A Novel Approach To ‘Regional Economic Engagement’?
New Delhi’s decision to opt out of the RCEP in 2019, along with its absence from the CPTPP pushed it on the side-lines. Thus, the IPEF can act as a means for New Delhi to increase its influence in the region.
While questions and concerns about the components that will embellish the framework are still under discussion, the assessment of its utility in the current scenario is divided at best. This paper will analyse the IPEF and its stated objectives and place them in the context of the growing aversion towards traditional Free Trade Agreements (FTA) in the United States to answer if this ‘new model’ of economic arrangement can give the desired dividend. Further, it will also attempt to understand India’s role in collaborating with the United States to pull the strings and establish its position as a serious economic actor in the Indo-Pacific to counter China’s covert weaponization of trade and economics.
Why is the Indo-Pacific important?
The onset of the Russo-Ukrainian war in February 2022 has re-focused the world’s attention to the dynamics at play in Europe, forcing it to deal with the intended and unintended consequences of the military aggression, with disrupted supply chains and an impending threat of food insecurity looming large in many countries. In the face of all this, the western countries, led by the US have responded collectively through NATO by imposing sanctions on Russia. While this activist diplomacy on the part of the west did cement the relations between Washington and Europe, it also raised fears about Washington losing sight of the Indo-Pacific, a region it considers crucial for its interests and for straitjacketing China. The region has enjoyed a predominant position in American foreign policy, irrespective of the party in power.
In the Indo-Pacific Strategy, which was released in February 2022, while acknowledging the China challenge, Washington expressed its desire to shape the ‘strategic environment’ in the region to tip the balance of influence in its favour. Its emphasis will be on maintaining a free and open Indo-Pacific, building connections within and beyond the region, propel prosperity, bolster security, and strengthen resilience in the face of transnational threats. It is still the number one exporter of services to the region and its Foreign Direct Investment was 969 billion USD in 2020, which has almost doubled over the last decade. Many American businesses have also expressed a desire to expand in the region as trade with the region supports 3 million American jobs.
While the US proudly claims itself to be an Indo-Pacific power, its involvement has been described as ‘ambivalent’ even during times of most engagement. Accusing it of ‘systemic neglect’, the countries in East Asia, especially Southeast Asia have been found wanting American support and assistance to counter the Chinese threat and also to improve trade with Washington.
Source: The Economist Intelligence Unit, Country forecast
Moving beyond traditional FTAs
The first reference towards establishing IPEF was made during the East Asia Summit in October 2021. Six months later, countries with different hues and shades joined hands with the US, namely- India, Brunei, Thailand, Singapore, Indonesia, New Zealand, Australia, Malaysia, Vietnam, Japan, Republic of Korea, Philippines and Fiji (the only South Pacific Island country in the grouping). The framework includes four pillars on which the partners will work together over the coming weeks and months that can be categorised as:
Even though member countries won’t be required to participate in all the four pillars, they will be expected to commit to all the sub-areas of cooperation within each pillar. The membership will also be kept open for other countries, the process for which will be decided by the partners together, and not be dictated by the US.
For the current US administration, the impetus behind the launch of this initiative was to counter the growing economic clout of China among the countries of the region and to ‘reclaim’ as some analysts point out, Washington’s lost standing as the rules and standard-setter of the region. It is also part of Biden’s policy of placing ‘American families and workers at the centre of..(the) economic and foreign policy” , and to ensure regulatory coherence across the region. Questions and concerns about Washington’s ability to translate its words into sound policy actions warrant a discussion. But before going into detail about what the agreement misses, it is essential to explain the division of responsibility with regards to the framework. Of the four components, the United States Trade Representative (USTR) will oversee just one, that is on the connected economy while the Department of Commerce, under Secretary of Commerce, Gina M. Raimondo will be responsible for the remaining three.
A strong counter to China’s influence in the region?
Under the Obama administration’s ‘Pivot to Asia’ programme, Washington expressed its intention to participate in the Trans-Pacific Partnership (TPP) to advance regional integration, making it the ‘cornerstone’ of Obama’s economic policy in the region. But while the negotiations kept lingering, the US formally withdrew from the agreement under President Trump, signing an executive order and permanently denting Washington’s prospects in the region and its willingness to be an influential player. China, on the other hand, has been gradually solidifying its economic presence in the region. A member of the Regional Comprehensive Economic Partnership (RCEP) and the biggest trading partner of all IPEF founder members, Beijing is well positioned to dominate the rules-making apparatus in the Indo-Pacific. Its willingness to join the Comprehensive Partnership for Trans-Pacific Partnership (CPTTP), the successor of the previous TPP and Washington’s aversion to joining the same has also placed it a step ahead of the US. In this context, the IPEF is Washington’s way of re-entering the region and replacing China’s predominance. But with all the extravagant rhetoric surrounding its launch, the framework falls short of becoming a strong defense against China’s economic expansionism in the Indo-Pacific.
Source: The Economist Intelligence Unit, Country forecast
In a briefing post the launch, the United States Trade Representative (USTR), ambassador Katherine Tai, while interacting with the press delved into a detailed explanation to justify the absence of tariff liberalization and market access in the IPEF. Disparaging the traditional FTAs as being ineffective in delivering the required benefits, she argued how they served only the big tech corporations while the workers were left to suffer from no tangible gains. The absence of market access is being presented as a distinct ‘feature and not a bug’ as trade is not the sole component of the agreement but the focus is also on non-tariff barriers to trade which are sometimes costlier. Thus, Washington’s efforts in ‘building a bridge’ will have positive externalities for the participating countries. This lack of market access severely reduces the incentives for the countries to commit to the provisions of the framework or to devote too much political and economic capital . It also goes against the major demands of the countries for whom market access is the ‘crown jewel’ of economic cooperation, even though as per Washington, an opportunity to work with the US to shape the rules will be a great chance in itself and incentive enough for the states to cooperate.
