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Not part of IPEF – Would that be so bad?

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Cambodia has enjoyed year-on-year growth on trade with the US, its largest export market. YOUSOS APDOULRASHIM

Not part of IPEF – Would that be so bad?

Unlike most of its peers in ASEAN, Cambodia was not included in the initial list of countries of US-borne IPEF. It is not a traditional free trade agreement. But it has commitments which must be met, or parties risk losing benefits

Looking from a purely trade angle, some might argue that being left out by the US from the Indo-Pacific Economic Framework (IPEF) is sacrilege. Like, not being part of an “in-group” with economic benefits.

Sovinda Po, a research fellow with Cambodian Institute for Cooperation and Peace (CICP), opined that it is not yet clear why Cambodia was not part of the framework.

“But it isn’t surprising given the stained relations between the US and Cambodia,” he said via email last week.

Maintaining a cordial relationship with the US, under China’s shadow in Cambodia, has been trying, to say the least, in the last 10 years.

The Chinese-funded Ream Naval Base debacle, and China’s presence in Cambodia, constantly sully any notion of keeping a civil pact with the US.

Cambodia attests that China’s support, ranging from donations of vaccine and medical equipment to public infrastructure investments and loans, has helped the economy.

Last year, Chinese fixed asset investments stood at $2.3 billion, making up over 50 per cent of total investments, from $1.4 billion in 2020, while total trade amounted to $11.2 billion.

Their diplomatic relationship, having grown from strength to strength over the years, is well-documented and often described as “iron-clad”.

Hence, when Prime Minister Hun Sen learned about Cambodia’s (along with Laos and Myanmar) exclusion from IPEF, he was nonchalant.

Responding to a question by Nikkei Asia on this, he said “not a problem”, and that he would rather focus on the Regional Comprehensive Economic Partnership (RCEP), which features China, among other non-ASEAN members.

Hun Sen also compared IPEF to the US-led, now defunct, Trans Pacific Partnership (TPP), wondering if the former would go the same way.

Carrot and stick?

The IPEF, which was first proposed last October and launched in Japan in May 2022, occurred just days after the ASEAN-US Special Summit where members agreed to sign a comprehensive strategic partnership in November this year.

Initial partners consist of Japan, Australia, India, Indonesia, South Korea, New Zealand, Brunei, Singapore, Malaysia, Philippines, Thailand and Vietnam.

While the objectives of the strategic partnership are being finalised in time for the agreement signing, the US has assured ASEAN of its cooperation to strengthen and develop key areas including health and digital transformation.

So, where does IPEF factor in? For the US, the IPEF, developed by President Joe Biden’s administration, is a “21st century economic arrangement” to tackle “21st century economic challenges”, the White House said on its website.

Not to be confused with a “traditional free trade agreement”, which the US insists it is not, the IPEF anyhow bears some resemblance to TPP – chapters and trading partners.

According to the Centre for Strategic and International Studies (CSIS), it consists of “four pillars of work” – fair and resilient trade, supply chain resilience, infrastructure, clean energy and decarbonisation, and tax and anti-corruption.

The Office of the US Trade Representative will lead the work on the first pillar while the other pillars would be managed by the Department of Commerce, said CSIS’ Matthew P. Goodman and Aidan Arasasingham in their analysis titled “Regional Perspectives on IPEF” in April.

They noted that negotiations on the pillars would begin soon with agreements to be signed within 18 months, “possibly ahead of the US-hosted Asia Pacific Economic Cooperation leaders’ meeting in November 2023”.

Recall that the US withdrew from TPP negotiations in 2017, as Republican President Donald Trump wanted to “safeguard national interest including jobs and wages”. Though it was signed, it was never ratified by the US Congress.

But the IPEF is a framework – which might not require ratification – with incentives for countries that sign an agreement with the US, but how it would be implemented is uncertain.

Based on some details shared during a press call with US government officials in May, the agreements would require parties to “hold up” their end of the bargain, failing which, benefits would be stopped.

“And so, there will be incentives to go ahead and live up to the commitments that will be part of the agreement,” said US secretary of commerce Gina Raimondo.

Other questions to US officials, such as the need for US Congress to vote on it, were not properly addressed, however, the Congress would be “kept close”, to remain informed, as the framework materialises.

‘Little interest’

To be sure, the US has launched several attempts to be more present and supportive in Asia in what critics say are in response to China’s rising dominance. One of it being, “pivot to Asia”, President Barack Obama’s foreign policy, which lost steam over time.

However, this policy strengthened parallel frameworks covering the Indo-Pacific area, such as the Quadrilateral Security Dialogue (QUAD) and AUKUS (Australian, UK and the US) security agreement.

