Will 2024 deepen Indo-Pacific economic cooperation?

2024 will be a year of transition for Indo-Pacific economic cooperation. The dominant feature of the political landscape is the US election, the outcome of which rests on a political knife-edge according to current polling. The difference presented on January 20, 2025, is likely to be stark: Either there will be a US government in place that provides an opportunity for closer coordination of economic policies in the region, building on the directions identified in what is still at best a work in progress, the Indo-Pacific Economic Framework (IPEF), or there will be a return to an America invested primarily in itself, without a vision for international cooperation, and rejecting the beginnings that have been made.

In either eventuality, countries in the region should decide now what they wish to see as their common economic future. We recommend that the leading middle powers—including Japan, Korea, Singapore, and Australia—begin planning for deepening their economic cooperation to serve the common goals IPEF has identified. They also should consider broadening participation in this endeavor of other Pacific Rim countries, such as Canada, Mexico, Chile, and others. The work should continue this year, awaiting a time when the United States is ready for deeper engagement. And if the result of the election is the temporary absence of the United States from economic engagement in the region, plans should be made for the possibility it will rejoin the common effort in the future.

The value and limits of IPEF

The Asia-Pacific Economic Cooperation (APEC) Summit held in San Francisco in mid-November after 18 months of negotiations had mixed results. The 14 member countries established important markers in three pillars: supply chains, clean economy, and fair economy. The trade pillar stalled out as the United States reversed course on the pillar’s work in crafting rules for the digital economy. It declared itself instead in favor of “policy space,” meaning making no commitments at all, to the potential cost to the business community. What was achieved for the other pillars, while praiseworthy as goals, includes no binding commitments, which would, in the case of the United States, require congressional approval. Because of the Biden administration’s distaste for formal trade liberalization both for ideological as well as political reasons (steering clear of the Congress), the trade pillar cannot lead very far to regional market integration.

During a period of explosive expansion of digital trade as well as strong growth in the region more generally—and with others moving ahead with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Regional Comprehensive Economic Partnership (RCEP), and the Digital Economic Partnership Agreement (DEPA)—the United States is not currently fully in this game, putting American firms at a competitive disadvantage.

Even though it lacks market access elements, IPEF deserves credit for putting together novel approaches to cope with new challenges that the global trading system faces, especially those of supply chain resilience and decarbonization. 2024 can be a critical year for IPEF partners to prove the validity of a number of approaches that they are taking as outlined below and to garner concrete deliverables through implementing agreements.

The Supply Chain Agreement is likely to be the first IPEF module to enter into force. Mobilizing the collective crisis response mechanism and diversifying highly concentrated sectors like critical minerals are urgent tasks. In this regard, the IPEF Critical Minerals Dialogue, launched at the IPEF Leaders’ Summit, could be a good point of departure to demonstrate how the IPEF could help in real-world situations such as the China's dominance of graphite, which China recently added to its list of export restrictions on critical minerals. The Critical Minerals Dialogueshould go beyond being a talk shop to operationalizing scenario-based collective action plans, including supply chain mapping, contingency supply arrangements, and alternative technology development. If some resource-rich IPEF partners become eligible for the Inflation Reduction Act (IRA) incentive scheme through critical minerals agreements, then the IRA can boost intra-IPEF investment and accelerate the diversification of supply chains.

The Clean Economy Agreement holds promise as the first of its kind to incorporate this broad an array of decarbonization elements in a standalone international economic agreement. It could evolve to be a reference for a future Environmental Goods and Services Joint Statement Initiative by the World Trade Organization. Two additional practical policy instruments included are worth paying attention to: an investment promotion initiative and Cooperative Work Programs (CWP). Bringing together main players from the private and public sector through the annual IPEF Clean Economy Investor Forum, this year in Singapore, and the IPEF Catalytic Capital Fund could bridge gaps in the market, address investment grievances, and facilitate green investment and financing in the region.

The CWP could be a useful tool for interested IPEF partners to initiate concrete projects such as hydrogen and carbon markets. IPEF ministers have announced hydrogen as its first CWP already. Carbon markets could be another good candidate for a CWP with genuine interests in the region. Carbon markets can mobilize private capital from developed countries to the Global South through market-driven carbon crediting mechanisms based on Article 6 of the Paris Agreement. The Indo-Pacific is an ideal region for the development of carbon credit markets because there is a good mixture of developed and developing countries with strong demand and supply for carbon credits, such as Australia, Japan, and Korea on the demand side and Indonesia, Vietnam, and the Philippines on the supply side. IPEF partners could develop high-standard guidelines and infrastructure necessary to enable carbon markets through CWPs, such as robust carbon credit accounting, certification systems, and capacity-building.

This is no time to take a gap year

IPEF’s innovations, together with traditional tools of deeper international economic integration, hold great promise. Good intentions are not enough. The current domestic US political setting, with its limitations and uncertainties, should not be a reason for failing to begin the process of maximizing the potential based on this initiative. In these circumstances, it is more important than ever for the middle power countries of IPEF who have the capacity and interest to do so to step up and take their share of ownership of the common endeavor, as Japan and other countries did for the CPTPP after the United States withdrew in 2017.

What can be achieved in the terms of implementation should be done without delay in the coming months. Strides should be made in collaboration among IPEF partners to de-risk their supply chains and mainstream green investment and clean technology between resource-rich developing and industrialized countries in the region. Ultimately, however, gains to be had should include deeper regional economic integration. Diversity among the participants, while adding complexity, can also be a strength. Arrangements can be shaped with built-in flexibility, with differing degrees of current participation but with common goals. IPEF should evolve, functioning alongside conventional market liberalizing trade agreements, providing participants with a new economic security framework.