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Biden’s Indo-Pacific Economic Framework is a paradigm shift

Foreign Policy | 1 July 2022

Biden’s Indo-Pacific Economic Framework is a paradigm shift

By Robert D. Atkinson, the founder and president of the Information Technology and Innovation Foundation

The Biden administration’s recently announced Indo-Pacific Economic Framework for Prosperity (IPEF), which aims to strengthen cooperation between the United States and multiple Asian nations on economic, trade, and technology issues, has elicited a fairly consistent response both domestically and internationally: Nice job, but try again. IPEF is a trade partnership, not a formal trade agreement, and foreign nations say what they really want is access to U.S. markets that the latter would have guaranteed. Many in the U.S. trade policy community agree, arguing that IPEF is a well-meaning but largely hollow effort.

Both are wrong. The United States can no longer afford to trade U.S. market access for geopolitical alignment, and other nations can no longer afford to stay on the sidelines as the United States does the hard work of limiting China’s economic, technological, and foreign-policy aggression alone. The sooner the U.S. trade policy establishment and realize this, the better off we all will be. IPEF nations may not want to look too far ahead in considering the double-edged sword that is burgeoning Chinese trade and investment. But having China—a country whose trading practices are hegemonic, thin-skinned, and punitive—as one’s main trading partner is sure to eventually end in tears.

The U.S. trade community has been almost unanimous in condemning IPEF’s lack of market access and tariff reductions from the United States. “Without including market access—the elimination of tariffs and non-tariff barriers—the framework is unlikely to affect trade flows between the United States and the other 13 participants,” Tori Smith at the American Action Forum commented. “As the U.S. seeks allies in a new cold war with Russia and China, it does so without a lever that helped win the last one: new economic pacts like the General Agreement on Tariffs and Trade and the North American Free Trade Agreement,” Greg Ip wrote in the Wall Street Journal. International trade expert Bryan Mercurio was even blunter, telling CNBC: “[W]hat the U.S. has to offer, and the only thing the U.S. has to offer, is money.” In other words, to thwart China’s mercantilist expansion, Washington must buy the cooperation of the countries in the region most likely be hurt by it.

Foreign trade officials and the media voiced the same complaint. “Without offering market access concessions to signatory countries,” the Indian press asked, “how will the US attract a sufficient critical mass of countries to sign up to IPEF and make significant commitments?” In January, before IPEF was formally launched, South Korea’s then-trade minister, Yeo Han-koo, noted that “traditionally … the most important aspect of this multilateral, bilateral trade agreement was this high level of market access.” And in June, Indonesia’s then-trade minister, Muhammad Lutfi, didn’t pull any punches when he said, “We’re going up the value chain to lithium batteries and electric vehicles. I want Indonesian cars to be driven in the United States”—implying support for a reduction of U.S. tariffs on Indonesian cars.

In most cases, U.S. markets are already more open to exports from IPEF nations than their markets are to U.S. exports. Indian tariffs on imports from the United States are almost three times higher than U.S. tariffs on imports from India. Malaysian and Philippine tariffs on U.S. goods are also higher than the inverse. Overall, the effective IPEF nation tariff rate on U.S. imports is 47 percent higher than the U.S. tariff rate on their exports. So why should the United States be the one expected to open its markets?

An article by Tobias Harris and Trevor Sutton in Foreign Policy sums it up: “The new Indo-Pacific Economic Framework isn’t quite what Asia-Pacific governments were hoping for.” What those nations were looking for was better access to U.S. markets without having to act reciprocally—while at the same time not having to choose between trade relationships with the United States and China. They’d like to continue to free-ride off the United States’ economic pressure on China while also gaining asymmetrical access to U.S. markets. Great work if you can get it.

Rather than offering to lower tariffs further, perhaps the Biden administration should suggest that unless these nations join IPEF, it will urge Congress to raise U.S. tariff rates to be reciprocal. This gets to a key point: Fifty or even 25 years ago, the U.S. economy may have been strong enough to afford to buy states’ political cooperation by granting them access to U.S. markets. But the United States’ advanced economy has since weakened so significantly that such a strategy is no longer possible if the country has any hope of avoiding irreversible deindustrialization. That would mean fewer good jobs, a weakened defense industrial base, reduced global economic power, and increased foreign dependency.

The Information Technology and Innovation Foundation’s new Hamilton Index (the creation of which I oversaw as the foundation’s president), which measures 10 nations and regions’ performance in seven advanced industries—pharmaceuticals, medicinal, chemical, and botanical products; electrical equipment; machinery and equipment; motor vehicle equipment; other transport equipment; computer, electronic, and optical products; and IT and information services—found that U.S. performance is weak and declining. These industries now play a smaller role in the U.S. economy than they do in many other countries. At 7.86 percent, advanced industries’ share of the U.S. economy is 6 percent smaller than the global average of 8.34 percent.

This fraction is 20 percent lower when IT and information services are removed from the equation. If U.S. advanced industries constituted the same share of the U.S. economy as they do in China (11.2 percent), then U.S. economic output would be 42 percent larger, or $679 billion annually—3.3 percent of GDP. While the United States has lost global share in advanced production industries, it has gained share in business services and public administration, education, health, and other personal services. Not exactly the foundations of a strong, technologically advanced powerhouse.

