Everything You Need to Know About the Indo-Pacific Economic Framework (IPEF)
We answer key questions around the US-led Indo-Pacific Economic Framework (IPEF), implications for member countries, and whether it will be able to counter China’s economic dominance in the Indo-Pacific region. We also compare the scope and approach of the IPEF framework with the mega trade arrangement, RCEP, which includes China and many IPEF member countries but not India or the US. Ultimately, the fate of the IPEF will be based on concrete incentives, otherwise present support and interest for the US initiative will soon fade away. Here, US intentions to keep trade provisions off the negotiating table and instead focus on labor, environmental, and digital trade standards may be major obstacles to the IPEF’s success.
What is the Indo-Pacific Economic Framework?
On May 23, 2022, India along with 12 other countries joined the US-led Indo-Pacific Economic Framework (IPEF) that seeks an open, inclusive, interconnected, and secure Indo-Pacific for sustainable growth of the region. India sees this framework as crucial for continued growth, peace, and prosperity in the Indo-Pacific region and intends to deepen economic engagement among partners in a free, open, and inclusive manner.
The new framework, which is perceived as an economic correlative of the US Indo-Pacific strategy, is not a Free Trade Agreement (FTA), as clarified by the US. Instead, it’s a loose framework that brings together 13 countries to shape rules on key focus areas like the digital economy, trusted supply chains, clean economic growth, corporate accountability, and anti-corruption.
The IPEF’s framework can therefore be objectively seen as a move by the US to strengthen its foothold in the region and to check China’s vast influence. The lack of details, however, has given cause to much speculation about the IPEF being merely geopolitical theatre. Most countries in the IPEF are members of the Asia-Pacific trade treaty – the Regional Comprehensive Economic Partnership (RCEP) – through which they are set to become even more economically integrated with China. They are also part of China’s Belt and Road Initiative (BRI), which seeks to make trade facilitative infrastructure and regional connectivity investments. So, if the US is not promising a trade treaty or access to its own markets under IPEF, a question that won’t go away easily is what’s in it for the countries located in the region.
What is the purpose of the IPEF?
The IPEF seeks to strengthen economic partnership among participating countries in the Indo-Pacific region to enhance resilience, sustainability, inclusiveness, economic growth, fairness, and competitiveness. The member countries will now discuss how to actually achieve these goals and strengthen economic cooperation.
Steered by US President Joe Biden, the IPEF’ framework is touted as US bid to balance its security provider role in the region by reclaiming a larger role in the economic sphere. This move is also more pertinent as it allows the US to regain some credibility following former US president Donald Trump’s sudden decision in early 2017 to pull out of the painstakingly negotiated Trans-Pacific Partnership (TPP).
How will the IPEF function?
The IPEF has identified four broad modules where it intends to bolster cooperation and build synergies with member countries. They are:
- Fair trade: In the field of trade, the member countries will build high-standard, inclusive, free and fair trade commitments and develop creative approaches in trade and technology policy to promote sustainable and inclusive economic growth.
- Supply chain resilience: The nations have resolved to make supply chains more resilient and integrated, with measures to mitigate the impact of disruptions and crisis by improving the transparency, security, and sustainability. In particular, talks will take place on access to semiconductors and critical minerals.
- Infrastructure and decarbonization: The members will accelerate development of clean energy technologies and build resilience to climate impacts. The nations are looking at technology sharing and ways for easy access to finance to meet goals outlined in the Paris Agreement.
- Tax and anti-corruption: The IPEF member countries intend to promote competition by enforcing robust tax, anti-money laundering, and anti-bribery regimes to curb tax evasion and corruption in the Indo-Pacific.
IPEF not a traditional trading bloc
It has been clarified that unlike traditional trade blocs, the IPEF will not negotiate tariffs or market access, and the framework will merely focus on integrating member countries in the four modules described above. There will be no binding commitments regarding market access characteristic of trade deals like the RCEP or free trade agreements. Instead, IPEF focuses on increasing regulatory coherence between the member nations.
Which countries are members of the IPEF and why have they joined this US-led framework?
The member countries backing the initiative include:
- New Zealand
- South Korea
The fact that these members jointly account for 40 percent of the global GDP, could result in significant economic engagement. As per Gu Xiaosong, Dean of the ASEAN Research Institute of Hainan Tropical Ocean University, inclusion in the IPEF framework would bring some economic benefits to ASEAN members in terms of investment and trade. For instance, Vietnam might enjoy some “policy bonuses” under the framework to further strengthen its textile and digital exports to the US. Some ASEAN members have joined the IPEF owing to the US’ grip on many core technologies, such as chips and software. ASEAN members are also concerned about the possible US exclusion in the region – a balanced presence of major powers is considered ideal and could contribute to more stable regional relations.
Member countries have cited different rationales for joining the IPEF, depending on their local requirements and larger goals.
- South Korea decided to join IPEF to diversify and stabilize the country’s supply chains amid fast-changing global trade circumstances. South Korean Ministry of Trade, Industry and Energy, in a statement, noted, “going through the COVID-19 pandemic, how to strengthen the resilience of supply chains to better respond to such issues as climate change, the pandemic and supply chains has emerged as a key trade issue. This is why we are to participate in the IPEF”.
- Malaysia has joined IPEF in hope of new opportunities to explore and enhance cooperation in areas of mutual interest, such as strengthening supply chain resilience, the digital economy, and clean energy. Senior Minister of International Trade and Industry Mohamed Azmin Ali suggested that IPEF could act as a broad structure for collaborative resolution of issues through cooperation, capacity building and technical assistance.
