The Indo-Pacific Economic Framework: What it is — and why it matters
- Seen as a means to counter China in the region, it is a U.S.-led framework for participating countries to solidify their relationships and engage in crucial economic and trade matters in the region.
- The Indo-Pacific Economic Framework is not a free trade agreement. No market access or tariff reductions have been outlined, although experts say it can pave the way for future trade deals.
- Analysts and observers say the IPEF deal lacks "teeth" and is more symbolic than it is effective or real policy.
U.S. President Joe Biden formally introduced the Indo-Pacific Economic Framework, or IPEF, this week during his first Asia tour, revealing Washington's long-awaited Asia-Pacific economic strategy.
It comes five years after the U.S. unilaterally withdrew from the Trans-Pacific Partnership, a trade deal signed by 12 countries in Asia-Pacific, North America and South America.
With the U.S. withdrawal, the remaining countries went on to launch the CPTPP, or Comprehensive and Progressive Trans-Pacific Partnership — one of the world's biggest multilateral trade deals, and one that China requested to join.
Since then, the U.S. has been largely absent in the region, made worse by its trade war with China. But the IPEF has broken the ice.
Still, analysts and observers say the deal lacks "teeth" and is more symbolic than it is effective or real policy.
CNBC takes a look at what the Indo-Pacific Economic Framework is about.
What is the IPEF?
Seen as a means to counter China in the region, it is a U.S.-led framework for participating countries to solidify their relationships and engage in crucial economic and trade matters that concern the region, such as building resilient supply chains battered by the pandemic.
It is not a free trade agreement. No market access or tariff reductions have been outlined, although experts say it can pave the way to trade deals.
"I think President Biden, unfortunately, indicated it shouldn't even be considered the beginning of a trade agreement," David Adelman, Krane Funds Advisors' managing director and former U.S. ambassador to Singapore, told CNBC on Tuesday.
Neither is it a security pact, unlike the four-nation Quad group, which is made up of Australia, India, Japan and the U.S.
For a start, the U.S. will be partnering with12 initial countries which include members of the Quad: Australia, India and Japan. It also includes seven ASEAN countries like Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, as well as South Korea and New Zealand.
Washington has said the framework is open to new participants.
"It is a fine collection of countries … but we need to remind ourselves this is not really a change in policy or breakthrough for trade across the Pacific — it's a framework," Adelman said.
Why the Indo-Pacific?
"The future of the 21st century economy is going to be largely written in the Indo-Pacific — in our region," Biden said this week.
The combined GDP of the participating countries represent 40% of the global GDP.
About 60% of the world's population reside in the Indo-Pacific, and the region is expected to be the biggest contributor to global growth over the next three decades, the Biden administration said.
The U.S. wants to restore its economic leadership in the region and is "presenting Indo-Pacific countries an alternative to China's approach," said Secretary of Commerce Gina Raimondo.
U.S. national security advisor Jake Sullivan has also said the framework is a means for the U.S. to "strengthen ties with allies and partners for the purpose of increasing shared prosperity."
But analysts say it is "more marketing than policy."
"The good news is, the U.S. is engaging actively in commerce in Asia and using its convening power to bring these 12 important economies together, now the bad news is, there really is no teeth in this," said Adelman.
Four pillars of the IPEF
To be clear, specific terms and details of the framework are still being hammered out. But for a start, here are the four main tenets of the framework:
- Connected economy: higher standards and rules for digital trade, such as cross-border data flows.
- Resilient economy: resilient supply chains that will withstand unexpected disruptions like the pandemic.
- Clean economy: targeting green energy commitments and projects.
- Fair economy: implementing fair trade, including rules targeting corruption and effective taxation.
"If you look at the four pillars, it's really asking the partners to do something to change their laws or regulations or the way they operate," said international trade expert and professor of law at the Chinese University of Hong Kong, Bryan Mercurio.
"I think what the U.S. has to offer, and the only thing the U.S. has to offer, is money. Which some, I think, will be forthcoming, particularly for clean energy, maybe even some for supply chain resilience, and anti-corruption," Mercurio said.
"But of course, what Asian partners really want is trade. I think they want market access. And the trade component of the IPEF is really lacking."
Where is China in this?
A natural free trade internationalist, Biden would rather work with Beijing to lift trade and wealth for the U.S. but he faces China hawks in Congress, protectionist sentiments in the U.S. and even a possible resurgence of Donald Trump.
The IPEF serves as a middle ground for Biden's plans to be more in control of economic flows in the Indo-Pacific especially with China at the center of the region's supply chains.
As a non-trade agreement entry into Asia, Biden would not need to to seek congressional approval and therefore avoid a battle for domestic ratification, analysts at Washington-based think tank Center for Strategic and International Studies said in a note.
This is crucial for Biden, who faces a tricky political cycle domestically at this juncture, Adelman said.
Former Indian Trade Secretary Ajay Dua told CNBC he saw the framework as an economic alliance to counter the emergence of China in this region.
Different from previous trade deals
The Trans-Pacific Partnership, an ambitious major trade pact involving the Indo-Pacific countries, was part of President Barack Obama's strategic pivot to Asia.
Trump pulled the U.S. out of the trade pact in 2017, after it drew criticism from the protectionist end of the U.S. political spectrum.
The TPP evolved into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, now one of the biggest trade blocs in the world which has attracted new applicants, including China.
But it is unlike the TPP or CPTPP.
The Indo-Pacific Economic Framework remains "quite far from the ambition displayed at the time of the launch of CPTPP," Julien Chaisse, a trade professor at City University of Hong Kong said.
"Overall, [this] seems to announce a kind of 'soft law' framework with a great degree of flexibility which [allows] members to agree on only some rules/pillars," Chaisse said.
"I think this 'soft law' framework allows for quick U.S. action [into the region]."