Indo-Pacific Bidenomics: The Emergence of a New Economic Order

The Biden administration has been making every effort to demonstrate its commitment both to the Indo-Pacific region in general and to its economic statecraft in particular. So far, that effort includes the development of a new economic standards framework, infrastructure initiatives, and implementation of new legislation to lure investment into the United States and address national security and foreign policy issues around technology and natural resources. Washington is no longer solely focused on military and diplomatic strategy; economic engagement has become the leading edge of diplomacy, something that has been a long time coming for the Indo-Pacific.

The upcoming Asia-Pacific Economic Cooperation (APEC) summit being held in San Francisco from November 15 to 17 will be a visible culmination of the work that has gone into these efforts. APEC San Francisco will aim to show that summits and high-level visits are not all talk but have had tangible outcomes as well. The Biden administration will have to show in the last year of its first term (and beyond) the durability and commitment of these arrangements. The commitments being made now must last through successive administrations or changing political winds.

Pendulum Swing Away From Trade Agreements

Since the Trump administration (2017-2021), U.S. economic strategy with respect to Asia has focused on countering China and bringing jobs back to the United States. This has also manifested in questioning the meaning and utility of the liberal rules-based order born out of the end of World War II, which had brought relative global stability and economic growth. Today, however, there are increasing questions as to whether the Bretton Woods system still applies to the 21st century world. 

There has been no greater visible manifestation of this shift in focus then the U.S. withdrawal from the Trans-Pacific Partnership (TPP), a trade agreement negotiated under former President Barack Obama that included the United States, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. This was a key piece of the “pivot to Asia,” the brainchild of then-Assistant Secretary of State for East Asian and Pacific Affairs Dr. Kurt Campbell to provide a strategic rebalancing of economic, military, and diplomatic interests from Europe and the Middle East to Asia. The TPP was viewed as an opportunity to expand U.S. trade and investment abroad, spur economic growth, lower consumer prices, and create new jobs while also addressing key issues in overseas market on labor, corruption, and creating a better enabling environment for investment.

But there were detractors too, coming from both the Democratic and Republican parties starting in 2015-16. The United States was undergoing a rethink of the impact of global trade, including on domestic constituencies, U.S. manufacturing, and jobs. During his run for president, Democratic Senator Bernie Sanders condemned the TPP, and like the Trump campaign, framed it as a means to undermine U.S. manufacturing and wages. Even the Democrats’ presidential nominee, Hillary Clinton, opposed the TPP on the campaign trail, despite being an ardent supporter during her time as Obama’s secretary of state. Clinton made the shift to garner votes from her party’s base.

When then-President Donald Trump withdrew the U.S. from the TPP shortly after taking office, it was a rare instance of Democrats agreeing with him. Sanders issued a statement saying, “For the last 30 years, we have had a series of trade deals – including the North American Free Trade Agreement, permanent normal trade relations with China and others – which have cost us millions of decent-paying jobs and caused a ‘race to the bottom’ which has lowered wages for American workers.”

That sentiment has not changed much in the Biden administration, which continues to have an uneasy relationship with trade even as it wants to have a liberal rules-based order where countries abide by an agreed upon set of frameworks, principles, and regulations.

National Security Advisor Jake Sullivan in an April 2023 Brookings Institution event himself questioned whether the pillars of Bretton Woods that built the economic world order as we know it were still structurally sound. Sullivan stated that technological advances, financial crises, rising economic inequalities, pandemics, and nefarious actors – namely China – seeking to work outside the accepted world order were creating irreparable “cracks in those foundations.” He questioned the premise that economic integration could make countries play fair or lift all ships, instead emphasizing the risk of creating dependencies that put countries’ critical supply chains at risk.

While Bretton Woods is a pillars-based system built on trade, macroeconomics, and development, Sullivan envisioned building an international economic architecture that has less of the “Parthenon style clear pillars as we did after the end of the Second World War, but something that feels a little bit more like Frank Gehry [an architect famous for his deconstructivist style]. You know, that's a mix of structures and substances.”

The United States has not convinced the Indo-Pacific region – much less the rest of the world – that free trade agreements are passe. Following the U.S. withdrawal from the TPP, in 2018 the remaining 11 countries – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam – came together to sign the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The agreement looks to deepen the liberalization of trade in goods and services among the members and address emerging issues around digital trade. The United Kingdom became its 12th member in July 2023, while China, Taiwan, Ecuador, Costa Rica, Uruguay, and Ukraine have all applied for membership.

