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INTERNATIONAL

How Japan should engage with IPEF

  • August 1, 2022
  • , Wedge , pp. 74–76
  • JMH Translation
  • , ,

By Watanabe Yorizumi, Professor of International Political Economy and Dean at the School of International Communication, Kansai University of International Studies

 

U.S. President Joe Biden launched a new economic initiative known as the “Indo-Pacific Economic Framework for Prosperity (IPEF)” in Tokyo on May 23. This was the first U.S. action [in this area] in five years since then-President Donald Trump withdrew his country from the Trans-Pacific Partnership trade pact in January 2017.

 

The new economic framework was launched with the participation of a total of 14 nations: the U.S., Japan, South Korea, India, Australia, New Zealand, seven ASEAN members, and the Pacific island nation of Fiji. IPEF is an economic bloc with the following four pillars: (1) trade; (2) supply chain resilience; (3) clean energy, decarbonization, and infrastructure; (4) tax and anti-corruption.

 

Moreover, additional areas of IPEF cooperation will continue to be identified based on consultations among the partners to advance regional economic connectivity and integration, and membership is open to the countries of the region that share the same goals and interests.

 

IPEF is regarded as a rival of China and its large-scale economic bloc known as the “Belt and Road Initiative,” but I see a few matters for concern in IPEF.

 

IPEF differs from greatly from the traditional trade frameworks the U.S. has proposed in the past in that, of the four pillars, trade is the only one overseen by the Office of the U.S. Trade Representative (USTR), which handles U.S. external trade negotiations. The other three pillars were proposed by the Department of Commerce. Moreover, negotiations to reduce tariffs—which constitute the core element in trade negotiations—are not included in the trade segment of IPEF. Has the U.S. government ever proposed a trade framework that does not include market access negotiations? This can only be interpreted to mean that the current U.S. administration is hoping to avoid reducing tariffs with the midterm elections coming up in the autumn.

 

Moreover, it would be hard to say that the other three pillars, which were put forward by the Commerce Department, have been adequately thought through and organized. One of the pillars is to cooperate in addressing disruptions in supply chains. Weren’t the disruptions caused by the Trump administration? IPEF proposes cooperation with developing countries through infrastructure support, but IPEF has not worked out how much it can involve developing countries through decarbonization. No reason was given as to why tax was coupled with anti-corruption, and the move seems sudden. The biggest defect of IPEF is that it does not provide any incentive to engage in rulemaking with developing nations. IPEF will simply be “discussions” and cannot be expected to result in effective rules that are legally binding.

 

IPEF excludes tariff reductions and so offers participating nations few benefits

 

The biggest difference between IPEF and the TPP, which Biden worked on while U.S. vice-president, is that the TPP is a free trade agreement (FTA) and IPEF is not. An FTA is a treaty where parties mutually eliminate tariffs. This is made legally binding, and the parties pledge to each other not to revert back. Because it is a legally “binding” agreement, the participants are comfortable engaging in intraregional trade without tariffs and are able to actively enter the markets of the other FTA partners. Being able to export one’s own country’s goods to the markets of the FTA partners at more advantageous conditions is an incentive to form an FTA as nonmembers are not given this kind of preferential treatment.

 

IPEF, however, does not offer such preferential treatment because it is not an FTA. It must be pointed out that it is completely unknown how actively participating countries will engage in making trade rules. ASEAN countries in particular are joining IPEF because they are attracted by the size and openness of the U.S. market. If the U.S. continues to be passive about trade liberalization and improving market access, it is unclear how proactive ASEAN members will be in the U.S.-led creation of new trade rules.

 

Moreover, it should be noted that Taiwan has not been invited to join IPEF despite the fact that IPEF is said to be a measure to contain China. I asked a high-ranking USTR official who accompanied President Biden to Japan about this and was told this was done “to make IPEF membership as broad as possible.” In other words, Taiwan was not invited out of concern that if Taiwan were to participate in IPEF, many ASEAN members would stay away from IPEF out of concern for what China might think.

 

Taiwan, however, holds a key position in supply chains as it is the world’s second largest manufacturer of semiconductors. Not including Taiwan is contrary to the IPEF goal of building supply chain resilience. Taiwan’s Ministry of Foreign Affairs issued a statement about the economy’s nonparticipation in IPEF, saying that it “regrets that [Taiwan] was not included.” The fact that the matter passed with such little reaction is thought to indicate that the U.S. had thoroughly explained the matter to Taiwan in advance. In fact, it is reported that U.S. Ambassador to Japan Rahm Emanuel laid the groundwork by speaking with the head of the Taipei Economic and Cultural Representative Office in Japan (equivalent to an ambassador) prior to Biden’s visit to Japan.

