What We Need and Definitely Don’t Need from the Indo-Pacific Economic Framework

The Indo-Pacific Economic Framework for Prosperity sounds good. Who doesn’t want prosperity? It’s a U.S.-led idea, bringing in 13 economies in Asia – including rising economic powerhouse India. The focus is on trade, supply chains, clean-energy policy and manufacturing, and taxes. Some on Capitol Hill, like Senator Mike Crapo (R-ID), ranking member of the Senate Finance Committee, want it to be a free trade deal with market access for U.S. goods and services. That committee’s jurisdiction includes trade agreements, tariffs and import quotas.  Perhaps unbeknownst to Sen. Crapo, IPEF countries like India and tiny Brunei Darussalam are not interested in such things.

So what is the IPEF, why would we need it, and what should it never become? CPA chief economist Jeff Ferry gives his view as what Washington should focus on within this new framework, officially announced by President Biden in Tokyo in May.

Trade is “pillar one” of the four main pillars for IPEF, but judging by how the White House describes it, they are using every buzzword imaginable to entice any and all stakeholders — they say they want free and fair trade. How is free and fair trade possible with countries whose labor costs are lower, among other things?

Jeff: That’s right. True free and fair trade is impossible with countries like India, South Korea, and Japan that provide a wide range of incentives, subsidies, and controls to encourage their own domestic business and consumers to buy locally-made products, not American-made products. IPEF should not include trade. We lose when we engage in so-called free trade with Asian countries that operate this sort of export-led economic policy at home.

The second most important issue for IPEF is supply chains. Again, judging by what the White House is saying, the supply chain issue is focused mainly on diversity of supply within that region. And creating some sort of AI-powered platform that would warn member states of shortages and bottlenecks ahead of time. All roads, however, still point Eastward when it comes to supply chains. None of this seems to be about the U.S. even being a partner in those supply chains, other than a buyer.  Doesn’t Washington need to change that message a bit, to show that we can be on the supply side of that chain, rather than just on the demand side.

Jeff: Yes. The U.S. should have a conscious policy of reshoring manufacturing industry and it should let its partners know that that is our intention. The Biden administration has adopted some very positive measures to promote reshoring, such as those in the Inflation Reduction Act for solar. They should be more explicit and say that a broad-based reshoring strategy is its goal. This is what will help the American worker find high-income jobs that are good for American economic growth.

What do you say to someone in Washington who thinks IPEF needs to go beyond talking about trade, but actually be a trade deal?

Jeff: The members of Congress who want to see a new trade deal with these Asian nations generally are working for their financial donors, not for the voters. Private equity firms are keen proponents of trade deals. Why? Because they buy American companies, offshore jobs to low-wage Asian countries, cut the pay of the remaining American workers, sell off property, reduce spending on safety and benefits, and then make a financial killing, typically by re-selling the company. These trade deals are in the interests of financial professionals and takeover artists but not in the interest of the American people.

The International Trade Commission report last year about free trade deals was actually bad news for free traders, especially given the new buzzwords in Washington about diversity and inclusion.

Jeff:  Yes, a comprehensive ITC study of all our trade deals going back to the 1970s found that their contribution to economic growth was infinitesimal. Instead, they found that these trade deals hurt the incomes of workers and especially minorities, the lesser-educated, and women. We’ve known for decades that countries like Japan and Korea manage their economies to export, preferably to the U.S., and control their own imports tightly to make it very hard for the U.S. to increase its exports. The problem is not static; it’s actually getting worse. Countries like Vietnam, Malaysia and Thailand have learned by watching Japan and Korea. They would love a free trade deal with a big, dumb set of political leaders like many of those in our Congress, so they could sell their manufactured goods here. Those countries have lower environmental and safety standards, lower wages, and government subsidies to help their exports. So it would not be free and fair trade at all.

(Photo by Max Taylor).


“As a nation with a trade deficit this year in the neighborhood of $1 trillion, the U.S. should be taking action to reduce its deficit, not embarking half-cocked on cockamamie trade deals dreamed up by diplomats who want to suck up to foreign dictators.”  – Jeff Ferry



What is the point of IPEF then?

Jeff: For soft power to counter China’s market influence and political influence. IPEF must stay a political alliance and military alliance and that is it. It is very important for us to have alliances with these countries. It would be good to diversify production away from China and into some of these countries. Apple has long been totally devoted to China, to borrow a phrase from the sadly departed Olivia Newton-John, so I’m thrilled to see Apple moving some production into India. The IPEF can encourage that through good diplomatic relations with India.

There is no mention of currency misalignment in IPEF. Talk about how currency comes into play in making for those huge trade gaps?

Jeff:  Right, there is no language about currencies in the IPEF. It could be possible to bring that into the IPEF and insist that members have fairly valued currencies. I don’t see that happening though. This is driven more by diplomacy and defense than by economic policy and I prefer to see it stay that way.

President Biden called IPEF a “priority on my agenda” during an IPEF inaugural event held in Tokyo in May.

During his opening speech, Biden talked about digital companies and IP protection, whereas joint ventures won’t need to share IP in order to do business in one of the 13 member countries. The digital economy was top of mind in all things. Next up was supply chain resiliency and climate change – where the president spoke about the post-fossil fuels economy, something no one in the region is close to adhering to, but instead are manufacturing those goods for the U.S. Vietnam is now one of the largest solar suppliers to the U.S. market today. (Most of them all Chinese companies.)

The White House said that the SARS2 pandemic “emphasized the importance of strengthening economic competitiveness and cooperation” and “securing critical supply chains.” However, none of the language in IPEF suggests that any of those supply chains that are worth securing will be secured within U.S. borders.

Narendra Modi, India’s Prime Minister, said it best when he called IPEF “the collective desire of its members to make this region the engine of global economic growth.  This Indo-Pacific region is the center for global manufacturing, financing, and global trade and investment.”

The U.S. is merely investing abroad or opening its borders to products made there.

South Korea, President Suk-Yeol Yoon said that “given all of the world’s difficult circumstances, IPEF is immensely important. Today’s launch in a challenging economic environment is a meaningful first step forward.”

IPEF has a long way to go.

Member states so far include Australia, Brunei Darussalam, Fiji, India, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand, and Vietnam.



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