Siwage Dharma Negara and Maria Monica Wihardja outline recommendations for Indonesia as the ASEAN Chair to align ASEAN’s interests with the Indo-Pacific Economic Framework for Prosperity (IPEF).
In May 2022, the US launched the Indo-Pacific Economic Framework for Prosperity (IPEF) with 14 countries, including seven ASEAN members — Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. It is seen as the US’ geostrategic move to re-engage economically in the region after withdrawing from the Trans-Pacific Partnership (TPP) in 2017.
Arguably the US’ main motivation to re-engage in the Indo-Pacific region is to counter-balance China’s growing influence in the region. In fact, many Southeast Asian economies have economically become deeply interdependent on China through global supply chains. The rising US-China contestation to gain influence in the region has put Southeast Asia in particular, in an uneasy position.
Overall, IPEF is viewed quite positively in the region. According to The State of Southeast Asia 2023 Survey, 46.5% of Southeast Asians view IPEF favourably for their countries, while only 11.7% of respondents perceive it negatively. Interestingly but not surprisingly, there is a significant proportion (41.8%) who are unsure about the impact of IPEF.
The main reasons among Southeast Asian respondents who take a positive attitude towards IPEF include US’ pursuit of greater economic engagement in the region (31.3%) and complementarity with existing ASEAN initiatives (30.4%).
Countries that think that IPEF signals the US’ pursuit of greater economic engagement in the region are Indonesia (45.2%), Vietnam (43.4%), and Malaysia (42.0%). However, only a minority (14.1%) believe that IPEF could strengthen global trade governance.
Apart from that, those who have a negative attitude towards IPEF believe that it will increase US-China competition (33.9%) and that it does not enhance market access (28.4%) for their countries. Respondents who think that IPEF will worsen US-China competition mostly come from Malaysia (63.2%), the Philippines (50.0%), and Indonesia (43.8%).
Indonesia’s Perceptions of IPEF
Indonesia’s view is particularly important, as it is ASEAN’s largest member, economically and geographically, and a G20 country. As this year’s ASEAN Chair, Indonesia needs to show its leadership in the regional grouping amid rising geopolitical tensions and global economic fragmentation.
Indonesia’s intention to join IPEF is premised on it being a means to maintain a strategic balance between the US and China. Through IPEF engagement, Indonesia hopes that there will be more opportunities for economic cooperation that would promote economic competitiveness, efficiency, and productivity in the region.
For Indonesia, IPEF is seen as complementary to other trade initiatives and economic cooperation it is pursuing globally and regionally, such as the Regional Comprehensive Economic Partnership (RCEP) and the Belt and Road Initiative (BRI), among others. IPEF is considered as a new and innovative way of pursuing economic cooperation on emerging issues, such as clean and fair economy as well as resilient supply chains, to help achieve national development goals.
Indonesia also sees IPEF as a platform for international economic diplomacy, especially with the US, which has traditionally been its important trade and investment partner. By joining the IPEF negotiations, Indonesia can contribute to rulemaking and resolve trade issues with the US. Particularly, since IPEF opens up opportunities for cooperation concerning critical minerals-related supply chains, such as nickel, cobalt and copper.
Finally, Indonesia expects IPEF to open up access to technology and financing for its green and digital economy development, as well as to improve governance in these areas.
However, despite its potential benefits, IPEF has some major issues. First, its sustainability is unclear. The fact that the US pulled out from the TPP, which was originally driven by Washington, creates a negative precedent to this new US-led initiative. Similar to the TPP, IPEF could be easily repealed by future US presidents.
Second, its effectiveness and legitimacy are questioned as the US has other binding policy initiatives that may supersede IPEF. For example, it is not clear how IPEF will work under the Inflation Reduction Act (IRA), which seeks to attract onshore investment in green technologies. Will IPEF bring benefits to its members that do not have an FTA with the US? Japan, a US ally, has signed a limited FTA on critical minerals with the US to qualify for US green subsidies under the IRA. But, can other countries, especially non-US-ally countries such as Indonesia, have the same privileges?
