world’s GDP, IPEF is structurally handicapped to achieve its ambitions. First and foremost, it is a loosely defined framework and does not delineate rules and regulations that are typically part of any trade deal. IPEF does not promise any future negotiations to cover tariff and market access issues; it is at best a statement of purpose and a vision of Biden administration as to how it wants to conduct trade relations with this region. The lofty slogans of changing “rules of the road” require a resolution mechanism to settle any trade dispute, but IPEF does not provide any such mechanism. In the absence of such arrangements, IPEF cannot see the light of the day as participant countries will not have any incentive to decouple their economies from China.
The successive US administrations have been high on rhetoric and low on substance when it comes to materializing multilateral agreements. Earlier in 2019, Donald Trump launched Blue Dot Network to ensure robust standards for high-quality infrastructure projects. In 2021, his successor, Biden launched the Build Back Better World (B3W) initiative to provide a better alternative to Belt and Road Initiative. Both projects have so far failed to achieve anything substantial. Unless Washington offers strong incentives for the participants, regional economies that are strongly linked with the Chinese economy can ill-afford decoupling; particularly, when most of the IPEF countries are already under the binding obligations of RCEP and other free trade agreements.
The exclusion of China and its close allies Myanmar, Cambodia and Laos has made it vividly clear that geopolitical objectives rather than geo-economic considerations would be the major driver of renewed US push to reassert its leadership in Indo-Pacific. That is another drawback of IPEF as the Pivot to Asia has remained the victim of geopolitical emergencies in the Middle East or Afghanistan. Damocles’ sword is hanging over international peace and security due to the ongoing Russia-Ukraine war and other hotspots; it would be very difficult for any US President to free up resources and undertake major infrastructure projects in this region. Either Biden would de-politicize IPEF, or be ready to see the unraveling of his initiative.
Economic interdependence is a bulwark against the outbreak of war. Countries that are interlinked with each other with complex exchanges generally avoid resorting to war. Therefore, it is very important for the major economies to remain coupled because it increases the cost of war. Indo-Pacific Economic Framework for Prosperity and like projects must be inclusive and participatory, and should not attach any strings; otherwise, it risks further polarization of global politics. Humanity is facing existential threats of the climate crisis, nuclear proliferation, and technological disruption, and these threats can only be solved by cooperation among great powers.

The writer is a graduate of the University of Agriculture, Faisalabad. He writes on national and
international affairs.

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