Trade negotiators from 14 countries convene in Bali this week to talk about a Framework for Prosperity in the Indo-Pacific. How much the Indo-Pacific Economic Framework (IPEF) secures the interest of businesses and attracts foreign direct investment (FDI) will be a key question on the minds of non-US negotiators.
FDI becomes a “carrot” in signing on to an agreement that does not provide market access to the United States but contains provisions seen as “sticks” that tackle concerns such as those regarding the environment and labor.
Unlike traditional US free-trade agreements (FTAs), the IPEF does not rely on the promise of new market access and lower duties to drive economic reform. Rather, the framework focuses on establishing rules and cooperation on trade, supply chains, clean energy and decarbonization, and taxation and corruption to create a connected, resilient, clean, and fair economic region – all of which advance regional needs.
Without the traditional “carrot” of market access to the US – the quantitative objectives that demonstrate savings and new market share – IPEF needs to be laser-focused on concrete outcomes. Against current macro-economic and geopolitical conditions, this becomes even more critical to executives when deciding if, when, and where to invest.
Three tailwinds
The IPEF starts with three tailwinds at its back, underscoring why so many countries signed on from the start – geopolitics, economic growth, and need.
IPEF governments want the US back in the Indo-Pacific region as a leader, architect, and partner on trade and investment, and not just security. In the more than a decade since the US entered a free-trade agreement in the region, China joined the Regional Comprehensive Economic Partnership (RCEP) and expressed its desire to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).
Today, US trade and investment into the Indo-Pacific is exploding, even without US government support for future FTAs. In 2020, the Indo-Pacific region received more than $969 billion in American FDI, nearly doubling from the last decade. A meaningful IPEF will increase investment even further.
Still, the region requires hundreds of billions of dollars of investment to meet its infrastructure and climate resilience needs. The US administration’s fiscal year 2024 budget request including $50 million to advance the Indo-Pacific Economic Framework for Prosperity barely scratches the surface.
IPEF advances green economy
The experiences from doing business in the Covid era, and the ever-worsening impacts from the climate crisis, in which countries across the region already feel the brunt, compels a pivot and acceleration toward a greener economy.
The IPEF embraces this and can serve as a platform for close collaboration with businesses, many of which are leaders on sustainability and have ambitious plans for attaining carbon neutrality in their IPEF operations.
For example, without liberalization of the renewable-energy sector, factories, facilities, and office buildings, businesses will not have viable options for meeting goals to curb Scope 1 emissions.
Without a common regional policy framework for electric vehicles, the automotive industry will struggle to scale up EV production in this fragmented region. These all require deeper conversations with business as business investment can accelerate the drive to Net Zero.
In addition, support for new decarbonization technologies early on to encourage uptake in addition to supporting batteries becomes a must. Getting to Net Zero requires compliance flexibility options such as the use of offsets/credits with a regulatory framework consistent across markets.
Beyond carbon reduction, the IPEF can also serve as a circular economy framework. US companies can create private sector leadership in Southeast Asia on plastic sustainability by helping solve the plastic pollution crisis in IPEF countries through a market-based financing mechanism.
Setting rules for digital economy
Businesses recognize the need for transformation to a digital economy. Digital trade presents unprecedented opportunities for small businesses to participate in the global marketplace. But the spaghetti bowl of regulations now governing digital trade makes it difficult for them to seize this opportunity and scale beyond their home markets.
The IPEF should set out common rules to allow for cross-border data flows and to promote interoperability, including by establishing common standards to build trust in the digital economy and guardrails on important issues such as protecting critical information infrastructure, privacy, and AI (artificial intelligence) governance frameworks.
An ambitious effort in this regard will enhance the IPEF’s value.
Stakeholders want IPEF to succeed
With the US absent from the CPTPP and RCEP, the IPEF addresses challenges associated with the United States’ trade commitment to the region, a goal that attracts enthusiastic support and advocacy from businesses.
Further, businesses seek scale and the understanding of each government’s strategy and plans. The promise of common rules and standards across the region will support scale and facilitate future investment. However, a strategic vision and a plan toward further integration must be articulated.
Risk and compliance are at the core of business operations in the region. Severe disruption to operations, chaos, and financial losses are fresh on business minds post-pandemic.
The IPEF’s efforts to foster cooperation on an early warning system for supply chains addresses the region’s lessons learned during the Covid-19 pandemic. Before developing regional solutions, IPEF negotiators should deepen conversations with lead firms, logistics, and small businesses on root causes and lessons learned.
For example, navigating a web of rapidly evolving regulatory changes during the pandemic to support business continuity would have been ameliorated by a regionally coordinated enquiry point to support trouble shooting.
Businesses recognize that a US-led framework will support needed rule of law, predictability, and transparency to confidently invest. Strong regulatory coherence and intellectual property protection are critical foundations of doing business and must be included.
The agreement must also be enforceable with a dispute settlement mechanism critical in ensuring value.
Governments, too, need to be creative and innovative and continue to push for solutions that deliver practical results.
Deeper conversations with US businesses based in the region will increase the frameworks impact and thereby business support, which further induces IPEF members to signing on to it. US businesses working through their American Chambers of Commerce across the region and other associations and business groups can become the de facto ambassadors of IPEF in selling the agreement. Bali offers an opportunity to develop that pitch.