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Will IPEF Help the US Counter China?

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Trans-Pacific View | Economy

Will IPEF Help the US Counter China?

It is uncertain whether the Indo-Pacific Economic Framework can succeed in reshaping China’s economic influence in Asia.

Will IPEF Help the US Counter China?
Credit: Official White House photo

During his recent trip to Tokyo, U.S. President Joe Biden formally launched the Indo-Pacific Economic Framework (IPEF) for Prosperity, along with his counterparts of the other 12 initial member states. Rather than a traditional trade agreement, IPEF is a flexible negotiation framework with four pillars (fair and resilient trade, supply chain resilience, infrastructure and clean energy, tax and anti-corruption).

From the strategic perspective, IPEF announced that the United States will engage more heavily in the Indo-Pacific economy. The framework is meant to renovate U.S. credibility in the regional economy and tries to “rewrite” the status quo of China’s strong economic influence in the Indo-Pacific. However, an unstable joint leadership, a lack of tangible interest, and the risk of the decentralized approach will all hamper U.S. efforts to counter China’s economic influence in the Indo-Pacific.

Renovate U.S. Credibility in the Regional Economy

First, IPEF increases U.S. credibility among Pacific partners, by responding to their request for U.S. engagement and leadership in the regional economy. From withdrawing from the Trans-Pacific Partnership (TPP) in 2017 to heavily focusing on the Ukraine crisis recently, the United States seems to be always deviating from its Indo-Pacific strategic pivot.

This pattern has weakened U.S. credibility in this region and disappointed its regional partners, such as Japan, who led the other TPP members to finish painstaking negotiations in 2019. According to the result of the “Countries that love Americans 2022” survey, Japan has a favorability of 57 percent for Americans, a 15-point drop since the Obama period. To some extent, the decline indicates that Japanese are losing confidence in the United States’ leading role – including in the Indo-Pacific economy.

IPEF shows that the United States is trying to revise this deviation and rebuild its economic leadership in this region, which will redeem its declining credibility among its pacific partners, Japan in particular.

“Rewrite” the Regional Economic Order?

IPEF also represents the United States’ economic plan for countering China’s expanding influence in this region. Some previous comments criticized that Washington held an “all guns and no butter” regional strategy, which allowed China to use its economic power to attract, or pressure, other countries. According to the State of Southeast Asia Survey Report, China has been regarded as the most influential economic power since 2019 (by around 75 percent of respondents), much higher than the United States (picked by just 8.9 percent of respondents in 2022).

IPEF’s ultimate vision is regarded to reinstate U.S. economic leadership, and enable Washington “to [re]write the rules of the road” for the Indo-Pacific. More specifically, the United States wants to “rewrite” the China-dominant economic model in the Indo-Pacific. Jake Sullivan, the United States national security adviser, said, “[W]e believe that we need a new model that we can move on quickly to take these challenges head on, and that’s what IPEF will do.”

However, in reality, the United States and its allies have lagged far behind China on economic linkages with Indo-Pacific countries. In the past decade, China has become a dominant trading partner with ASEAN, accounting for over 20 percent of Southeast Asian trade, far ahead of the United States. There is a lot of ground to make up, especially with IPEF already facing a skeptical reception.

Rebuild an Unstable Joint Leadership With Pacific Allies and Private Investors

Rather than direct competition, through IPEF the United States looks to play a role in specific fields (clean energy, tax regimes, and data privacy, for instance) to counter China by reshaping rules. Evan Feigenbaum, vice president for studies at the Carnegie Endowment for International Peace, illustrated that the United States needs to outperform the Chinese competition, which means getting skin in the game, setting standards, shaping rules, and being active.

However, since its withdrawal from TPP, the United States is outside of most economic agreements that could shape rules in the Indo-Pacific, including CPTPP, RCEP, and Digital Economy Partnership Agreement (DEPA). Therefore, to engage more in the regional economy, the United States needs to cooperate with other regional powers, including Japan, South Korea, Australia, etc.

On infrastructure, the United States partners with Japan and Australia to design quality infrastructure standards, such as certification frameworks for quality infrastructure projects. For example, the U.S., Japan, and Australia are cooperating with several South Pacific countries to build a new undersea telecommunication cable. U.S.-led standard setting also appears in the digital economy. Last month, the U.S., Canada, Japan, South Korea, Philippines, Singapore, and Taiwan (under the name Chinese Taipei) jointly released the Global Cross-Border Privacy Rules Declaration, based on the APEC CBPR.

Japan and Australia seem to support the IPEF strongly, but it is not the only choice to pursue their regional influence. Japan has already impacted regional trade and investment via CPTPP, and Singapore could influence digital trade through DEPA.

In addition, U.S private actors make a difference in ASEAN investment, despite the Trump administration’s geoeconomic retreat from this region. According to the ASEAN Secretariat, the United States was the top investor in ASEAN in 2019 and 2020, at around $35 billion, four times more than China’s investors. Biden’s administration will welcome private investors participating in the IPEF, but their interests are different.

IPEF is constructing the U.S. economic leadership in partnership with its allies and private investors, especially in standard settings. But this joint leadership is unstable, relying on how much common ground the U.S. government and its partners can find.

Requesting Rule Commitment But Offering Little Tangible Benefits

Even if the United States can push forward certain rules and standards, there are few incentives for other actors to buy in. IPEF does not provide many tangible benefits to its members such as market access, or at least these incentives remain vague before negotiations. The Biden administration insists that this framework is better than traditional trade agreements because of its flexible negotiation approach. However, until now, except for the four policy pillars and list of initial members, IPEF lacks any details on negotiations. Even which countries will join in which pillars’ negotiations remains unknown.

The framework indicates Biden’s hunger for greater U.S. economic engagement in this region, but lacks a positive vision of inclusive economic cooperation. The agreements will ask participators to adjust their economies in lines with a range of new rules on clean energy, taxes, data protection etc. without offering increased market access in return. James Crabtree of Singapore’s International Institute for Strategic Studies argued that IPEF amounts to an “all-pain, no gain economic deal” for Southeast Asian countries.

Without market access, IPEF lacks incentives to attract developing countries to join. Singapore’s Prime Minister Lee Hsien Loong noted that several ASEAN countries are interested in the framework, but there is “not much substance yet” in terms of investment and trade.

The Risk of Splitting Regional Development

Innovative negotiation under four pillars could lead to unpredictable challenges. Some scholars from the Washington, D.C.-based Center for Strategic and International Studies argued that this decentralized approach could advance IPEF negotiations by attracting more countries to join the framework with low barriers and flexible choice. However, in the long term, this approach would risk splitting regional economic development.

Despite the Biden’s administration’s repeated emphasis on ASEAN centrality, only four ASEAN countries (Brunei, Malaysia, Singapore, and Vietnam) jointed IPEF as initial members. Under the framework of flexible participation in four-pillar negotiations, a probable result of IPEF will be several “minilateral” agreements, guided by participators’ interests rather than regional development. These agreements may limit trade flows or technology exchanges between insiders and outsiders, then widen the development gap between these blocs.

That said, ASEAN members participating in IPEF are willing to wait and see what the new grouping could provide. There is little risk in taking part in the coming negotiations, as countries can always quit this framework if they do not see any sustainable interest arising from IPEF.