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Indo-Pacific Economic Framework is not an FTA: 5 things to know

By KENTARO IWAMOTO, Nikkei staff writer

 

TOKYO — U.S. President Joe Biden will launch a new economic framework for the Indo-Pacific during his stay in Tokyo early next week, with Washington hoping to boost its economic presence in the region to counter China’s influence.

 

From strengthening supply chains to setting rules for the digital economy, the Indo-Pacific Economic Framework (IPEF) is designed as a tool to bolster U.S. cooperation with its Asian partners.

 

It is not, however, a traditional free trade agreement, U.S. Trade Representative Katherine Tai has said. Like the Trump administration before it, the Biden administration takes the position that unfettered trade liberalization hurts American workers. 

 

While frustrations remain, a number of Asian governments have responded positively to the proposal and several have already expressed interest in joining the IPEF.

 

Here are the five things to know about the new framework:

 

Why is the U.S. developing the IPEF?

 

President Biden unveiled the plan last October during the virtual East Asia Summit, saying that the IPEF will focus on standards for the digital economy, supply chain resiliency, decarbonization, infrastructure and worker standards.

 

The arrangement also includes measures to establish sustainable food systems and science-based agricultural regulation, as well as good regulatory practices and trade facilitation, Tai told a Senate Finance Committee hearing in late March.

 

Wendy Cutler, vice president at the Asia Society Policy Institute and a former acting deputy U.S. Trade Representative, told Nikkei in a recent interview that the IPEF will be “a vehicle for U.S. economic re-engagement in the Indo-Pacific,” adding that she hopes it will “help fill the void that was created when the U.S. left the TPP,” referring to the Trans-Pacific Partnership agreement, from which former President Donald Trump withdrew.

 

During the American absence, China has gained ground in terms of regional economic integration. Last year it applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the current 11-member version of the TPP.

 

China is also a member of the world’s largest trade bloc, the 15-member Regional Comprehensive Economic Partnership (RCEP), which entered into force in January. The U.S. is not part of RCEP.

 

Why is the U.S. not rejoining the CPTPP?

 

While the Biden administration has removed some of Trump’s tariffs against America’s allies, it has made it clear that the U.S. will not be revisiting the CPTPP. Free trade agreements are “very 20th-century” tools, Tai has said. During the March congressional hearing, Tai said such FTAs have led to a “considerable backlash” from the American people, who are concerned about the offshoring and outsourcing of American jobs and opportunities. 

 

The undercurrent of the Biden administration’s approach is a “foreign policy for the middle class,” which it hopes will allow ordinary American citizens to see greater benefits from U.S. trade and diplomacy.

 

How is the IPEF different from CPTPP and RCEP?

 

Unlike the CPTPP and RCEP, the two biggest trade blocs in Asia, the new framework will not lower tariffs. Instead, the U.S. is seeking cooperation on strategic pillars, such as supply chain resilience and the digital economy. The IPEF is a more tailor-made mechanism that seeks the benefits of trade partnerships while insulating Americans from the downsides of trade liberalization.

 

The establishment of the IPEF is also likely to look different from traditional free trade agreements, which often take years of negotiation and require ratification by participating countries.

 

Cutler said in the Nikkei interview that the IPEF was going to be “a step-by-step approach,” adding, “I hope it will go a long way in filling the vacuum we created when we left the TPP. Maybe, over time, the United States will realize that more needs to be done and we would get closer to a TPP-like model.”

 

Eleven countries belong to the CPTPP: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. RCEP encompasses the 10 countries of ASEAN, China, Japan, South Korea, Australia and New Zealand.

 

Which Asian countries will likely join?

 

Japan has welcomed the new framework. The fact that Biden is launching the pact during his visit to Japan reflects the high hopes he has that his Asian ally will take part. Biden will be accompanied by cabinet heavyweights Secretary of State Antony Blinken, Commerce Secretary Gina Raimondo and Tai. 

 

Although Japan still maintains that it would be best for the U.S. to join the high-level CPTPP, America’s return to the regional trade arena is a welcome development.

 

South Korea, as well as some Southeast Asian countries, such as Singapore and the Philippines, have also expressed interest in the IPEF.

 

“The terms of the objectives of the IPEF — such as advancing resilience, inclusiveness, and competitiveness, as well as technology, innovation, digital economy, energy transition, climate goals, and equitable growth — are aligned with the Philippines’ trade priorities,” the Philippines’ Trade and Industry Department said in a statement.

 

Thailand will join, with the Thai cabinet approving a statement on Tuesday notifying the U.S. of its participation in the negotiations.

 

Meanwhile, Japan’s Fuji TV reported on Wednesday that India and Indonesia had expressed reservations about joining. Indonesian President Joko Widodo said during the U.S.-ASEAN Summit last week that cooperation under the IPEF “must be inclusive.”

 

Some countries appear to be questioning the benefits of the framework.

 

Vietnamese Prime Minister Pham Minh Chinh, on May 11, at an event organized by Washington think tank the Center for Strategic and International Studies, said the concrete elements of the IPEF were not yet clear. “We are ready to work alongside the U.S. to discuss, to further clarify what these pillars entail.”

 

Jayant Menon, a senior fellow at ISEAS-Yusof Ishak Institute, told Nikkei Asia: “IPEF proposes that members abide by binding trade rules and adopt stringent labor, environmental and other standards without receiving anything in return, such as improved market access to the U.S. This would be a major disincentive for the developing countries in ASEAN,”

 

What is the likely impact of the IPEF on the Asian economy as a whole?

 

Menon pointed out that there is concern that the IPEF’s push to increase supply chain resilience is actually “code for reshoring, trying to push China out of supply chains, which would disrupt the regional network that ASEAN is a part of.”

 

One concern is whether IPEF will survive beyond the Biden administration, he added. “These uncertainties suggest that IPEF is unlikely to have a major impact on the region, as it currently stands, and nowhere near treaty-based agreements like RCEP.”

 

The economic impact will also depend on how many members the framework has. Commerce Secretary Raimondo in November said during her trip to Asia that the new economic framework would be “flexible and inclusive,” and thus open to new members.

 

China, meanwhile, has criticized the plan. When asked about the IPEF during a news conference on May 12, Foreign Ministry spokesperson Zhao Lijian said that the Asia-Pacific region is “not a chessboard for [a] geopolitical contest,” and that China rejects “small circles [that] smack of the Cold War mentality.”

 

Additional reporting by Erwida Maulia in Jakarta.

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