These run alongside infrastructure-investment initiatives such as Build Back Better World, developed by G7 countries to counter China’s Belt and Road Initiative, and Blue Dot Network, all of which focus in this region.

The cancellation of TPP by President Trump ruled out efforts to bring much of the Indo-Pacific region within its fold. The decision to stay out of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) – TPP successor- also possibly reduced its clout in the region.

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Source: Regional Perspectives on IPEF, CSIS Briefs (April 2022).

With IPEF, the US might be feeling little optimistic, having started talks over what it intends to achieve with the initial partners. However, that feeling might not be strongly reciprocated.

According to CSIS’ Goodman and Arasasingham, government officials from ASEAN and advanced nations, who were interviewed, “repeatedly and forcefully” noted that a “successful IPEF cannot only be made up of the usual suspects”.

Goodman, CSIS senior vice president for economics, and Arasasingham, CSIS economics programme coordinator and research assistant, stressed that IPEF’s success “hinges on the extent to which the US can attract developing countries from Southeast Asia, South Asia and the Pacific”.

Throughout the process, the Biden administration “signalled little interest” to invite Cambodia, Laos and Brunei, while “offering no clear rationale” as to their exclusion, Goodman and Arasasingham said. Brunei, however, made it into the list.

So, where does that leave Cambodia? Chad Roedemeier, spokesman for the US Embassy in Cambodia, commented that IPEF is an open platform, therefore other countries can join in the future.

He said it is the most significant international economic engagement that “the US has ever had in this region”.

“It marks an important turning point in restoring US economic leadership in the region and presenting Indo-Pacific countries an alternative to China’s approach to these critical issues,” he told The Post.

Reiterating that IPEF is not a traditional trade agreement, Roedemeier said a new approach was needed, given the exposure to an “evolving landscape and new challenges”. “We will shape the substance of this effort together with our partners.”

Unclear benefits

Cambodia’s immediate neighbour, Vietnam, is part of the CPTPP while Thailand is making plans to join as well. Both these countries have now been invited to join IPEF. Would these undertakings jeopardise Cambodia’s competitiveness?

Sam Seun, a Royal Academy of Cambodia analyst, whose article on the threat of IPEF over ASEAN centrality was widely shared, personally felt that Cambodia would be “pleased” to see its neighbours grow and achieve “high economic standards”.

“… especially since Cambodia treats Vietnam and Thailand as good friends. Even though Cambodia is not part of the IPEF and CPTPP, it can still conduct business with members of those organisations,” he said.

However, he doubted how many members “trusted” the US, given that the TPP was a “lesson” for them.

Seun believed that IPEF is “only for those who can survive after their leader leaves the group”, meaning that Cambodia would see IPEF as a “short-term initiative” that would change once the US had a new president.

“Because the US is one of the most democratic countries in the world, the new president will change the country’s foreign policy.

“I believe the IPEF will provide more benefit to President Joe Biden in order for him to lead the US and compete with China, but it will only last a short time because it will be gone once he leaves office,” he said.

Research fellow Sovinda Po agreed, noting that one must look at the practicality and seriousness of the IPEF. Similar to TPP or CPTPP, the IPEF is likely to gain traction from most Asian countries. However, what is unclear are the practical economic benefits to its members.

“Those who are eager to sign up only want to show their foreign policy preference – that they are willing to go with the US. Apart from that, it remains to be seen how far IPEF can go,” Sovinda said.

According to Goodman and Arasasingham’s CSIS report, IPEF partners are clueless about the framework, although the US government has shown that it is intended to be an “affirmative partnership to promote shared economic interests”.

But the Biden administration has portrayed the IPEF to domestic stakeholders as an initiative that will “allow the US to better compete with China in the region”.

Owing to that, they said, some regional partners are concerned that the IPEF is “primarily a political endeavour meant to counter China, rather than a sincere and thoughtful economic policy integration initiative”.

“This perception of an anti-China bent has a chilling effect on enthusiasm among certain prospective South and Southeast Asian participants who are aiming to deepen economic relationships with both the US and China,” Goodman and Arasasingham said.

Additionally, the type of framework – as it is not a multilateral trade agreement – has raised questions to what it actually is, and if it would “add value” beyond existing regional architectures and bilateral engagements with the US.

Sources of supply

In less than a decade, Cambodia is expected to graduate from the least developed country (LDC) status, and trade preferences it enjoys, such as the US’ generalised system of preferences (GSP) and EU’s Everything but Arms, will end.

By then, it hopes to have inked as many free trade agreements, and diversify its economy to survive without a crutch.

To date, Cambodia has in force 16 bilateral investment treaties and 17 treaties with investment provisions (TIPs), including China-Cambodia Free Trade Agreement and RCEP. A majority of TIPs are via ASEAN.

