US’ Indo-Pacific economic bloc irks China but it may not be all bad for the region

The Indo-Pacific Economic Framework signals the start of competition within global institutions between the US and China
While this could have destructive effects, it also has the potential to inspire institutional reform and for great powers to provide more public goods

Kai He

Published: 3:30am, 3 Jun, 2022

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On May 23, US President Joe Biden announced the establishment of a new economic grouping, the Indo-Pacific Economic Framework (IPEF), including 13 inaugural members and accounting for about 40 per cent of the world’s GDP. China has not been invited. Given Biden’s claim that “we’re writing the new rules for the 21st-century economy”, it is clear that China is not only excluded but also targeted.

It looks like a win for the United States in this round of the institutional balancing game against China. Given former president Donald Trump’s withdrawal from the Trans-Pacific Partnership (TPP) some five years ago, the IPEF sends a clear message to the region that the United States is back in business.

The IPEF is also an economic branch of the US Indo-Pacific strategy against China, which previously focused on security issues through the Quad. Similar to the TPP and the Quad, the IPEF is an exclusive institutional balancing strategy that the US has adopted to counteract China’s economic clout in the region.

Exclusive institutional balancing can be defined as a strategy aiming to exclude a target state from an institutional grouping so the cohesion and unity of the institution will undermine the influence and power of the target state. In contrast, inclusive institutional balancing includes the target state in an institutional setting. In this case, the target state will be constrained, shaped and socialised by the rules and norms of the institution.

Following the 2008 global financial crisis, the US and China led a new wave of multilateralism. China’s Asian Infrastructure Investment Bank (AIIB) touched a sensitive nerve in Washington as it was considered a challenge to US global financial governance through the World Bank and the International Monetary Fund.

In a similar fashion, China’s Belt and Road Initiative was seen as a Chinese economic hub-and-spoke system challenging US leadership.

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Under former president Barack Obama, the US advocated the establishment of the TPP – a high-standard trade bloc – that would directly rival the China-backed Regional Comprehensive Economic Partnership (RCEP). Trump’s decision to withdraw the US from the TPP was a big blow to American credibility and commitment to the region, especially in the economic sense.

Biden’s IPEF aims to recover the loss of US reputation and leadership in the region. However, it will not be an easy job because the IPEF has already been described as a deal of “all pain, no gain” for Asian countries without any offer of US market access.

Facing the exclusive institutional balancing from the US, what are Beijing’s policy options? It has no choice but to counter US pressure with similar institutional balancing strategies.

For example, China could deepen its economic and trade ties with other states by strengthening the RCEP – the largest trading bloc in the world, consisting of 12 members without the US. With the increasing economic interdependence between China and the outside world, any US attempt at economic decoupling from China will be extremely difficult.

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In addition, China could initiate rule-making negotiations with its Asian neighbours on agendas similar to the pillars of the IPEF: the digital economy, supply-chain resilience, clean energy, infrastructure and anti-corruption. China could establish new institutions or utilise existing ones such as the RCEP or even Apec to start the negotiations.

China’s institutional approach is more likely to be inclusive; the US would be invited to join. However, Washington might still decline, just as it did in the case of the AIIB.

The IPEF is the beginning of the institutional competition between the US and China. Given nuclear deterrence, a conventional war between the two nations is unlikely.

Institutional competition in the form of institutional balancing will become the new game in town. Intense institutional balancing between the two giants will extend to all areas, followed by diplomatic stand-offs, political divisions and even strategic rivalries.

Even so, two positive, unintended consequences will result from the US-China institutional competition. First, such competition can encourage reforms inside existing institutions and retain the dynamics of multilateralism in the region. For instance, the AIIB’s establishment could prompt reforms in infrastructure finance in the World Bank and the Asian Development Bank.

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In addition, institutional balancing will encourage great powers to provide more public goods to the region. Without the Belt and Road Initiative, it is difficult to imagine that the Quad countries would have committed US$50 billion to regional infrastructure projects at their latest summit in Tokyo.

Competition is not always destructive to regional peace if it is confined within the institutional domain. The real danger is to conflate institutional competition with ideological antagonism, which will lead to a new cold war in the region.

Middle powers such as Asean should not stay on the sidelines during this new wave of multilateralism. They can play a more active and leading role in managing the institutional competition between the US and China. Asean led the first wave of multilateralism in the Asia-Pacific in the post-Cold-War era, and it is time for it to stand tall again and initiate a new round of institutional peace in the region.

Kai He is professor of international relations and director of the Centre for Governance and Public Policy at Griffith University