Will Bangladesh fall into a Sri Lanka-like crisis?

As Washington ramps up efforts to restore US “economic leadership” in the Indo-Pacific region, US President Joe Biden launched the Indo-Pacific Economic Framework for Prosperity (IPEF) on May 23 in Tokyo, which includes 13 member countries joined for the frame.

In addition to the US, other participants in the framework include Australia, Brunei, India, Indonesia, Japan, the Republic of Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand and Vietnam. Together, these countries represent around 40% of the world’s gross domestic product (GDP). However, the framework excludes China and some ASEAN countries such as Myanmar, Laos and Cambodia.

In the past, the US has repeatedly been accused of pursuing an “all guns and no butter” strategy in its policy towards the region. The newly launched IPEF is seen as an economic pillar of the US Indo-Pacific strategy to increase US economic presence in the region after the Trump administration withdrew from the Trans-Pacific Partnership (TPP) in 2017, paving the way for China there paved its economic footprint in the region unhindered to expand.

Rather than simply rejoin the TPP, which later became the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Biden opted for the new economic framework to work with the Regional Comprehensive Economic Partnership (RCEP), which China and the others joins 14 Asia-Pacific economies in the world’s largest trading bloc to compete for influence.

As a means to counter China’s growing economic clout in the region, the IPEF will focus on four key pillars: supply chain resilience; clean energy, decarbonization and infrastructure; taxation and anti-corruption; and fair and resilient trade. However, the Biden administration may face certain challenges in implementing the framework due to a lack of clear trade incentives and the appeal it brings to the region.

Lack of market access tariff reduction

Unlike the CPTPP and RCEP, the US-led IPEF is not a Free Trade Agreement (FTA) as it offers neither the expanded market access nor the tariff reduction, thereby lacking trade incentives for regional countries. Some analysts and observers say the deal lacks “teeth” and is “more symbolic than effective or real politics.”

Bryan Mercurio, an international trade expert and law professor at the Chinese University of Hong Kong, said the US could put money into IPEF “especially for clean energy, maybe even some for supply chain resilience and anti-corruption.”

“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 missing,” he added.

In the absence of better US market access and tariff-cut commitments, Washington would find it difficult to reduce some regional countries’ economic dependence on China. However, Biden faces political pressure from both the left and the right in the US to avoid free trade deals, which has prompted “significant backlash” from the American public concerned about the offshoring and outsourcing of American jobs and opportunities. The Biden administration is unlikely to allow Asian countries more access to the US market amid strong protectionist sentiment at home.

High quality provisions on digital trade, labor and environmental standards

It’s important to note that Washington intends to seek “best-in-class commitments” in new areas such as the digital economy, clean energy and decarbonization. It also seeks a strong commitment to labor and environmental standards, which are highly unpopular in the region.

The Biden administration will face headwinds trying to convince some regional countries to make strong commitments in these areas because they don’t share the same policies and standards as the US. Southeast Asia, for example, is not a monolith when it comes to digital trade, and each country in the region is at different stages of digital development. Some developing countries in the region may not be able to meet the so-called high IPEF standards for digital trade, labor and environment.

The US and India also have different views on digital trade, labor and environmental standards in the framework. India has consistently opposed the inclusion of such standards in free trade agreements it concludes.

According to Prabir De, professor at the Research and Information System for Developing Countries (RIS), “some areas proposed in the IPEF do not appear to serve India’s interests”. He also argues that the IPEF formulation contains points that are in direct contradiction to India’s stated position, such as the ban/restriction of cross-border data traffic and data localization requirements, including for financial services. Similarly, as Pranab Dhal Samanta argues in The Economic Times, politically sensitive labor and environmental standards in terms of trade resilience could prove to be a challenge for India.

Dcoupling regional countries from the Chinese economy

One of the biggest challenges for the US is to decouple IPEF members from the Chinese economy, which would be destructive for some economies in the region. Beijing said the US-proposed economic framework is an attempt by Washington to decouple regional countries from China’s economy, but many countries in the region are concerned about the “huge cost” of doing so. Aside from the US and India, the other IPEF members previously joined China and signed the RCEP, which is the world’s largest binding free trade agreement with regional market access and tariff reduction.

Without trade incentives such as access to the US market, it would be difficult for the Biden administration to get significant commitments from IPEF members on the new economic framework compared to the RCEP. It remains to be seen whether and why IPEF members would be willing to risk their economic ties with China in exchange for intangible gains from IPEF.

At this stage, the IPEF is more symbolic than effective, as the lack of clear trade incentives and tariff concessions does not give it enough bite to actually translate into meaningful action. While IPEF can help Washington increase its economic presence and strengthen ties with its Asian partners in the region, its implementation presents significant national and international challenges.

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