With the US, Cambodia has been a signatory of the bilateral Trade and Investment Framework Agreement since 2006. But, the GSP accorded to LDCs (for Cambodia in 1998) is currently under review by the US Congress, following its expiry last December.

Thanks to the GSP, US and Cambodia share a strong trade relationship. More than a third of Cambodia’s garment, footwear and travel goods are shipped to the US, making it Cambodia’s biggest export market.

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Source: US Census Bureau.

In 2021, bilateral trade stood at $9.2 billion with exports alone representing $8.7 billion. That year, the US experienced its highest trade deficit in recent years with Cambodia at $8.3 billion. Between January and April this year, up to $3.8 billion worth of goods was exported to the US.

But this feel good factor might not last if IPEF has enlisted other ASEAN members to develop its supply chains.

Eve Barre, economist with Paris-listed credit insurer Coface, explained that the strengthening of economic resilience by reorganising supply chains, which is one of IPEF’s pillars, would induce diversifying sources of supply.

This could encourage businesses from IPEF members, notably the US to look for new trade partners among other signatory states, preferring Vietnam or Thailand over Cambodia.

“Consequently, not being part of the agreement could make the country miss export and investment opportunities,” she said.

Missing boat, riding dragon

Although international trade facilitator Deborah Elms understood the concerns of being “left out”, she said worries over competitive edge “may not be necessary at this time”, given the characteristics of the IPEF.

It’s more of a framework to structure future discussions that may lead to adjustments, which is different from granting market access where Cambodia already possesses under the GSP, which non-GSP recipient firms do not have.

“This is a much more valuable and obvious benefit that Cambodia gets that members of the IPEF will not have, as IPEF is not about lowering tariffs on trade,” said Elms, founder and executive director of Singapore-based Asian Trade Centre Pte Ltd.

Having said that, Cambodia should monitor the developments in IPEF and ask to participate if conditions warrant.

For instance, she cited, if the climate pillar discussions lead to new practices on recycling or adaptation that might help Cambodia address climate change challenges, it might be useful to be inside the conversation.

“I think Cambodia’s government has actually done a good job of considering how to encourage economic growth and further integration, particularly by seizing on RCEP as a means of anchoring Cambodian companies more firmly into Asian supply chains. This is important as every government has concerns about being too dependent on any specific market,” Elms observed.

She also advised that the government continued to focus on economic development and ensuring the policy environment supports growth, warning that GSP benefits will be “withdrawn as the country gets richer”. “It is important to provide companies with additional market access opportunities.”

But all of this could come to a head at some point. Using a metaphor to describe the situation, Sophal Ear said Cambodia was “missing the boat and riding a dragon”.

“It seems that other countries have smartly decided to partake by engaging the US while Cambodia continues to self-sabotage itself economically,” said Sophal, author of “Aid Dependence in Cambodia: How Foreign Assistance Undermines Democracy”.
Dependence on China alone is “risky and dangerous”, he shared while questioning whether Cambodia was “left out or left itself out”.

“What is the harm in Cambodia saying it wants to partake? Instead, Cambodia claims to enjoy the best relationship ever with the US while actually ribbon-cutting at the Ream Naval Base with China. This does not add up,” said Sophal, an associate dean for undergraduate programmes and global development at Arizona State University, US.

He opined that the Ream Naval Base continues to be the “elephant or the dragon in the room”, and that China’s presence in Cambodia, as a large investor and creditor, was allegedly damaging to Cambodia’s image in relation to the US and its peers in ASEAN.

“The truth is – ASEAN should be about ASEAN, not about China or the US. Cambodia’s never-ending bandwagoning with China is making ASEAN look like a tool of China. ASEAN has been hijacked,” he retorted.

Is it a bad thing?

China has a predominant position in the region, economist Eve Barre of Coface acknowledged. But, for the US, IPEF is a way to reinforce its influence and economic ties in Asia-Pacific and therefore counter Chinese dominance, she said.

By joining IPEF, Cambodia’s ties with the US could have been strengthened, which would have balanced its strong dependence on China.

“This would have been particularly opportune for Cambodia in the current context of Chinese economic slowdown and its continuation of its zero-Covid policy,” Barre shared.

Analyst Sam Seun, on the other hand, did not think that Cambodia’s exclusion was a bad thing because it can still conduct business with other trade initiatives, such as RCEP, as well as with IPEF members individually.

Adding to that, Sovinda Po pointed out that Cambodia is a small economy and has diversified its trading partners and signed trade agreements, most recently with China and South Korea, and RCEP. “But if it has a chance, Cambodia should join the IPEF,” Sovinda advised.

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