Reality Bites

Well, the chickens are finally coming home to roost as far as the Indo-Pacific Economic Framework (IPEF) is concerned. Last week’s IPEF summit concluded largely as expected, with one exception. As anticipated, the three pillars led by the Commerce Department (supply chains, clean economy, and fair economy) were all either signed (supply chains) or substantially completed. These are good things, but not the big cheese. At best they’re medium-sized cheese. They are mostly agreements to cooperate on a wide range of issues, and they establish some structures and mechanisms for organizing the expected dialogues. Some of the agreements to cooperate, such as those in the supply chain pillar, are intended to either forestall or deal with crises—another pandemic, earthquakes, climate disasters, etc. Others are intended to speed up decarbonization, fight corruption, and promote tax transparency.

The exception to this bevy of good news is the failure to produce much of anything in the trade pillar. Administration briefings prior to the summit confirmed what everybody already knew—that the pillar would not be concluded. There was also talk of an early harvest of provisions that had been agreed to, which is ironic since more than two years into the negotiations can hardly be called early, but that seems not to have happened. So the surprise is we appear to be left with nothing on trade at this point. That opens the door to recrimination and laying of blame, and I will cheerfully participate.

First, it is clear the administration has finally run into trade negotiation reality. Trade agreements are about tangible benefits and what nations are willing to give in order to get something in return. The administration’s approach, in contrast, has been idealistic—promoting worker’s rights, inclusivity, and sustainability. These are good ideas, but they are neither cheap (decarbonizing costs money) nor easy (labor reform is a fraught issue in many countries because it means combating established interests). The other IPEF parties’ response has been to ask what the United States is offering in return for them doing these difficult things, and the U.S. answer has been that these are good ideas, period. The result is what most of us predicted from the beginning: in the absence of incentives like improved market access, other countries have little interest in cooperating. Reality trumps idealism.

Second, the negotiations took fire from both the left and the right. Progressives were unhappy because it became apparent that their worker rights and sustainability goals were not going to be fully met. Senator Sherrod Brown (D-OH) went so far as to call for dropping the pillar entirely. (Another irony—since the administration does not intend to submit the agreement to Congress, the senator has no leverage in weighing in, except for the administration’s desire to accommodate him as he faces a tough reelection campaign.)

Business groups, by contrast, were unhappy because the administration has pulled back from its long-standing digital trade goals of free flow of data and bans on data localization and forced transfers of source code. Since there is no longer much in the pillar for them, their interest is waning. The result is that the perfect became the enemy of the good, with the left opposing the pillar because it was not going to include everything they wanted, and the right lacking enthusiasm to defend what was for them small cheese.

Much of that is political. The administration is catering to the left’s hostility to “Big Tech” and ignoring the interests of the business community. In the past, that would not have happened because business community lobbying was essential to obtaining congressional approval of an agreement. Since IPEF is not going to Congress (another mistake that has only encouraged the other IPEF parties to resist significant concessions since they have no confidence in the agreement’s durability if it is not Congressionally approved), there is no need to obtain business support. Another irony. The decision not to send the agreement to Congress has not only frustrated the IPEF partners, it has irritated Congress—even those members who might otherwise support the content of the agreement. The only “winners” from that decision are the White House legislative lobbyists who no longer have to worry about selling the agreement.

There are also rumors that the digital pullback grew out of national security concerns—that the United States might want to block the free flow of data or impose data localization requirements. If so, that is profoundly disturbing, both because we would be undermining our own companies that dominate this sector, which would be playing into China’s hands by advocating the kind of internet they would like to see. There can be no good explanation of why the United States would want to kneecap its own tech companies as well as its financial sector, which depends on free flow of data, and compromise our free speech principles in the process.

In addition to a growing list of missed trade opportunities, there are also geopolitical consequences for the pillar one failure. From its beginning, IPEF was a response to criticism that the United States’ rejection of Trans-Pacific Partnership and failure to join Comprehensive and Progressive Agreement for Trans-Pacific Partnership left us with no Asian economic policy and created doubts about our commitment to the region. The absence of a trade pillar reinforces those doubts and has already led to the conclusion that the real winner at the IPEF summit was China.

Historians may eventually give the administration credit for nobility of purpose, but as I have said many times in this column, in the real world our trade officials get measured by what they finish, not by what they start, and at this point, three years into the administration, there is very little to measure. Trade skeptics may say that is a good thing, but for most people it represents missed opportunities. Reality does indeed bite.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.