Free trade agreements
IPEF’s early fanfare masks risks in the US approach
Published 26 October 2022
The progress of Biden's Indo-Pacific Economic Framework for Prosperity (IPEF) will encounter challenges. This is already evident from India – one of the largest economies in the group and a strategic partner of the US – opting out of negotiations on trade policy. While the IPEF’s focus on a flexible approach to regional rulemaking is distinctly novel, it remains to be seen how this approach might work.
The US motivation for making rules in the Indo-Pacific has been increasingly driven by the geopolitical demand to deny China the opportunity of making regional rules. The US dissociated itself from such rulemaking after President Trump pulled out of the Trans-Pacific Partnership in 2017.
The Indo-Pacific Economic Framework for Prosperity (IPEF) is an opportunity for Americans to make a decisive comeback.
Launched by President Biden in May, the new framework has had two ministerial meetings of its members. A virtual ministerial in-person ministerial in September. The second meeting defined the negotiating objectives for the framework.
Comprising 14 economies from the Indo-Pacific region – Australia, Brunei, Fiji, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, Vietnam, and the US – the IPEF accounts for more than two-fifths of the global economic output. The bloc's formidable economic clout and diversity is evident from it having four of the world’s 10 largest economies.
But the IPEF is not going to grow as a traditional free trade agreement. This was made clear at a press briefing by the Biden administration during the launch of the framework. Washington is framing its new approach as 'a 21st century economic arrangement designed to tackle 21st century economic challenges'.
Demands for a new approach
The Biden Administration enjoys bipartisan domestic support in aspiring to step up the US role as a rule-setter for the Indo-Pacific, aimed at negating China’s influence in the region. Such a role is sought and backed by US strategic and security allies such as Australia and Japan. Advancing economic diplomacy by engaging with allies and partners in regional rulemaking is a core objective of the US in the IPEF.
Developments following Covid-19 also demanded a new approach in shaping the IPEF. The extensive disruptions to supply chains during the pandemic placed new emphasis on their safeguarding resilience. The disruptions highlighted especially critical supply breakages in sectors including semiconductors, pharmaceuticals, food, and energy – deemed high national priorities for many countries. Global rule-making bodies such as the Group of Seven, Group of 20, Organisation for Economic Co-operation and Development, and the World Trade Organization focused heavily on clean energy, sustainable development, and transparent financial systems in the wake of the outbreak. The IPEF’s focus on a clean economy and fair economy issues comport with these developments.
The negotiating objectives of the IPEF reflect a focus on these issues and an effort to reconfigure the conventional US approach to multilateral trade issues, such as labor, environment, trade facilitation, and competition policy. The IPEF seeks to advance ‘resilient, broad-based economic connectivity and integration in the Indo-Pacific region.’
Washington has signaled that it hopes the IPEF will stay ahead of the multilateral rule-making process at the WTO and establish rules for the Indo-Pacific region that can shape benchmarks for other economies. The IPEF will, it hopes, negotiate new rules and standards across four core areas, described as ‘pillars’: trade, supply chains, clean economy, and fair economy. The September Ministerial outlined the negotiating issues for all the pillars.
US economic and strategic priorities
The issues being negotiated at the IPEF reflect the core interests of the US.
The Biden administration wants to be seen as protecting the interests of American workers through its trade policy – increasingly a ballot issue – and considers labor standards as both moral imperative and economic requirement. The US consequently has placed high priority on labor and environment regulations in American trade policy. Working with partners in the Indo-Pacific to institutionalize regional labor standards is aimed at giving advantage to American workers and business competitiveness, evident from the US Trade Policy Agenda 2022. Similarly, establishing environment standards and digital trade rules, particularly for cross-border data flows, competition policy, and tax practices in the Indo-Pacific region, are major US interests for better prospects for American companies.
Challenges in moving forward
The IPEF’s progress will encounter challenges. This is already evident from India – one of the largest economies in the group and a strategic partner of the US – opting out of negotiations on trade policy.
The Biden administration envisages negotiations under that trade pillar anchoring its new approach, which would cover areas such as digital economy, data localization, and labor and environmental standards.
India’s pullout on the IPEF trade front is an early setback. Indian Commerce Minister Piyush Goyal explained the decision by alluding to an absence of a ‘broader consensus’ among IPEF members on key aspects of global policy such as labor and digital trade. India’s concerns relate to worries over negotiating outcomes that might affect comparative advantages for its businesses.
Crafting new standards in such areas is likely to cause anxieties among some IPEF members. India symbolizes these anxieties. The concerns arise from lack of adequate domestic regulations in these areas and the hesitation in accepting ‘top down’ standards that might be unsuitable for local industries, businesses, and workers.
There are already civil society groups from several IPEF members – including Australia, Indonesia, and even the US – expressing apprehension over the US’ proposed labor rules favoring ‘Big Tech’. These rules are likely to establish higher minimum wages across-the-board along with labor management conditions currently being followed by US tech firms and businesses. There are concerns that new environmental standards may further reduce market access for major exports of some IPEF members. Similar worries abound on cross-border data flows and privacy standards.
Strong disagreement among members over standards is common in trade negotiations. The US would be especially familiar with the fractious positions in labor and environmental talks during the TPP negotiations. Some members, depending on their economic circumstances and evolution of specific regulations, would be uncomfortable in agreeing to standards that mirror those of developed economies.
The IPEF is aware of the problems of reaching consensus on rulemaking in difficult issues like labor, the environment, and digital trade. This is probably why it dropped the approach of traditional free trade agreements. The latter, particularly those crafted by the US like the US-Mexico-Canada Agreement, make adherence to standards binding and consequence of non-compliance serious. By offering a more flexible and non-binding approach, the IPEF has tried to avoid the disincentives.
The IPEF’s focus on an innovative and flexible approach to regional rulemaking on 21st century challenges is distinctly novel. It might, however, need greater clarity on how its new approach might work.
The question of effectively producing multilateral market access is bound to come up in the negotiations. Malaysia has already proposed inclusion of market access in the last Ministerial. Whether all members would agree to US-proposed standards without offers of preferential access to the US and other large IPEF member markets are yet unclear. The US will need to take a judgment call on how much flexibility is sufficient for ensuring members can reach agreement on standards. Indeed, flexibility might mean that some members can agree to some standards but disengage from others. Yet such disengagement would likely obstruct broad-based adoption of standards on the issues that the IPEF hopes to advance.
The success of the IPEF will be pivotal for continued US leadership in the Indo-Pacific. Washington hopes the framework too will help to isolate China in the regional economic space.
As of now, progress on the framework and articulation of negotiating objectives indicates some level of ‘acceptance’ of these goals by members.
But the IPEF still has a long way to go. The challenge for the US leadership is to ensure the geo-strategic imperative of the IPEF is strong enough to make members stay committed to enacting under the IPEF aegis new rules in complex and geopolitically sensitive issues like digital trade, environment, labor and supply chains.
The author is Senior Research Fellow and Research Lead (Trade and Economics) at the Institute of South Asian Studies in the National University of Singapore. He can be reached at firstname.lastname@example.org. Views are personal.
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