IPEF: Building Structures and Substances

With no plans to revive the TPP or to join CPTPP, the United States wanted to find another way to demonstrate an economic commitment to the Indo-Pacific region. One of the ways it came up with to accomplish that was through the Indo-Pacific Economic Framework (IPEF). Less of a traditional trade agreement, according to Kurt Campbell, now the deputy assistant to the president and coordinator for the Indo-Pacific, IPEF focuses on shaping the environment for the economies of the future, particularly around decarbonization, supply chains, and digital trade. It is also an opportunity to address imbalances – an ongoing issue since the Trump administration – and fairness around trade and investment by setting common standards and promoting access to U.S. exports and investment in the U.S. economy.

The Biden administration launched IPEF in May 2022 and included four primary policy pillars as part of the framework: (1) “Connected Economy,” which covers fair and resilient trade, including the seven subtopics of labor, environment and climate, digital economy, agriculture, transparency and good regulatory practices, competition policy, and trade facilitation; (2) “Resilient Economy,” which covers supply chain resilience and related issues; (3) “Clean Economy,” which covers infrastructure, clean energy, and decarbonization; and (4) “Fair Economy,” which covers taxation and anti-corruption.

Australia, Brunei, Fiji, India, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Thailand, and Vietnam signed onto the framework, although India only signed onto three of the four pillars, opting out of the first pillar due to concerns on binding conditionalities on environment and labor. The initial joint statement emphasized that “this framework is intended to advance resilience, sustainability, inclusiveness, economic growth, fairness, and competitiveness for our economies. Through this initiative, we aim to contribute to cooperation, stability, prosperity, development, and peace within the region.”

What IPEF absolutely did not include was market access – a key focus of the CPTPP and other regional trade pacts like the Regional Comprehensive Economic Partnership (RCEP), of which China is a part.

Since the launch, the Department of Commerce and the Office of the U.S. Trade Representative have conducted a flurry of ministerials, summits, and meetings in cities located in IPEF signatory countries.

The most notable progress to date has been around Pillar 2 and supply chains, with the announcement in May 2023 of an IPEF Supply Chains Agreement, called the “world’s first multilateral supply chain agreement.” As in IPEF itself, members countries did not make any binding trade commitments in the agreement but did establish a council to oversee the development of sector-specific action plans designed to build resilience and competitiveness in critical sectors. They also sought to improve crisis coordination and response during a crisis, strengthen supply chain logistics, enhance the role of workers, boost workforce development, and identify opportunities for technical assistance and capacity building.

IPEF is expected to be notionally negotiated by the November APEC summit. This will be an accomplishment for the Biden administration and certainly will signal the United States’ economic commitment to the region. But serious questions around next steps remain. IPEF lacks durability and could come apart under a new administration in the U.S. or other member countries. The U.S. Congress has not, and will likely not, ratify it and no other member’s parliamentary counterpart has or has plans to ratify it either.

Another missing piece, and a major sticking point for member countries, is lack of market access. According to conversations I had with governments and business from members countries early in the IPEF process, there was hope that the IPEF negotiations would eventually include market access. That has not happened, and the likelihood of it happening in the Biden administration or during a possible second term is slim.

That said, most signatories are committed to the agreement and see it as an effort to break new ground on issues like supply chains and achieve meaningful results.

IPEF is just one step on trade and, as the administration and Campbell assert, is about shaping standards and setting a foundation for the future economy. But the U.S. will have to maintain its political leadership to ensure continuity of discussions and more importantly, implementation of standards to get toward trust-building among the signatories – and maybe, eventually, the market access so desired by Indo-Pacific partners.

Countering China’s Belt and Road Initiative Through Investment

Another addition to the structure of the Biden administration’s Gehry-like economic diplomacy policy is investment overseas. This has culminated in a series of initiatives such as the G-7-led Partnership for Global Infrastructure and Investment (PGI), engagement through the Quad (Australia, India, Japan, and the U.S.) and utilizing financing and development agencies such as the U.S. International Development Finance Corporation (DFC), Export-Import Bank of the United States (EXIM), U.S. Trade and Development Agency (USTDA), and USAID.

The PGI, formerly known as Build Back Better World and PGII, was announced at the G-7 summit in Cornwall in June 2021 and officially launched the following year as a way to address the trillion-dollar infrastructure gap by mobilizing up to $600 billion in public and private financing in high quality, values-driven infrastructure projects in low- and middle- income countries. The focus of the PGI has some overlap with the priorities of IPEF, with a focus on climate, healthcare, ICT, and gender-related infrastructure investments.

In May 2022, the Quad leaders announced the formation of the Quad Infrastructure Coordination Group to address Indo-Pacific infrastructure needs in digital connectivity, transportation infrastructure, clean energy and climate resilience. This is not to be confused with the Trilateral Infrastructure Partnership (TIP), in effect since 2018, which includes the DFC, Japan Bank for International Cooperation (JBIC), and Australia’s Department of Foreign Affairs and Trade (DFAT), and Export Finance Australia (EFA). All of these acronymed efforts were focused on building a pipeline of commercially viable and high-quality infrastructure projects in developing countries – but also ones of increasing national security and foreign policy importance.

