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Is IPEF an obligations-only agreement?

The Hindu BusinessLine | 15 July 2022

Is IPEF an obligations-only agreement?

by Ajay Srivastava

Designed to serve US’ interest, the Indo-Pacific Economic Framework for Prosperity must offer incentives to other members

The negotiations for the Indo-Pacific Economic Framework for Prosperity (IPEF) may be over in two years. What’s in it for the 13 member-countries, including India? Launched by US President Joe Biden in May at the Quad Summit in Tokyo, IPEF will be the world’s most significant trade agreement. Its members account for 40 per cent of world GDP.

However, IPEF will not be a normal trade agreement and hence challenging to negotiate. Here are some of the challenges:

One, no exchange of tariff concessions among members. Broadly, two types of measures are negotiated in trade agreements. Border measures include eliminating Customs duties on products from partner countries. And harmonising domestic regulations of members. All trade agreements deal with border measures, while many deal with both.

IPEF may be the first multi-country trade agreement that will not negotiate tariffs. Customs duty elimination lowers the cost of products and promotes trade among members. In CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) and RCEP (Regional Comprehensive Economic Partnership), tariff concession was the core feature. A trade agreement without tariff concession creates only obligations.

Two, negotiating agenda dominates the US’ priorities. The critical negotiation areas are (i) digital trade, (ii) labour and environment standards, (iii) clean energy, (v) tax and anti-corruption, and (v) supply chain.

In digital trade, cross-border data flows and localisation are two critical priorities. The US pushes for free flow of data across borders at every forum, from the WTO to G20, to benefit its technology giants in continuing global dominance. Digital trade and data flow rules are new subjects. Rules are under finalisation in many countries, including India, where the industry is in nascent stages.

Strong labour and environmental standards are on the agenda to protect US workers’ rights. In the United States-Mexico-Canada Agreement (USMCA), an auto component must be made by workers earning at least $16 per hour. Notice that the minimum wage in Mexico is $8 per hour. Most exports will disqualify.

On patents, details are unavailable, but the push may be for the ever-greening of patents at the behest of Big Pharma. If agreed, such provisions will affect the introduction of generics in the market by Indian firms.

Members will also negotiate accelerated deployment of clean energy technologies, de-carbonisation, and methane emissions. Agreeing to standards disproportionate to development levels may limit the use of a particular technology or set limits on emissions.

Negotiations on tax and anti-corruption issues will focus on promoting fair competition by enacting and enforcing robust tax, anti-money laundering, and anti-bribery regimes. This looks good on paper. But the fair competition may involve committing to high labour and environmental standards, which may lead to the disqualification of most exports.

On supply chains, the struggle is to secure assured supplies from countries other than China. The focus areas are semiconductors, critical minerals, and clean energy technology. This would present a dilemma for IPEF countries that are also a part of RCEP. Would they forego duty-free trade with China to implement supply chain restrictions proposed by IPEF? How they will react if the new obligations bar them from trading with China because of a lack of transparency or fair play.

Overall, IPEF would require changing many domestic regulations and harmonising these with the US laws. But this may not be in our best interest in many areas. India is a signatory to many international environmental conventions like global multilateral environmental agreements (MEAs). These obligations are like guidelines; the partner country may impose no penalty if others fail to achieve the agreed targets. However, if such commitments are reiterated in an FTA, they become binding. The same logic applies to sustainable development, labour, gender, and other issues.

Nothing wrong with the US laws, except they are made for a country with a $50,000 per capita income. Most economic activity will halt if countries with a per capita income of $2,000 use the same standards.

Three, no additional value to most members. IPEF members, except for India and the US, are already part of two of the most significant free trade agreements in Asia–Pacific region — CPTPP and RCEP. These countries are Australia, Brunei, Indonesia, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand and Vietnam. IPEF would only be useful to these countries if it adds value to what the two agreements offer.

American compulsions

The US economic thinking has changed from external to atmanirbhar. From pushing offshoring of production to China and low tariffs at the WTO in the 1990s to Trump blocking imports by imposing new tariffs in 2017, it is experimenting with new models.

President Biden is continuing the Trump era’s additional tariffs. No wonder the US does not want to negotiate a normal FTA that would require lowering tariffs. It also needs to cater to domestic worker and technology lobbies. But, the US also needs to participate in the Asia Pacific region to contain China. IPEF agenda is the result of such conflicting constraints.

With a focus on changing domestic regulation and no market access through tariff concessions, IPEF may be an obligations-only agreement sans incentives. IPEF will also not have dispute settlement provisions to help partners quickly resolve business-related disputes.

Because of these reasons, IPEF would be tough to negotiate and sell. A thorough review and a buy-in of negotiating agenda by all members will offer acceptable outcomes.

The writer is a former Indian Trade Service Officer. He writes on technology and trade issues

 source: The Hindu BusinessLine