Hot takes on the U.S. Indo-Pacific Economic Framework and Canada

by Carlo Dade
Director, Trade and Investment Centre
May 2022

The announcement on Victoria Day of the beginning of talks for countries to join the U.S. Indo-Pacific Economic Framework, widely covered in the U.S. and Asia, was mentioned in Canada only to note that we weren’t invited. That turns out to be the least important piece of news.

The new initiative, the Indo-Pacific Economic Framework (IPEF), is the biggest move by the U.S. in the region to date and is heralded by the Americans as such. Bloomberg called the IPEF “the most significant US effort to engage Asia on economic matters since former President Donald Trump in 2017 withdrew from the Trans-Pacific Partnership.” Bloomberg went on to add a critical addendum, noting that “as an attempt to counter Beijing’s influence it falls laughably short of what is needed.”

And this is where things get interesting for Canada.

To sort this out, here are the critical initial hot takes.

First, what is the IPEF?

The Indo-Pacific Economic Framework (IPEF) is an attempt to bring together America with 12 Asian economies – Australia, Brunei, India, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand and Vietnam with the door open to others including China and potentially Canada. That Canada was not invited upfront is a Canadian red herring as neither were Mexico, Chile, Peru – the normal Western Hemisphere countries that are on stage for this type of event. The Americans wanted to focus on the U.S. in Asia and for the launch and didn’t want to share the stage and photo ops with non-Asian countries.[1] And had Canada been there it would have been to join a crowded stage to publicly agree to have consultations to have negotiations to hold talks over the next year or perhaps eighteen months to either forge agreements or maybe make commitments on four areas that are important to the Americans but not so much to their Asian partners. Yes, read that again for it to fully sink in – agree to consultations to negotiate to have talks with no defined outcome.

The Americans have hope but no commitments that at least one country will show up for each of the four sets of talks.  The four areas, only two of which clearly deal with trade, are:

  • Connected Economy: Digital trade rules, cross-border data flows, labour and environmental issues and corporate accountability;
  • Resilient Economy: Commitments to anticipate and prevent trade disruptions, including through an early warning system and trade diversification;
  • Clean Economy: Climate change, including targets for renewable energy, carbon removal and energy efficiency standards; and
  • Fair Economy: Tax, anti-money laundering and anti-bribery regimes.

Some of these areas already have substantial progress around the Pacific. For example, a Digital Economic Partnership Agreement (DEPA) was launched in June 2020 by Chile, New Zealand and Singapore, the three founders of the original Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) agreement. Korea has applied to join the DEPA. Canada has been mulling joining for over a year. If digital trade is important then the DEPA, not the IPEF, is where Canada should focus its efforts. In other words, take the offer that’s been on the table and on which it’s been dawdling. It’s not clear to anyone what more the Americans would bring with a new set of negotiations to duplicate the DEPA except perhaps to change the name to the Digital Economic Partnership to Make America Great Again Agreement.

So, where’s the beef?

While the areas identified by the Americans are important, what’s not on the table is just as important – a traditional trade agreement with tariff reductions, rules of origin for market access, and dispute settlement procedures.

In other words, despite the media calling it a “trade pact” the IPEF is not a comprehensive trade agreement nor is it a vehicle to achieve one, nor to achieve anything that’s a top priority for Asian partners.

So why show up at all? The answer is something Canadians understand: if the U.S. invites you to the party, you attend. If there is nothing that you want on offer, but there are things that you do not want, like signing up for meaningless talks, you take the posture of Asian participants: agree to consult on holding discussions and hope that something other than American goodwill eventually emerges.

For Canadian exporters still smarting from losses to the Americans caused by the U.S.-China and U.S.-Japan Phase One Agreements, the fact that the IPEF does not include the normal exchange of market access that comes with a traditional trade agreement is a relief. Asia’s loss is Canada’s gain.

But beyond the short-term ‘no-loss-is-win’ victory, there is an important lesson for Canada about the limits of American economic power on display. Any American offer of a traditional trade agreement has to be ratified by Congress, which is an unrealistic expectation. Approval was impossible to achieve under Obama, Trump or Biden. Anyone who even remotely follows U.S. politics knows that this will not soon change. Therefore, any agreements negotiated by the Americans in Asia will have to avoid the inclusion of commitments that would require coming before Congress. This limits what can be offered – like tariff cuts and market access. And while there are things that can be done solely on the signature of the President, these are easier for a successor to undo or to be stymied by a Congress that hasn’t agreed to them.

The yawn heard across the Pacific

Hence, the lack of excitement in Asia. Our colleagues at the Asian Trade Centre in Singapore described the reaction in Asia as the “equivalent of holding a rather important party—announced months in advance—that almost no one wanted to attend.” The Financial Times noted that with tariff reductions and market access off the table, the American trade deal was not only less appealing, but the proposed “this will go over well in Washington” agenda had to be watered down even further to induce some countries to attend.

What the U.S. administration is heralding, and American media are lauding as a great success, is anything but.

