New Indo-Pacific Economic Framework May Be the Death Knell for Globalization

AMAC Exclusive – By Daniel Berman

President Joe Biden is the last person we have come to expect boldness from over the past year, yet he sprung something of a surprise when flanked by the Prime Ministers of Japan and India. Biden announced a new Indo-Pacific Economic Framework for Prosperity (IPEF) late last month. The agreement includes 13 countries: the U.S., Japan, India, South Korea, Australia, Indonesia, Thailand, Singapore, Malaysia, the Philippines, Vietnam, New Zealand, and Brunei. The IPEF is, in many ways, a continuation and extension of the Trump Indo-Pacific Strategy, and the announcement represents the fulfillment of the previous administration’s efforts to bring the Indo-Pacific nations into economic alignment with the United States against China.

In launching the initiative, the Biden administration seems to have stumbled onto a different model for economic cooperation, one which does not rely on removing borders and then waiting for capital to do the rest. Furthermore, the participation of so many nations in the region represents a vote of no confidence in China’s willingness or ability to anchor any sort of economic system in which these countries would wish to partake. Of course, all of this is conditional on the Biden administration or a future Republican president turning aspirations into reality.

Let’s first get out of the way what IPEF is not. It is not a revival of the late Trans-Pacific Partnership, the wide-ranging free-trade agreement which emerged as a major issue in the 2016 election, highlighting the disparity between Hillary Clinton’s championing of globalization and Donald Trump’s American economic nationalism. The TPP was in many ways the culmination of the program launched by Bill Clinton in the 1990s of pursuing a globalized economy under which national and regional economies and supply chains would be supplanted by a single global supply chain. This model was based on the assumption that the greatest scale would produce the greatest efficiency.

Already, the defects of that approach were apparent, and Donald Trump’s warnings now appear prescient, given the collapse of global supply chains following COVID-19. The Trans-Pacific Partnership and its premise that eliminating as many borders as possible was the path to economic progress are dead.

The IPEF does not grant members tariff-free access to the U.S. market. In part, this is a concession to political expediency. Joe Biden would likely meet resistance if he opened the US market to the outside competition when Americans were already feeling insecure. But it would be a mistake to call the Framework limited as a result. Rather, the countries involved are trying something different. The Framework suggests that cooperation does not require abandoning national interests or borders. Rather, in a departure from orthodoxy, it suggests that cooperation can occur between protected economies with strong borders—a point that the former president made often in international forums.

At the heart of the Framework is recognizing that there are two types of trade barriers. One type is zero-sum barriers. These include the sort of tariffs and regulations that globalization sought to avoid. Tariffs impose costs and benefits. Lifting tariffs on imported goods might allow Americans to buy manufactured goods more cheaply or Filipinos to have access to cheaper American food, but in turn, put American factory workers and Filipino peasant farmers out of business. By contrast, even if countries decide to protect their domestic workforces, they will still wish to trade some goods and they will still wish to protect the supply of others. That means ensuring that ports are capable of loading and unloading goods, that trade lanes are protected, and energy supplies are secure.

The Framework represents a second approach to international economics—more statist, nationalist, and almost Trumpian. Rather than removing barriers to trade, and then watching as one country specializes, it is interested in security rather than efficiency. At the heart of the framework is a commitment to ensure that within the 13 member states, there is at least one major supplier of every good (one reliable supplier of energy, one reliable supplier of microchips, one reliable supplier of foodstuffs, etc.). The agreement does not try and suggest that there should only be one, nor does it prohibit any member from subsidizing their own producers of these goods, or protecting them from competition from others. Rather, it seeks to ensure that if any member needs to access any product, they will not have to approach a state outside the framework.

This is where the rhetoric about how the Framework is a challenge to China derives from. Each of the agreement’s four pillars – digital trade and trade facilitation, clean energy and decarbonization, supply chain resilience, and anti-corruption and taxes – is a direct challenge to China. The first, digital trade and trade facilitation, targets China’s efforts to take control of ports and extend its digital firewall beyond its borders. The second, clean energy and decarbonization, can either be read as fluff or as a commitment to energy security for member states, something the United States can provide if regulators allow it. The third, supply chain resilience, is self-explanatory. The fourth, anti-corruption and taxes, is a commitment to an integrated financial system to counter the one Russia and China are seeking to construct.

Self-sufficiency from China is not only politically desirable but, after the last few months, increasingly an economic imperative. Rather than exploiting COVID-19 to fill the vacuum left by the West, Xi Jinping’s reliance on domestic vaccines of dubious efficiency combined with a fanatical commitment to zero-COVID has plunged China’s largest cities into lockdown long after the rest of the world has moved on. The results have been catastrophic. For the first time since the 1970s, U.S. GDP growth is predicted to outpace China’s.

There are wider implications, and they lead directly to the Framework. Xi’s mismanagement of COVID-19 has not only harmed the Chinese economy but threatened the security of every country that relies on Chinese manufacturing. With Chinese factories closed, countries that shuttered domestic production on the globalist promise that it would be cheaper to rely on Chinese goods now find themselves unable to source products. It is not just that they may not want to rely on China for political reasons. They cannot afford to rely on China when the Chinese economy can shut down at any moment. That China’s problems are the result of erratic decisions from leadership, which seems increasingly irrational, is further reason to pull away.

It is significant that the Framework includes not just longstanding American allies such as Australia, Japan, New Zealand, and South Korea, but also Malaysia, Thailand, and the Philippines, which in recent years have drawn closer to Beijing. For them, this is a reversal of nearly a decade of policy, a clear sign that their experience with China has been an unhappy one. It also includes India, which historically has been close to Russia, and, as recently as this past month, was defying the White House by contemplating buying Russian oil. India’s decision to join is a sign that when it comes to long-term supply-chain security, it does not trust either Russian reliability or Chinese industry.

It is possible the Framework will not amount to much. None of the members except for Australia and the United States are energy exporters, and both currently have left-wing governments dedicated to reducing CO2 emissions. Yet, for the Framework to work, Australia and the United States will have to be the ones to supply the other ten with energy, as a failure to do so would force them to look outside the Framework, to Russia or the Middle East, defeating the premise entirely.

It is an odd move for a U.S. administration that killed the Keystone Pipeline to commit to a policy whose success relies on turning the United States into an energy supplier. Yet if Washington is willing to do so – and it may well take a future Republican administration to carry through on the promise – there is potential for a viable regional bloc to replace the system of globalization. The 13 signatories between them account for over 40% of the world’s GDP. That is a solid base upon which to try and build a new economic order. But it requires following through, not just promises.

Daniel Berman is a frequent commentator and lecturer on foreign policy and political affairs, both nationally and internationally. He holds a Ph.D. in International Relations from the London School of Economics. He also writes as Daniel Roman.