By contrast, IPEF nations as a group are now stronger than the United States when it comes to advanced industry output. These industries’ share of South Korea’s GDP is more than twice the global average, Japan 43 percent higher, India 13 percent higher, and Thailand 7 percent higher. Overall, IPEF countries are 29 percent more concentrated in advanced industries than the United States. Given their strength, maybe it is these nations that should be making asymmetrical market opening to the United States. After all, they now lead in advanced industries and have more closed markets.

Given its significant deterioration in advanced industry competitiveness, the United States can no longer afford to offer asymmetrical market access to woo other nations. If Washington is to counter China’s economic and technological advances, the most important thing it can do is to boost U.S. advanced industry output, not weaken it.

IPEF nations, for their part, must ask themselves where they stand on the issue of China’s rise and decide whether their economies will thrive more in an Indo-Pacific economy dominated by a mercantilist power or one in which market-based, democratic economies—including the United States—are strong. This extends to questions of national security and territorial integrity.

IPEF nations presumably understand the China risk. But like many countries during the Cold War, they hope they can sit on the fence and not have to choose, knowing their prevaricating will likely lead the United States to try to woo them even harder. In the Cold War, this might have been acceptable: The United States, if it had to, could have confronted the economically weak Soviet Union on its own. However, in the new cold war with China, going at it alone will not work, as former U.S. President Donald Trump’s solo and unsuccessful efforts to get China to change its economic and trade practices showed. If the IPEF nations wish to avoid being under the thumb of Beijing in a decade or two, now is the time to choose.

For its part, the Biden administration needs to make it clearer to IPEF nations that China’s economic strategy in the Indo-Pacific region is not one of seeking Ricardian comparative advantage. Rather, it’s about dependency theory—with China being the advanced industrial producer and exporter and nations in the region, especially developing ones, cast as commodity and low-wage production export partners. Given China’s systematic mercantilist targeting of U.S. tech firms and products, IPEF countries cannot realistically expect that China will allow their advanced tech firms and products to enter, compete, and succeed in China in the future.

Like Germany from 1900 to 1945, China embraces neither free trade nor protectionism: It practices power trade, a way to ensure that trade boosts its power vis-à-vis other nations. China’s punitive targeting of trade with Australia, Lithuania, and others over political disputes is indicative of this practice, as well as Beijing’s disregard for the rules-based trading system. For all the United States’ faults, when it subscribes to power trade, it is to provide beneficial trade deals to allies.

It is wishful thinking to believe we can return to the halcyon days when the United States was happy to allow foreign economies access to U.S. markets so they took its geopolitical side. Trump’s so-called America First policy didn’t change that; it simply caught up to the reality that the U.S. economy is no longer globally dominant and thus cannot afford such one-sided policies. U.S. Commerce Secretary Gina Raimondo has said as much herself.

None of this is to say that IPEF is optimally structured. In fact, it is not. While the Biden administration has rightly rejected protectionist Trumpian trade policy, it appears to have adopted a progressive, labor-focused trade policy that makes global equity and governance the preeminent goals. Indeed, much of what IPEF proposes reflects progressives’ wish list: stronger labor and environmental standards, tougher antitrust enforcement, corporate transparency, climate change measures, higher corporate taxes, and more economic fairness. The progressive Roosevelt Institute, for its part, celebrated “another nail in the coffin of the Washington Consensus,” the view that trade liberalization, fiscal restraint, and free markets were the royal road to growth.

While perhaps increasing equity—which is now the left’s overarching goal domestically and internationally—their paradigm would limit trade, innovation, and growth and do nothing to build a stronger bloc against China. No wonder so many U.S. allies are slow-walking their participation in IPEF. They are like the United States used to be: putting economic growth and competitiveness first, not global public goods and equity.

So rather than reverting to the prior asymmetric access approach or embracing progressives’ new equity-based framework, the administration should instead be laser-focused on one goal: working with IPEF allies on win-win activities that will boost the nations’ economic and technology growth while limiting China’s. It is understandable that the Biden administration wants to hide that the entire raison d’être of IPEF is for democratic nations to beat China, in part to not spook nations that already fear Chinese retaliation. But that doesn’t mean beating China should not be IPEF’s associated goal.

Crafted properly, IPEF can help the democratic, market-based economies of the Asia-Pacific region work more closely together to push back against Chinese economic and political predation—all while helping each other. IPEF can and should include rules enabling cross-border data flows and digital trade, cooperation on export controls and technology standards as well as technology development, joint financing of key infrastructure and climate change programs, and shared efforts on cybersecurity and confronting Chinese industrial espionage. In short, IPEF should be about building market access, scale, investment, and business connections as part of a mutually beneficial trade and economic arrangement.

The days are gone—or at least should be gone—when the United States must make concessions to get other nations to do the right thing, in this case cooperating to beat China. IPEF needs to be a coalition of the willing, with Washington at the helm. But the United States should not have to buy acquiescence with market access to get there.

 Fuente: Foreign Policy