Trade deals hinge on geopolitical realities for success
With the Russian invasion of Ukraine entering a phase of stalemate and the worst of Covid-19 seemingly over, the Biden administration seems to be focusing on economic and political challenges emanating from China in the Indo-Pacific region.
One of the primary economic initiatives in this regard was the unveiling of the trade agreement called Indo-Pacific Economic Framework for Prosperity (IPEF). Aimed at seven countries in the South East Asian sphere, India in South Asia and Northeast Asian economic powerhouses, namely, Japan and the Republic of Korea (South Korea), IPEF is crafted in a manner to integrate partners through agreed standards in four main areas: digital economy, supply chains, clean energy infrastructure and anti-corruption measures.
Beyond the diplomatic semantics and grandstanding, the aim is to pick up the threads where President Obama left in 2016. His administration had facilitated the formulation of the Trans-Pacific Partnership Agreement (TPP) on February 4, 2016, a trade agreement with 11 other countries in the Asia-Pacific.
As soon as TPP was signed, there was opposition from blue-collar base of the Democratic Party and swing voters in the manufacturing hubs of the US, particularly the mid-western states. President Trump capitalised on this sentiment which worked to his advantage and called for the US withdrawal from TPP within a month of his inauguration.
The present initiative is sensitised to the US political landscape which is protecting the interests and addressing the apprehensions of the US workforce at all costs. Going by the contours of the framework and honest admissions by the US officials, the Biden administration doesn’t want to ink any deal that is politically destructive domestically. That is why the IPEF stays away from any goal of tariff reductions. While the details relating to the framework will be thrashed out in a year or so, the framework to have future potency regarding the existing politico-economic realities relating to the region cannot be ignored.
In terms of de-monopolising supply lines, which seems to be based on one of the lessons from the pandemic for many countries, the IPEF is merely a push to the ongoing trend in the Indo-Pacific region for more than a decade. Many companies are shifting their manufacturing base from China and establishing their factories in Southeast Asian countries to take advantage of the lower labour costs. Some of the prominent countries in this regard include Indonesia, Vietnam, Cambodia, Laos and the Philippines. In fact, replicating this reality in Myanmar was part of the capacity-building strategy for many Western countries to incentivise military to continue to civilianise governing structures in the early 2010s. The fact that this strategy didn’t succeed, with a coup d’état in Myanmar on February 1, 2021, is a different story.
The IPEF bloc is stated to be 40 per cent of the global GDP. The fact is that there are already several intra-regional arrangements in place and the success of the present exercise will be demonstrated by how far it is able to synergise with them. For instance, the Association of Southeast Asian Nations (ASEAN), a political and economic union of 10 member-states in Southeast Asia, already has its own treaties or declarations, including ‘ASEAN Economic Community by 2025’. With a population of nearly 600 million, the regional body aims to “create a single market and production base for the free flow of goods, services, investment, capital and skilled labour within ASEAN”. Integrating IPEF with ASEAN will run into trouble as three ASEAN countries — Laos, Cambodia and Myanmar — seen to be part of China’s orbit, are excluded from the new framework.
China’s rise as a manufacturing hub has already led to US domestic reverberations over the last decade, paving the way for Trumpism. The US Commerce Secretary, Gina Raimondo, reportedly said that the US would seek to attract businesses investing in China away towards the IPEF. “I would say, especially as businesses are beginning to increasingly look for alternatives to China, the countries in the Indo-Pacific Framework will be more reliable partners for US businesses.” The de-coupling is easier said than done because of the enormous scale and variety of China’s manufacturing and granular connections established between China and other IPEF participating countries. This is work in progress and will take several years.
One of the prime attractions of any trade deal is the lowering of the tariff barriers. This is congruous to the age-old Ricardo’s law of comparative advantage which states that the countries engage in international trade when one country’s workers are more efficient at producing every single good than workers in other countries. Within IPEF, various countries, particularly Quad, have their own comparative advantage. Japan’s comparative advantage is in high-quality products, superior manufacturing and technological innovations whereas Australia has its strength in extracting mineral wealth required for aerospace, defence, medical, automotive and telecommunications sectors. The US is undoubtedly the global economic behemoth and is the fountain-head of most of the 21st-century tech giants and a trailblazer in shaping the future trends in services, high-value manufacturing and technology in general.
Populous India has a vast young population, with reportedly 67.27 per cent in the 15-64 age-group and has a variety of skill-sets in all grades and scales. It can continue to be a provider of top-class human resource in the technological sector whether in India or the world. This is visible in the tech diaspora across the world, particularly the US. For instance, a cursory morning sight at any of the San Jose public transportation spots in California’s Bay Area symbolises that nearly half of the waiting passengers are Indians. At the same time, it is important to scale up the manufacturing capacity, similar to what China did in the last four decades, to absorb the enormous labour force to ensure a more harmonious and equitable growth. India’s ability to become one of the global manufacturing hubs nicely dovetails with any grouping that allows efficiencies in international trade.
Ultimately, IPEF’s success will lie in not only underwriting the normative space of trading architecture of the Indo-Pacific region but also in its ability to factor in the hard political, social and economic realities on the ground.
