This strategic-economic bloc will only tighten the leash

General Studies Paper 2

Context

• India chose to join the Indo-Pacific Economic Framework for Prosperity (IPEF) but declined the Regional Comprehensive Economic Partnership (RCEP).

About Regional Comprehensive Economic Partnership (RCEP)

• About:
  • RCEP is a regional Free Trade Agreement between ASEAN and 6 other countries, viz. India, China, Japan, South Korea, Australia and New Zealand.
    • It was signed in November 2020 after 8 years of negotiations.
  • Although, India walked out of the negotiations. Therefore, it is now an agreement between 15 countries.
  • RCEP members constitute nearly a third of the global population and 29% of global GDP.
• Significance of India pulling out of RCEP:
• India pulled out of the RCEP negotiations, citing its negative impact on the domestic producers.
• India has said that the international groupings have many times led to de-industrialisation and an unfair competition imposed on domestic producers.
  • In a veiled reference to China, India has also said that many countries preach openness, but are not so transparent about their own policies.
• Other members have said that the doors of RCEP would be open for future participation of India.

About Indo-Pacific Economic Framework for Prosperity (IPEF)

• About:
  • It is aneconomic framework for enhancing US involvement in Asia.
  • It is tocounter the influence of China in the region and fill the vacuum created by not being a partner to RCEP.
  • Not a traditional trading block: 
    • The IPEF, unlike FTA, is more of a tailor-made mechanism that seeks the benefits of trade partnerships while insulating Americans from the downsides of trade liberalisation.
    • Unlike FTAs, it does not include market access commitments such as lowering tariff barriers, as the agreement is more of an administrative arrangement.
  • Stress on supply chain: 
    • IPEF manifests US’ ambitions to expand ties with key Indo-Pacific economies through robust supply chains excluding China.
  • Focus Areas: It is based on 7 strategic pillars:
    • Trade facilitation, particularly for small and medium enterprises (SMEs)
    • Standards for a digital economy and technology
    • Supply-chain resilience
    • Decarbonisation and clean energy
    • Infrastructure
    • Workers’ standards
    • Other areas of shared interest
  • ‘Menu’ based approach: 
    • The 7 pillars will have specific modules and countries would have to sign up to all of the components within a module, but do not have to participate in all modules.
    • Member countries can opt to participate in parts of the framework.

Significance

• Strategic importance:
  • The US-led Indo-Pacific Economic Framework for Prosperity (IPEF) is strategically important for India.
  • It will enhance India’s economic engagement in the region.
  • The IPEF will help control the damage caused by the RCEP withdrawal as all the IPEF members save India and the US are signatories to the RCEP.
• Supply chain building:
  • Building resilient supply chains is one of the motives of the IPEF.
  • India can consider members as alternative sources for its raw materials requirements.
  • This could reduce India’s overdependence on China for these inputs.

Challenges & criticisms of IPEF

• India’s economic issues with USA:
  • India has economic issues with the U.S., e.g. about agriculture, intellectual property, labour and environment standards, and the digital economy.
  • And the Strategic partnership should not mean accepting a completely U.S. self-interest-driven economic framework that does not suit India’s current economic interests.
• Centring USA:
  • According to the early assessment by many experts, it shows that the IPEF would result in a complete stranglehold over the economic systems of the participating countries, in a manner that is to the complete advantage of the U.S.
  • The IPEF is really about developing a strategic-economic bloc — an integrated economic system centred on the U.S., and, as importantly, excluding China.
• Detrimental to domestic policies:
  • According to critics, the systemic integration caused by the IPEF’s actual long-term impact willleave little leeway for domestic policies to help a country’s own industrialisation.
    • For example., through tight supply chain integration that many elements of the IPEF contribute to.
  • Deep implications for India:
    • The IPEF can already be seen to have deep implications in 
      • Agriculture,in terms of genetically modified seeds and food,
      • Surrendering policy space for regulating Big Tech, and
      • Compromising a comparative advantage in manufacturing because of unfair labour and environment standards.
    • It will also seriously affect India’s ability to create a vibrant domestic ecosystem in emerging areas such as a digital economy and green products.
  • Digital Governance: 
    • IPEF formulation contains issues that directly conflict with India’s stated position. These are:
      • Prohibition on cross-border data flows and data localization requirements including for financial services
      • Prohibition of the levying of customs duties on digital products distributed electronically
      • Promotion of the interoperability of privacy rules and related enforcement regimes, such as the APEC Cross-Border Privacy Rule, while respecting U.S. federal and state privacy laws and regulations.
    • Huge investment demand: 
      • Though it’s stated to be beneficial for the countries in the region it would require huge investments and active participation in the implementation phase.
    • Silent on market access: 
      • The arrangement is silent on providing access to the indigenous goods and services to the markets of would be member states including U.S.

Way ahead

• India would stand to gain by being part of the supply chain initiative of the arrangement but it would need flexibility on the other initiatives.
  • The IPEF has four pillars: trade, supply chains, clean economy, and fair economy. Already fearful of a possible trap, India has joined the other three pillars but not trade.

The one clear difference is of China versus the U.S. Developing a strategic partnership with the U.S. is India’s top foreign policy priority. Its relationship with China has, meanwhile, further deteriorated.