Unlike traditional FTAs, the IPEF is also an ‘executive agreement’, i.e., it won’t require Congress authorisation. While officials did hint at working with the Congress throughout the negotiations and in implementing the framework, concerns about the quantum of concessions that the US would be willing to give the members have emerged in the absence of Congress utilising its constitutional authority to regulate foreign commerce. The current mood in the US is stacked against FTAs and liberalisation of trade and hence securing bipartisan consensus will be a difficult task. The Biden administration is also uninclined to invite accusations of ‘selling out America’, keeping in mind the mid-term elections scheduled for November.
While countries with diverse economies and income levels have come together to cooperate, granting a semblance of diversity and inclusivity to the membership, the notable exception of Taiwan from the framework is important. While there was some hope for the country to be a part of this framework in the policy circles (around 250 members of Congress called for its inclusion) owing to its indispensable role in the semiconductor industries, Taipei was absent from the launch. Even though the membership of the framework isn’t exhaustive and new members will be accepted as the negotiations go on, the US commitment to include Taiwan has been evasive at best. In response to a question on the same, the Ambassador Tai talked about her meeting with minister John Deng from Taiwan before the IPEF launch and the fruitful discussions that the two sides had, focusing instead on the bilateral relationship between the two. Washington was aware of the reaction it would have received from Beijing had Taiwan been included, and so was unwilling to risk it. There were also fears about the members rethinking their support to the initiative had it included Taipei as they were unwilling to risk antagonizing China.
The subtle protectionist overtones in Washington’s messaging on the issue, with its focus on US workers can risk discontentment amongst the members. Presenting it as a ‘Made in America’ initiative for the American population does not bode well for burnishing the leadership credentials of Washington. What is also crucial is the different levels that the countries are on in terms of their domestic legislations on the four pillars. If standards based on the US experience or experience of other wealthy nations are adopted or taken as the basic templates, it will render any consensus-building difficult. This will be felt most starkly in negotiating labour standards, environment, and climate change which are managed through the World Trade Organisation (WTO) and the United Nations Framework Convention on Climate Change (UNFCC) respectively and thus their inclusion increases the risk of undermining the already set targets.
Finally, the very nature of the talks and ‘negotiations’ that the launch has given a green flag to, can be a source of debate and dissension. The nature of the talks, i.e., if all the four pillars will be discussed together or separately will greatly determine the outcome as members are more willing to make concessions when they can trade it off for a better deal. But this won’t be possible if a very siloed approach is adopted throughout the process. As per senior US officials, the framework should be viewed coherently along with seeing it as a vehicle driving initiatives in part, which is to say that a formal consensus on all the pillars will not be necessary before cooperation on any one factor begins. This, while a creative approach does have the potential of further complicating the process.
Where does India stand in all this?
In a briefing before Prime Minister Narendra Modi’s visit to Japan, Vinay Kwatra, the Foreign Secretary while underlining the importance of economic cooperation in the Indo-Pacific region, didn’t fully commit to India’s presence during the launch as the decision was still being deliberated. Two days later, the PM attended the launch event, heralding the framework as a “declaration of our collective will to make the region an engine of global economic growth”. While India’s participation did not come completely out of the blue considering its wide-ranging cooperation with the US, the growing importance of Quad, and its Act East policy, it is to be seen whether New Delhi can leverage this membership to carve for itself a bigger stake in the region.
New Delhi’s decision to opt out of the RCEP in 2019, along with its absence from the CPTPP pushed it on the side-lines. Thus, the IPEF can act as a means for New Delhi to increase its influence in the region. Of the four pillars, while cooperation on supply chain resilience and connected economy can become major avenues for India to contribute to, the strict US positions on data localisation and cross border flows of data, contrary to those of New Delhi’s will be tough to navigate. The standards for labour also vary between the two, with India’s ‘flexible labour market’ standing in contrast to the strict labour standards that the US aims to achieve. As per some analysts, to address these differences, India will intend to retain a few ‘escape clauses’ during the negotiations to etch out space for itself in case of an exigency.
The way forward
The next few months will be crucial for the United States and its allies and partners in the region. The administration is hoping to organise a ministerial summit in mid-summer by which all the countries would have scoped out the pillars and broken into negotiations based on their preferences. While 12-18 months is being considered as an adequate time for the states to specify the details, the Asia Pacific Economic Cooperation (APEC) Summit in November 2023 which the US will host is being viewed as an informal deadline. The talks can act as a means for Washington to understand the needs of the partner countries and restore confidence in its role as reliable strategic and security partner in the region, an area in which it has fared worse over the years. While the capacity of the IPEF to supplant China’s economic influence is bleak considering the current dynamics, the agreement has the potential to bring about some regulatory coherence and common operational standards to the region and provide space to other countries for sharing their ideas on bringing about shared prosperity. But Washington’s failure to walk the talk and keep the group together will strike a blow to its leadership credentials in the region and vindicate the perennial distrust that the countries have about its episodic engagement in the region.
Shivam Shekhawat is a recent graduate from the London School of Economics and Political Science where she was a Commonwealth Scholar. She is interested in studying about India’s neighbourhood, particularly India’s relationship with China and its response to the situation in Afghanistan and Myanmar. Her interests also lie in analyzing contemporary conflicts through a historical lens and the factors which affect a country’s response to humanitarian crises.
Get a daily dose of local and national news from China, top trends in Chinese social media and what it means for India and the region at large.