global trade

Indo-Pacific Economic Framework falls short

On May 23rd the US president, Joe Biden, unveiled the Indo-Pacific Economic Framework for Prosperity (IPEF). IPEF is light on detail, however, affirming our long-held view that the US will struggle to deepen its economic influence in Asia, particularly considering China’s economic prominence in the Indo-Pacific region. 

Why does it matter?

The limited scope of the IPEF, meant to compliment the security-focused Indo-Pacific strategy, released earlier this year, confirms our expectation that the US will prioritise geopolitical themes in its overall strategy towards Asia. This will come at the cost of a more coherent economic strategy. 

The US is an important economic partner for Asia, and the focus of IPEF, as a part of the Indo-Pacific Strategy, on areas of emerging trade concern—specifically on the digital economy, supply-chain resilience, clean technology and labour standards—will be welcomed in the region. Achieving progress on this will nevertheless be difficult, given unclear negotiating timelines or measurable outcomes. In addition, although the structure of IPEF suggests that the US will not need congressional approval to pursue these goals, US domestic hostility towards new trade agreements will prevent the US from formally offering any new market access openings. This will curb future enthusiasm to engage with IPEF by governments of Indo-Pacific countries.

This uncertainty of IPEF contrasts with the market pledges offered by Asia’s existing mega trade agreements, with which the US has avoided re-engaging. This divergence has become starker amid China’s participation in the Regional Comprehensive Economic Partnership, effective from January 2022, as well as its application to join the Comprehensive and Progressive Agreement on Trans-Pacific Partnership, which we expect to be successful, given the size and attractiveness of the Chinese market. Both factors will cement China’s importance in Indo-Pacific economic networks over the next decade, regardless of US attempts to re-engage Asia via updated trade frameworks. 

What next?

More details on the Indo-Pacific Economic Framework are likely in the coming weeks, but we do not expect IPEF to meaningfully restructure current Asian economic linkages. The lack of an attractive US alternative to the existing China-focused trade reality in Asia will also preserve—and deepen—the pressures facing Indo-Pacific countries to “choose sides” between the US and China. This pressure has largely been driven by the US via tariffs, sanctions, export controls and other punitive economic measures amid frictions in the wider US-China relationship, highlighting the importance of the US providing alternative economic opportunities for Asian countries. This dilemma will continue to frustrate US foreign policy in Asia over the next decade as growth concerns incentivise Asian governments to maintain (and expand) their economic ties with China. This, in turn, may dilute the effectiveness of US policies aimed at reducing regional reliance on the Chinese market.

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