The DFC will be a key agency in implementing the ambition of the PGI, Quad, and TIP, and other ways to counter China’s Belt and Road Initiative and development issues in low- and lower middle-income countries. The DFC is the successor organization of the Overseas Private Investment Corporation (OPIC) and is combined with USAID’s Development Credit Authority. Created through the U.S. Congress’ October 2018 bipartisan legislation – the Better Utilization of Investment Leading to Development (BUILD) Act that doubled OPIC’s budget – the DFC has a total spending cap of $60 billion and new financial tools such as private equity and technical assistance.

Since it officially launched in late 2019, DFC transactions have contributed to energy security and climate goals, food security and agriculture, and financial inclusion across the globe. The DFC has also been an active player in contributing to health and infrastructure initiatives, most notably financing transactions to boost COVID-19 vaccine supplies from India and Senegal, providing $300 million in financing for critical infrastructure projects to support IPEF, and supporting infrastructure and renewable energy projects in India announced at the 2023 G-20 summit. The DFC participated on a project developing digital infrastructure in the Pacific Islands through the TIP and on COVID-19 vaccine manufacturing through the Quad partnership.

The United States is deploying other agencies as well to boost U.S. investment activities overseas, such as USTDA. USTDA occupies the front end of an investment, including feasibility studies and pilot projects, that help get larger infrastructure project concepts off the ground. As part of the official PGI launch in June 2022, USTDA announced that it had awarded a $600 million contract to U.S. telecommunications company SubCom to build the Southeast Asia-Middle East-Western Europe 6 submarine telecommunications cable that will connect Singapore to France through Egypt and the Horn of Africa. The U.S. Department of State, Commerce’s Advocacy Center, EXIM, and USTDA added another $4 million in capacity building to support the project.

At the same launch event, USAID announced an investment of $40 million in the Southeast Asia’s Smart Power Program to decarbonize and strengthen the region’s power system through increasing regional energy trade, accelerating the deployment of clean energy technologies, and actively engaging private sector leaders, and key development partners. One key aspect of the program was the expectation of mobilizing $2 billion in financing, likely expected to come from private sector sources, that would result in the increase regional energy trade by 5 percent and hopefully 2 gigawatts of advanced energy systems deployed.

Making Time for Face Time

There have also been a flurry of high-level visits, all of which have come with announcements of new projects and investments. U.S. Vice President Kamala Harris, Secretary of State Antony Blinken, and Secretary of Commerce Gina Raimondo have all attended regional forums or attended bilateral meetings supporting IPEF, the Quad, and PGI.

To demonstrate the importance of the Indo-Pacific region to the U.S., Biden made a trip to Vietnam in September 2023, where both countries’ leaders announced the U.S.-Vietnam Comprehensive Strategic Partnership, which is intended to encourage bilateral and regional cooperation on critical and emerging technologies. Both countries also pledged to support the “rapid development of Vietnam’s semiconductor ecosystem and to work together energetically to improve Vietnam’s position in the global semiconductor supply chain.”

Will It Make A Difference?

The PGI is a good step toward bringing high quality infrastructure to low- and lower-middle income countries. To compare it and the implementing agencies to BRI is a folly, however. To put the numbers in perspective, China’s BRI planned to invest as much as $8 trillion in infrastructure projects across Europe, Africa, and Asia. The China-Pakistan Economic Corridor (CPEC) alone, China’s 15-year investment in Pakistan, touts $62 billion in funding, which is more than the DFC’s spending cap. The PGI intends to gin up $600 billion in five years, with $200 billion coming from the United States. Given the state of Congress and budgeting, it is unlikely that any new money will be forthcoming.

According to Ambassador Ted Osius, president of the U.S.-ASEAN Business Council, there is optimism about the prospects of new investments, regardless of Congress. Osius pointed out the DFC’s list and other investments into the region in healthcare, small and medium enterprise financing, energy transition, and efforts on infrastructure. There are more than 6,000 U.S. companies in ASEAN and the region is the United States’ fourth largest export market. Osius assessed that the Biden administration’s efforts have contributed to these numbers.

The views on the impact on the Pacific Islands are mixed. Hayley Channer, director of the Economic Security Program with the United States Studies Centre at the University of Sydney, pointed out the dramatic increase in U.S. aid to the Pacific Islands. Channer believes U.S. engagement will have a big impact simply because Pacific Island nations are small and millions in new investment go a long way. Biden has asked Congress to approve more than $800 million in assistance the Pacific. In such small countries, millions of dollars for development and commercial opportunities in the United States will improve outcomes. 

