IPEF: Selling a (non-)trade agreement without market access
I had the pleasure of listening to Simon Lester’s presentation at the recent CIEBEL Global Network Conference, on “The U.S. Shift from Enforceable Trade Liberalizing Agreements to Coordinating Investment: Short-Term Experiment or Permanent New Paradigm” which included an interesting discussion of IPEF. In the Q&A time, I asked Simon for his views on whether the much-touted investments associated with IPEF are best seen as incentives been given to countries to join IPEF or as actual benefits resulting from the establishment of IPEF itself and I thought it was worth setting out some further thoughts on this.
Traditional trade agreements have some pretty clear selling points with dollar values attached to them from tariff liberalisation and other market access commitments. This means that when a government is weighing up the ‘costs’ of signing up to new rules, e.g., on transparency or environmental standards, they can point to specific benefit for its economy and the businesses who might otherwise complain.1
IPEF’s lack of market access means this idealised trade-off can’t happen. Instead, when trying to convince governments to sign on to IPEF, the US and other IPEF advocates need to point to things like:
The value of US ‘engagement’ and the ‘strategic benefits’ of a US-led economic forum in the Indo-Pacific;
The ‘rules’ only being aspirational or non-binding so they aren’t an imposition (see Indian reporting emphasising IPEF’s Supply Chain Pillar doesn’t effect India’s “policy space”);
Showing that the rules will actually promote investment and trade if participants sign up to them or embed investment creating initiatives in the agreements. This could be through sound policy analysis showing what rules drive economic development, or intentional investment-raising initiatives such as regular IPEF forums and roadshows or creating an ‘IPEF brand’ that raises the profile of IPEF parties as good places to do business; and
Just directly giving or arranging investments into IPEF participants or rebrand existing initiatives as IPEF-related. For example, convincing the private sector to invest and label it as part of IPEF, providing technical assistance and capacity building, or public-private partnerships.
There is also a fifth option, which would be to use IPEF to enable specific benefits under domestic laws - such as under the US’s Inflation Reduction Act (IRA). However, I’m not sure this is really on the table at the moment (particularly not IRA benefits given the US Commerce Secretary’s apparently saying that IPEF “is not and was never conceived to be a trade agreement”).
This all has implications for IPEF’s longevity and credibility. If short-term incentives dominate, that suggests participants will have only weak ties to IPEF as an enduring institution (if the benefits are too nebulous compared to the costs of participation or have already been realised). Conversely, if IPEF’s rules and forums are seen as being beneficial, that suggests on-going benefits to participation and so points to a more durable and meaningful arrangement over the longer term.
A mix of all of the above arguments have been used to demonstrate IPEF’s value proposition (as will always be the case). This is also true in terms of the concrete benefits associated with points 3 and 4.
In terms of showing that IPEF will itself enable investment, to-date this has focused on creating IPEF forums and funds, alongside creating an ‘IPEF brand’. For example, we have the IPEF Clean Economy Investor Forum, which will meet annually to drive green investment projects in IPEF parties; and the IPEF Catalytic Capital Fund which will “pool resources and expand the pipeline of bankable climate infrastructure projects in IPEF emerging and upper-middle income economies that participate in Pillar III”. A lot of the messaging has also focused on IPEF’s aspirational provisions showing IPEF participants are reliable places to invest - i.e. the IPEF brand will be worth something into the future. However, given the lack of binding rules (at least in Pillar II) it has been harder for IPEF’s first agreements to really show that they themselves will create the conditions for investment.
There has also been use of what seems to be shorter-term incentives or mere IPEF-badging of initiatives that don’t actually rely on IPEF itself existing or doing anything meaningful. For example, announcements like this one referring to the Global Climate Fund as being relevant to IPEF, while it actually appears to be a separate initiative; and the linking up of IPEF with the already announced G7 Partnership for Global Infrastructure and Investment. There are also plenty of IPEF-linked capacity building and technical assistance (e.g. through USAID and Australia committing AUD$25 million for IPEF capacity building).
On balance, my current take is that while there’s a lot of things happening that don’t necessarily require IPEF, it would be too cynical to say that short term incentives are the dominant or only things on the benefit side of the scale. There does seem to be enough credible work and standard setting being done to justifiably say that IPEF itself is going to enable investment and trade, economic integration, sustainability, supply chain resilience, etc. That said, the ‘costs’ around IPEF for participants are also pretty minimal at the moment, and the apparent difficulties around labour in Pillar I suggest there isn’t enough in concrete benefits to outweigh real impositions on participants.
Ultimately, as Simon noted in his response to my question, getting the real answer to these questions requires delving into the discussions actually being had at the IPEF negotiating table and how the US has been selling IPEF to the other participants. And that is something we won’t know without some nimble FOI requests or disclosures from officials.
This is a very simplified/cynical picture of course, sometimes government want to sign up to these rules to enable and support domestic reform efforts or to ‘lock them in’ or provide credible guarantees to outside investors/traders.