 

I think, however, that what actually lies behind the U.S.’s putting off Taiwan’s participation in IPEF is a far-sighted scheme of the Biden administration. By leaving room for future trade negotiations with China, the Biden administration is looking for an opening to improve trade ties with China, which deteriorated due to former President Trump’s punitive tariff negotiations. With skyrocketing prices today, the U.S. economy is at risk of inflation accelerating. One way to lower prices is to cut high tariffs. The United States today is faced with the need to lower tariffs on Chinese imports not out of consideration for China but out of consideration for its own economy.

 

If the U.S. were to unilaterally lower punitive tariffs on Chinese goods, the Biden administration would be accused of being “soft on China” and would not perform well in the midterm elections. Biden would also need to get some kind of concession out of China that is equivalent to the U.S. tariff cuts. At a time when such negotiations are anticipated, there is no need to rankle China for no purpose by including Taiwan in IPEF. I conjecture that this was America’s thinking behind not including Taiwan in IPEF.

 

Another point of interest is China’s views on IPEF. Despite the fact that the Regional Comprehensive Economic Partnership Agreement (RCEP) has come into effect, China has officially applied for membership to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). To China, IPEF probably looks like a feeble “paper tiger.”

 

How should Japan engage with Biden’s IPEF? The high-ranking USTR official mentioned earlier said to me, “IPEF is a completely different ‘animal’ from the TPP. It is a forward-looking move in a new direction.” What he was telling me is that IPEF has a completely different nature from a traditional trade agreement. If that is the case, IPEF may be useful as a forum for Indo-Pacific nations, including the United States, to consult on new economic issues like digital trade and a supply chain risk management framework. If the Democratic Party loses the U.S. midterm elections this autumn, however, there is a chance IPEF may be aborted partway. Japan needs engage with IPEF in a skillful and careful fashion.

 

Japan should lead the international trade order in the Indo-Pacific region

 

Japan managed to keep the TPP alive after the U.S. withdrew and to bring it into effect as the CPTPP. The United Kingdom is trying to join the trade pact, and this is on the verge of happening. Still standing outside the CPTPP gate are China as well as Taiwan, which applied to join the CPTPP close around the same time as China. I had an opportunity in 2017 to meet Taiwan President Tsai Ing-wen. Concerned that Taiwan could become isolated, President Tsai was very eager to have her economy join the TPP. It seemed that she expects the TPP to be the “gold standard in the 21st century,” as former U.S. Secretary of State Hillary Clinton said.

 

If that is the case, Japan should persevere in helping the United States to return to the TPP over the medium to long term. Meanwhile, over the short term, Japan should probe the level of U.S. interest and ambition in [creating] new rules by demonstrating a commitment to IPEF and thereby cooperate in confidence building to increase the presence of the United States in the Indo-Pacific region. IPEF contains the elements of a kind of “TPP-Plus.”

 

Moreover, Japan has a unique role to play in relation to China. China is well aware that it will be hard for it to join the CPTPP because it requires a much higher level of tariff elimination and rules than RCEP. China is actively initiating negotiations in the capitals of CPTPP members, and Japan stands out somewhat for its backward-looking stance.

 

What I want to say, however, is not to make compromises so China can join the CPTPP. I want to say that it would be advisable not to simply refuse China admittance but rather to provide capacity building through negotiations – namely, to support China in building domestic systems so that the CPTPP’s high standards are fully accepted in China. Japan can handle tough negotiations with China by establishing a coordination framework with the UK, which is likely to join the trade pact before China. The UK would be a powerful helping hand for Japan because it has the bitter experience of negotiations with China over Hong Kong.

 

Today Japan has adequate “experience” and “tools” to lead the international trade order in the Indo-Pacific region. What is needed is the political will to do so.

 

Profile of Watanabe Yorizumi

Born in 1953, Watanabe Yorizumi was a PhD candidate in international relations at Sophia University. He held such positions as Economic Affairs Officer at the GATT Secretariat and Deputy-Director General of the Economic Affairs Bureau in Japan’s Ministry of Foreign Affairs before taking up his current position as professor of international political economy and dean at the School of International Communication at the Kansai University of International Studies in 2019. He is professor emeritus at Keio University. His specializations are international politics and economics, GATT and WTO law, and the European Union. He recently supervised the compilation of Shokai: Keizai renkei kyotei (Economic trade agreements: A detailed analysis).

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