However, some Pacific Islands countries are a bit more cynical. Dr. Henryk Szadziewski with the Center for Pacific Island Studies at the University of Hawaii at Manoa noted that the Pacific Islands welcome both China and the United States. There is an appreciation for the attention the U.S. is bestowing, but, according to Szadziewski, there is also skepticism. Lofty promises of investment and work on climate change go all the way back to the first Bush administration and little has materialized.

Lure or Punish?

Further complicating the response from Indo-Pacific countries, national security issues are increasingly woven into economic policy, resulting in less and less daylight between domestic and foreign policy.

In August 2022, Congress passed the CHIPS and Science Act to incentivize domestic funding to support U.S. semiconductor manufacturing capability. This has spurred investments from partner and allied economies to invest in the United States. Taiwan Semiconductor Manufacturing Company (TSMC), which began construction on a chip plant in Arizona in 2022, announced plans to triple its investment to $40 billion. Samsung has announced plans to build a $17 billion plant in Texas.

The Inflation Reduction Act (IRA), by far, has made the biggest economic splash. The act includes a broad range of subsidies, incentives, and domestic manufacturing requirements meant to spur green technological innovation in wind, solar, and hydrogen, among others. It also is designed to encourage the purchase of U.S.-made green energy products, no doubt a necessary provision to ensure its passage. Its sheer size and scale, according to Channer, are a boon for climate change action but it is also concerning for some U.S. allies who are trying to reshape their own economies to take advantage of the clean energy transition.

One example centered around the tax credit provision to support the adoption of electric vehicles (EVs) in the United States. Initially this was seen by South Korea as a violation of trade rules, a “betrayal” as one official called it, and risked undermining the growing economic partnership.

Australia is another example. Australia has an FTA with the United States, which allows it to benefit from the IRA. In reality, Channer said, Australian hydrogen companies are setting up shop in the U.S. as a direct result of IRA opportunities – despite Australian efforts to develop its own hydrogen industry. 

The Biden administration is not just looking to lure investments to the U.S. but also ensure allies, partners, and like-minded countries in the region are on the same page when it comes to critical technologies. On October 7, 2022, the Biden administration announced a new export controls policy on artificial intelligence (AI) and semiconductor technologies to China. The controls seek to choke off access for the Chinese AI industry to high-end chips; block China from designing AI chips domestically by restricting access to U.S.-made chip design software; prevent China from manufacturing advanced chips by curbing access to U.S.-built semiconductor manufacturing equipment; and block China from domestically producing semiconductor manufacturing equipment by choking off access to U.S.-built components. This fits in with the larger work on future economies around digital trade and supply chains and ensuring safe and trusted access.

However, similar to the IRA, the October 7 controls took some partners, like South Korea, by surprise and brought the reality of a very complex industry and supply chain into view. Korean chip firms have a lot of business in and with China; Korean firms make money from Chinese sales, but they also produce around 40 percent of their memory chips at facilities in China, which they have invested in for well over a decade. The United States has made some exemptions to allow for the Korean companies to adjust, but the furor yet again shows that these acts meant to address national security concerns have unintended consequences.

Bringing It All Together

The November APEC summit is a chance to showcase how all of these pieces work together. The APEC member countries themselves are also focused on showcasing more tangible results. The topics that the United States and its partners and allies have been working on, particularly on sustainability, climate, gender, and SME financing, overlap well with APEC priorities.

This is also a chance to highlight what has been accomplished and what needs to be done in the year ahead to solidify gains. The APEC summit is the notional date as to when the IPEF framework is set to be finalized. Most of the pillars, with the exception of the digital trade piece, seem to be on track. Participating countries will have to ensure that the momentum behind the negotiations does not slow, proving that the concerns around the durability of the agreements were just that: concerns. The United States got a vote of confidence from a wide range of Indo-Pacific actors on IPEF and it will be up to U.S. leadership to continue to hold that trust and provide tangible policy and commercial outcomes with IPEF.

The same goes for its infrastructure initiatives. Unfortunately for policymakers, project lifecycles do not always meet policy timelines. To do a project right, it takes time and due diligence, and it costs money. Investing in low- and lower middle-income economies is inherently risky and relying on private sector capital mobilization to achieve policy goals in the Pacific Islands or tricky Southeast Asian markets may not be appealing to many companies. Engaging with the private sector will be key to understand what tools are helpful from government. APEC will be hosting CEOs and that would be a good place to start.

With a presidential election one year away, the Biden administration should focus on making these initiatives – especially IPEF and PGI – durable, so they can live beyond an administration or political lifecycle. The issues these frameworks and initiatives seek to address are long term and will require partnership and coordination with allies and like-minded countries on development gaps and building news systems and structures for the future evolving economic landscape. 

This also means that policies meant to protect national security interests must be undertaken to mitigate collateral damage, such as export controls that could potentially harm allies and partners. The United States must find a way to encourage growth without punishing those we mean to support. The frameworks are there; now it is time to deliver.