Third, IPEF is widely perceived as ‘all sticks but no carrots’. It aims to set rules and high standards in labour, environment, and regulatory or governance practices. However, there is no ‘market access’ compensation (in the form of reduced tariffs) for implementing those rules while imposing high standards may require costly adjustments, especially for countries like Indonesia and India.
Fourth, if the US is allowed to dominate IPEF negotiation outcomes, it could undermine and divide existing trade and investment mechanisms. The exclusion of China and three other ASEAN countries with close links to China, namely Laos, Cambodia, and Myanmar, may give the perception that IPEF is an ‘anti-China’ club. The biggest risk to the region is IPEF heightening the US-China contestation in the Indo-Pacific region.
ASEAN’s Responses to IPEF
Being part of IPEF is certainly not an ASEAN objective. Some ASEAN countries join IPEF primarily based on their respective countries’ interests. That said, the high standards and rules within IPEF can eventually help other ASEAN countries that are non-members of IPEF to benchmark their economic governance against global norms. Excluding the three ASEAN members in the framework will complicate the convergence of standards and rules that ASEAN has been trying to achieve with its ASEAN and ASEAN plus initiatives. It may also risk breaking ASEAN into rival economic blocs.
During IPEF negotiations, Indonesia tried to uphold the ASEAN Outlook on the Indo-Pacific (AOIP), which embraces the ASEAN centrality principle. The Indonesian lead negotiator has clarified that IPEF should be aligned with AOIP, such as promoting open and inclusive principles. This means IPEF should allow the three remaining ASEAN member countries to join. In addition, IPEF should not compete with RCEP, which comprises all ten ASEAN members and another five countries. With negotiations still underway, uncertainty about the US’ acceptance to accommodate Indonesia’s proposals remains.
Other dialogue partners may also influence the progress of IPEF negotiations. For instance, India has opted out of the trade pillar, citing that lack of market access obscures the benefits of joining it. India feels that IPEF’s digital economy regulations, environmental, and labour standards are too stringent. Some other countries, including Indonesia, share the same concern. These countries demand more flexible conditions considering their respective development stage and needs.
Japan, which has been leading the global dialogue on Data Free Flows with Trust (DFFT) and the Hiroshima AI Process, feels that IPEF should establish consistent rules for digital trade that retain the same high degree of standard as in the CPTPP.
There is a significant gap in agreeing on common digital trade principles. Given the wide disparity in regulations and standards in each member country and its respective domestic situation, it is understandable that the US has chosen a non-binding approach to IPEF. But this non-binding approach will make IPEF less effective than the CPTPP or RCEP.
In digital governance, regulatory gaps and diversity across sovereign states, with data localisation as the most contentious issue, will pose a serious negotiation challenge. The proliferation of preferential trade agreements, each with its own e-commerce provisions, for example, already creates fragmentation in digital trade. Since IPEF does not include commitments on market access, participating countries may not engage seriously. In essence, IPEF may not significantly impact digital trade rulemaking among member economies.
Given both the potential benefits and risks of IPEF, the key to Indonesia’s success in IPEF lies in its capability to promote ASEAN interests during the negotiation process. It needs to balance its own national interests and ASEAN goals. Indonesia should continue to promote the inclusion of the three ASEAN countries currently not in IPEF.
Finally, Indonesia should ensure that IPEF would not jeopardise stability in the region. It should ensure IPEF will not become a new platform that creates bifurcation of standards, making members choose sides, and exacerbating unnecessary contestation and conflicts.
This article is part of ASEANFocus Issue 2/2023 published in September 2023. Download the full issue here.
Siwage Dharma Negara is Senior Fellow and Co-coordinator of the Indonesia Studies Programme, and the Coordinator of the APEC Study Centre, ISEAS - Yusof Ishak Institute.
Maria Monica Wihardja is an Economist and a Visiting Fellow in the Media, Technology and Society Programme, the Regional Economic Studies Programme and the Indonesia Studies Programme at ISEAS – Yusof Ishak Institute.