The IPEF is not the first “nothing burger” that the Americans have served in Asia. At the June 2022 G7 Summit, the Biden administration launched its response to China’s Belt and Road Initiative: the Build Back Better World Infrastructure Initiative. A year on and “the precise contours of Build Back Better World remain unknown” with the U.S. president unable to provide details. The IPEF has, at least, a policy document and consultation process behind it but given the Biden administration’s track record, there is no reason to believe this will go anywhere.

So what does it mean for Canada, and the West in particular, if this is the best the Americans can do to counter China and reassert leadership in Asia?

First, the region’s commodity exporters should not panic. This is not a trade pact that threatens market share as was the case with the U.S.-China and U.S.-Japan Phase One agreements.

Second, if this is the best the Americans can offer to contend with the rise of China, other than tariffs, then Canada needs to look elsewhere. The U.S. may not be able to pursue traditional trade negotiations, but Canada can. If expanding rules-based trade through comprehensive agreements is important to Canada, then we have to forge ahead without the U.S.

Canada has entered negotiations with India and the Association of Southeast Asian Nations (ASEAN). Even though these are negotiations for partial trade agreements, they are still better than anything the Americans are offering.

There’s the beef!

But even more important than negotiating new agreements is that Canada, as Prime Minister Trudeau noted, has what the U.S. does not, cannot, and will not have – a real trade agreement with market access, tariff reductions, dispute settlement, high standard rules with seven Asian economies and others lined up to join, including China – the CPTPP. What the Prime Minister neglected to mention is that Canada is part of the CPTPP despite, not because of, his government which considered following the Trump administration in withdrawing. The PM personally almost torpedoed the agreement by refusing to sign at the 2015 APEC summit in Manila, publicly embarrassing the Japanese prime minister who was leading the drive to keep the TPP alive and angering the Australian delegation to the point of publicly cursing.

Despite this history, Canada is still part of the CPTPP, though apparently a reluctant member given the lack of attention by the government and business community. Rushing to complain about not being included in a meaningless IPEF initiative but not devoting the same attention to advocating for the CPTPP is but one indication of Canada’s inability to focus on what’s most important in Asia.

And this is where things get interesting. The CPTPP remains attractive for other countries with the U.K. well along in its application to join and China preparing a serious application as well.

And perhaps this is the most interesting, read-between-the-lines news out of the IPEF announcement – it removes a major barrier for China joining the CPTPP.

The reasoning here is as follows. Americans explicitly opened the IPEF to China. They did so because countries in Asia would not join an initiative that would be perceived by China as designed to isolate it. No country in Asia wanted to alienate the Americans by not accepting the IPEF invitation, but neither did they want to offend China by accepting. Assuring that the IPEF launch could not be touted by the Americans as a means to alienate or exclude China gave the Asian countries the cover they needed to attend.

For Canada, the U.S. invitation to China to join the IPEF provides a different gift; it makes it more difficult for the U.S. to invoke the infamous section 32.10 in the new North American Free Trade Agreement (NAFTA) that allows a member to withdraw if any other member enters into a trade agreement with a non-market country, i.e., China.

Waking up to smell the coffee . . . or tea

The Americans have signed their own trade agreement with China, the U.S.-China Phase One agreement, and now, on top of that, have just invited China to apply to join their IPEF. This makes it more difficult for the U.S., with a straight face, to oppose China joining the CPTPP. The Americans being Americans will not care. They will oppose China joining the CPTPP regardless and government and elected officials may threaten to invoke the non-market country clause in the new NAFTA and do so with a straight face even if China is sitting at their IPEF table. But the credibility of their opposition has just taken a second major hit. If China puts a serious offer on the table to join the CPTPP that benefits Canada, then let’s hope Canadian spines are, after what the Americans have done, now stiff enough to allow the country to think more about whether a Chinese offer makes sense for Canada and less about what the Americans will think or do.

The lesson for Canada in the IPEF are the limits of U.S. ambition and its capacity to advance meaningful progress on the aspects of trade that matter most for Canada or to stop Canada from pursuing its own interests. It’s time to stop waiting for Godot and get on with growing the CPTPP. It’s the one thing we have that the Americans do not and the IPEF will not give them – a real trade agreement in Asia.

[1] Two side points. Australia and New Zealand are not always thought of as “Asian countries” but including them in the IPEF is similar to including Canada in Western Hemisphere events and organizations such as Las Cumbres de las Américas aka, the Summit of the Americas and the Organization of American States. Second, if any Western Hemisphere country should have been included in the IPEF it would be Chile, not Canada. Chile has bi-lateral trade agreements with 11 Asian countries in the IPEF going back decades, was one of the three founders of the original Trans-Pacific Partnership agreement and more recently is one of the three founders of the Pacific Rim Digital Economic Partnership agreement. Canada, on the other hand, has just one bi-lateral agreement with an Asian IPEF member. Chile has earned a spot from decades of putting in the work. Canada’s absence, in contrast, goes back decades.