The Indo-Pacific Economic Framework (IPEF)

Will it be a Game-Changer for regional businesses?

The economic idea of the Indo-Pacific has formalized after the announcement of the Indo-Pacific Economic Framework (IPEF) by the US President Joe Biden on 23 May 2022. Comprising 14 economies and accounting for more than 40 per cent of the global GDP, the IPEF is the most formidable economic bloc in the world. 

The IPEF member economies include the US, Australia, India, Japan, Korea, New Zealand, Brunei, Singapore, Malaysia, Vietnam, Thailand, Indonesia, Philippines and Fiji. These economies bring to the IPEF a strong and varied economic presence from across the Pacific and Indian oceans, symbolizing the articulation of the Indo-Pacific and its economic power.

The significance of the IPEF emanates not just from its articulation of the economic sense of the Indo-Pacific. It is also significant because of its specific objectives. These objectives pertain to the IPEF’s efforts to set rules and standards for the Indo-Pacific region across a set of cross-cutting new generation economic subjects that will have far-reaching consequences on the conduct of cross-border business.

What are the IPEF’s objectives? Unlike similar other regional economic blocs that work towards constructing a free trade agreement (FTA) among its members, IPEF is looking to act differently. 

Standard FTAs proceed on the basis of reducing tariffs and non-tariff barriers among members that enable products and services of each member to get preferential access to the other’s market. All IPEF members belong to multiple FTAs that are functioning on this principle. These include, most prominently the Regional Comprehensive Economic Partnership (RCEP), which has all IPEF members, except the US, India and Fiji; the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), which figures seven IPEF members (Singapore, Japan, Australia, Vietnam, Brunei, Malaysia, New Zealand); various FTAs of the Southeast Asian economies (ASEAN) and several bilateral FTAs among IPEF members.

Moving away from the usual process of constructing FTAs, the IPEF has defined four ‘pillar’s or work areas, on which it has begun discussing. The pillars are connected economy, resilient economy, clean economy, and fair economy.More simply, the pillars have led to the IPEF discussing trade; resilient supply chains; clean energy, decarbonization and infrastructure; and tax and anti-corruption. The first round of discussions has taken place among senior officials of the member countries at Singapore during 13-14 July 2022. This was followed by the first virtual ministerial among the IPEF members during 26-27 July 2022.

The IPEF’s goals are distinctly ambitious. It is aiming to get the key economies of the Indo-Pacific region to agree on new economic and business rules for the bloc in areas that would be fundamental for enterprises, workers, industries and households. Some of these areas are clean energy; sustainable industrial practices; digital connectivity; cross-border data transfer rules and privacy issues; labour and environment standards and taxation rules.

The Indo-Pacific is the most vibrant economic region of the world. It is also at the same time home to several communities and income groups that are facing serious livelihood challenges following the outbreak of the COVID19 pandemic and its episodic persistence. Enterprises and businesses across the region are trying to come of terms with functional challenges created by the COVID19. Foremost among these are adapting to digitalization and ensuring sustainability with climate issues.

Given the Indo-Pacific’s economic predominance, rules and standards adopted by the members of the IPEF, can, over time, become leading benchmarks in their respective spheres. As some of the world’s largest and major economies – both developed and developing – start engaging economically on common rules, these would, ostensibly, be adopted by more countries in other parts of the world and integrated into existing economic frameworks.

One of the closest spheres of influence in this regard are existing FTAs and economic partnership agreements. Those between the IPEF members, such as the comprehensive economic partnership agreement (CEPA) between India and Australia, is likely to upgrade itself further with IPEF’s rules, given that both Australia and India belong to the IPEF. The same might happen for ASEAN FTAs. Similar influence is also expected for agreements that IPEF members are currently engaged in with non-IPEF member countries, such as with the European Union, United Kingdom and Canada.

The IPEF’s negotiating approach will be of considerable interest to policymakers and businesses as it is not adopting the negotiating style of a standard FTA. These FTAs focus on cutting tariffs and other border restrictions on movement of goods and services between countries. The IPEF is avoiding this approach as mentioned earlier. It’s strategy, therefore, will be watched keenly, as a possible model for upcoming economic cooperation agreements.

The United States Trade Representative (USTR) and the US Department of Commerce are leading the discussions on the four pillars of the IPEF. With the US leading the negotiations, it is expected that existing US FTAs, as well as major Indo-Pacific FTAs like the CPTPP with which the US was heavily engaged in at a point in time, will provide initial ideas for the negotiations. The RCEP might also be a framework offering initial ideas given that several IPEF members are a part of it. At the same time, the IPEF is also expected to pick up ideas from new issue-specific agreements that include its members, such as the Digital Economic Partnership Agreement (DEPA) between Singapore, Chile and New Zealand.

In several respects, the IPEF’s outcomes will be game-changing. But reaching these outcomes will require overcoming challenges. A lot of these arise from the economic heterogeneity of its members. There are great variations among its members in domestic capacities and institutional progress in areas, where it is aiming to set common rules. In digital economy and ecommerce, for example, IPEF members have different levels of internal capacities and variations in domestic regulations. It is the same with respect to standards for energy efficiency and tackling carbon emissions, green technologies and labour management practices. The differences in national capacities and state of progress on domestic standards will be major challenges in reaching common benchmarks for the group as such.

The challenges will be enhanced by the regional and national political economies. As arriving on common standards will mean engaging on ‘behind the border’ issues and amending domestic regulations, domestic political economies of several members, will pose hurdles for greater implementation. Much will depend on the overall political commitment and negotiating flexibilities of the IPEF members in arriving at meaningful outcomes.