Underlying perils of the Indo-Pacific economic framework on ASEAN's economies

By Hanh Duong

The United States introduced the Indo-Pacific Economic Framework for Prosperity (IPEF) in May 2022 in conjunction with countries such as Australia, Brunei, Fiji, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, the US, and Vietnam. Experts recognized IPEF as a moment of economic cooperation among Indo-Pacific countries with the US based on cooperation in four strategic pillars: Connected, Resilient, Clean, and Fair Economy (Office of the United States Trade Representative, 2022). However, the IPEF is less optimistic than it looks, especially for its members which have less political and economic power (such as Fiji, India, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam). Despite its economic vision, IPEF has received criticism from those developing countries that it needs to grant access to the US or more advanced markets (Benson & Arasasingham, 2022). With ASEAN member states in the IPEF, especially its low & middle-income countries, they may face two specific challenges: maximizing its benefits with other developed economies and harmonizing the division among ASEAN members affecting the regional principle of centrality. 

IPEF is regarded as a non-traditional agreement and features significant drawbacks. Although it opened a platform for enhancing US ties with the Indo-Pacific region and enhanced investment in new areas such as critical minerals and the clean economy, skepticism arose because of the lack of access to the market of big economy powers - necessary for developing member states to expand their trade (Benson & Arasasingham, 2022). There remain two specific obstacles that ASEAN member states should be mindful of.

First, there remains a question of how IPEF is fair when other countries, for example the ASEAN nations, cannot access the US market and the US shows a lack of commitment to deepening the economic ties with ASEAN countries. Protectionism in the Biden era shows a closed door of the US to the world economy. The following example highlights the US’ economic coercion and its impact on Southeast Asian economies. Biden announced the US CHIPS Act in August 2022 (The White House, 2022). After its release, there were concerns regarding the negative impact of government subsidies on its semiconductor companies. According to Politico, as a semiconductor wafer, Singapore expressed its worries about the increase in cost and whether the US or EU subsidies could lead to the loss of advantages in economic scale and the digital revolution (Bordelon, 2023). Malaysia's communication and digital minister also shared the same view. Though some believe countries can benefit from the US CHIPS Act as the US is making efforts to diversify its supply chain, it is no doubt that in the long-term, the vision of the US CHIPS Act is oriented in a self-sufficient way (Bordelon, 2023). The US's subsidies of 52 billion USD show their ambition (Bordelon, 2023) in trying to localize the semiconductor industry by producing its chips without importing any parts from other countries. 

Further protectionism that the US might implement in the future is the potential proposal that resembles the European Union's Carbon Border Adjustment Mechanism (CBAM), a tariff mechanism to avoid carbon leakage from carbon-intensive products announced in December 2022 and planned for implementation in October 2023 (Smith, 2023). During the 117th Congress session, several similar documents, such as the Fair, Affordable, Innovative, and Resilient (FAIR) Transition and Competition Act and the Clean Competition Act, were introduced by Senator Chris Coons and Senator Sheldon Whitehouse, respectively (Smith, 2023). The similarity between these two proposals is the aim of establishing a potential trade policy to charge a fee on the imported products that emit emissions over the permitted level and thus ensure the environmental standard of the US. Though both pieces of legislation are still at the proposal stage, they show the intention of the US to follow the path of the EU - tackle the issue of carbon leakage and encourage trade partners to decarbonize their production by implementing carbon pricing (Smith, 2023). Such policies, in any form, will draw concern, severe criticism, or even retaliation from other countries as it would violate international trade commitments based on the World Trade Organization's agreement (Brauch et al., 2021). For developing countries with inadequate capacity and resources to control the emission level of their products, fees in whatever forms can drive up the cost of export and pressure the institutional reforms of the managing and reporting emissions system. The incompatibility of technological development and the differences in environmental standards between developed countries like the US and its developing trading partners like ASEAN makes such decisions a constraint on the smooth transaction of supply chains between ASEAN countries and the US, undermining the IPEF goal of a fair economy. 

Second, though IPEF offers a tool for ASEAN countries to balance against the expansion of China, ASEAN countries need to recognize that the IPEF threatens ASEAN cohesion due to the divisions in responses to the IPEF (Manning, 2023). While most ASEAN countries such as Brunei, Indonesia, Malaysia, Singapore, Thailand, and Vietnam support and believe in the "early harvest" in this cooperation with other big economies (Bloomberg, 2023), Cambodia and Laos seemed to have the opposite reaction. Dr. Sam Seun from the Royal Academy of Cambodia claimed that the IPEF is a short-term commitment (CGTN, 2023). Moreover, it is not a coincidence that both Laos and Cambodia are China-backed countries in Southeast Asia. There has been a division among ASEAN members regarding regional initiatives by outside powers. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) has four, and IPEF has six ASEAN members. Even the initiative by China - the Regional Comprehensive Economic Partnership (RCEP) only has eight ASEAN members - the highest number. These highlight that if ASEAN countries want to join those regional initiatives, it comes with the cost that ASEAN countries have to trade off the "Centrality" principle of ASEAN. Experts believe that "Centrality" matters as it ensures the leadership and upholds the centric participation of the organization in any issues relating to the region or international community (Kominfo, 2023). The divisions among member states showing through their conflicting stances toward great powers' initiatives in the region will threaten this principle, weaken ASEAN's unity, and risk ASEAN becoming a mere symbolic organization without any impactful voice on international platforms. Though still playing an essential role in the region, there is an increasing trend of criticism of the organization regarding slow response and the need for more consensus in making decisions (Cooper, 2023). It is not beneficial for the organization's reputation with the outside world (Geoeconomic Briefing, 2023), which can weaken ASEAN countries' standing at the negotiation table in regional affairs. 

Recognizing the challenges above, ASEAN countries in the IPEF should develop suitable approaches. Since there has not been any binding mechanism for the members, ASEAN countries in the initiative still have various chances to negotiate with developed partners (Benson & Reynolds, 2022). Meanwhile, the ASEAN states in the IPEF must show an apparent attitude towards different unfair deals with the US, or at least leverage its strategic position with China to persuade the US to have a more substantial commitment to opening a part of its market for economic cooperation, which helps ASEAN maximize their benefits in IPEF. 

In conclusion, despite the optimism and hopes in IPEF, ASEAN countries in it should be cautious because of the US's protectionism movement and the threat to the disunity of ASEAN. Yet, as the IPEF is a newborn agreement, ASEAN countries still have an opportunity to flip the negotiation table to minimize disadvantages and maximize their benefits.

References

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