- Philippines has welcomed the initiative with the intention of opening up the country’s economy to the maximum. Incoming president of the Philippines, Ferdinand Marcos Jr., reiterated that he will place importance on the new framework.
- Vietnam, too, has joined the initiative, hoping for it to bring substantial benefits. However, it has exercised caution in terms of having more discussions. Prime Minister Pham Minh Chinh has said that Vietnam will continue discussions with ASEAN members and relevant countries, to clarify cooperation in order to make the framework effective. Chinh highlighted the need to adjust the growth model and economic linkage to be more sustainable and more self-resilient to make the most of internal power and external resources.
Which countries have been excluded from the IPEF?
The Biden-led IPEF excludes China and some Southeast Asian countries – Myanmar, Laos, and Cambodia, who are perceived to be firmly pro-China.
Taiwan, which has been lobbying for IPEF membership, ever since it was first proposed in October 2021, too, was excluded despite bipartisan support for its membership in the US because of its importance in the supply of semiconductors. This is likely because Taiwan’s inclusion would materially change longstanding US foreign policy on China, triggering consequences that nobody is prepared for – especially in the wake of the situation in Ukraine.
What is the next course of action for the IPEF?
It is expected that after the IPEF’s formal announcement on May 23, negotiations in each of the four modules will soon follow. All 13 participating countries will be allowed to choose in which of the four areas they want to pursue deals – without having to commit to all of them.
It is speculated that the parameters for the negotiations will be put in place over the following two months. Once that happens, the US will likely close deals with the relevant member country within 12 to 18 months, which shall further be submitted to the respective local governments for ratification.
However, the IPEF will provide for ambitious labor and environmental standards and create new guidelines for how data flows between countries. A White House fact sheet states, “IPEF will enable the United States and our allies to decide on rules of the road that ensure American workers, small businesses, and ranchers can compete in the Indo-Pacific.”
This statement mentioning “American workers” has raised questions on the intentions of the US to bring equitable prosperity to the Indo-Pacific region. Also, the stakeholder countries may not be in a position to align with the US on labor and environmental reforms.
How will IPEF membership impact India?
India was initially reluctant to join the IPEF, rather keener on having a bilateral trade pact with the US and plurilateral agreements under the Quad instead. However, an understanding has since been reached. During Indian Finance Minister Nirmala Sitharaman’s visit to the US in April, 2022, both sides came to agree that this type of cooperation would serve US-Indian interests. This announcement comes in the backdrop of Indian exporters having benefited from a move by the US and the EU to de-risk supply chains by reducing their reliance on China for essential imports. So, while immediate benefits cannot be linked directly to the IPEF membership, it may be assumed that India’s complicated relationship with China will drive its foreign and trade policy engagement. Further, India is not part of the RCEP but is still keen on increasing its economic association with the Indo-Pacific.
Experts however caution that India would need to assess its stance very clearly when discussing issues like e-commerce and data localization, which the US is aiming to address through the framework. India has so far declined to enter discussions on multilateral rules for e-commerce and its data localization requirements have been criticized by the US as creating barriers to digital trade.
What are the challenges surrounding the success of IPEF?
While the initiative may seem opportune, in its current format, the IPEF will not be able to dilute or counter China’s economic dominance in the region. This is owing to the lack of direct incentives offered. There has been no discussion to expand market access to member countries.
Additionally, many stakeholders have expressed concern that through this framework, the US might try to dominate the rules and standards of digital technologies like artificial intelligence and 5G. However, these US-framed rules of digital trade and technology might not suit local jurisdictions of the member countries.
Besides, it is unlikely that ASEAN countries will decouple from China and the existing pattern of supply chain division, given the deep integration of their economies with that of China.
How is China responding to IPEF?
While addressing the Economic and Social Commission for Asia and the Pacific (ESCAP) on May 23, 2022, China’s Foreign Minister Wang Yi Wang affirmed that “the Asia-Pacific region is where China lives and thrives”. Without mentioning IPEF, Wang has retorted that Beijing will advance China’s accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the Digital Economy Partnership Agreement to counter the new trade and economic initiative of the Quad alliance. China has also offered higher cooperation to the Indo-Pacific region with better BRI projects and investments.
Beijing will strengthen dialogue and cooperation with other Asia-Pacific countries to implement the Global Security Initiative (GSI), widely seen as Beijing’s initiative to counter the Quad alliance, which it describes as “Asian NATO”, along the lines of the North Atlantic Treaty Organization (NATO), which clubs Western countries under a security umbrella.
Will the IPEF impact how the RCEP works?
China is presently pushing for comprehensive free trade in the Asia Pacific, especially with the operationalization of RCEP. On the other hand, the IPEF has little to offer to Asian economies by way of tangible economic benefits, such as opening up US market access to Asian exports. There are trade related incentives or tariff reduction provisions in the framework, which countries in the region desire. However, some experts predict that the framework could emerge as an eventual alternative to the RCEP. This is all conjecture at present and will depend on US leadership, regional compulsions to secure stability in Asian supply chains, and China’s own economic behavior and status.
It is interesting to note that list of member countries of IPEF somewhat overlaps the RCEP. But that is just where it might end. In 2019, India pulled out of the RCEP, citing concerns about a potential surge in imports from China under the regional pact.
Bilateral trade of IPEF member countries with US and China
Total Trade of IPEF Member Countries with US and China
Total trade with the US
Total trade with China
Note: Data for the countries marked in * is for 2020. All other data is from 2021.
This article was first published on May 25, 2022 and last updated on September 9, 2022.
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