The Taiwan Banker

Ever since President Biden announced the policy concept of the Indo-Pacific Economic Framework (IPEF) at the 2021 APEC summit, many Asian countries have been watching and waiting. According to the Center for Strategic and International Studies (CSIS), IPEF will have four main pillars: fair and resilient trade, a resilient supply chain, infrastructure and decarbonization, and taxation and prevention of corruption. The first pillar is assigned to the Office of US Trade Representative (USTR), while the Department of Commerce will oversee the other three. USTR is responsible for areas including labor, environment, data, trade, agriculture, market competition and trade facilitation. Digital trade agreements are the top priority of the Office of the USTR. In previous conversations, USTR Katherine Tai has said that past free trade agreements (FTAs) no longer meet the needs of the future. Her hope is not to negotiate tariff reductions, as in traditional trade liberalization, but new trade rules, especially for e-commerce. Therefore, this article first explores the current state of digital sovereignty in global e-commerce, and then analyzes the situation of IPEF. Three models of digital sovereignty Sovereignty is the domain of a country, but international trade agreements can use reciprocal concessions to restrict the sovereignty of signatory countries. As the world globalizes, digital trade is developing rapidly. E-commerce reached US$ 1.33 trillion in 2014, and is expected to reach US$ 5.91 trillion in 2023, growth of 3.8 times over 10 years. Even though digital industries have globalized, however, that globalization still lacks norms. There are three rough models for regulation of digital trade. The EU protects personal information and regulates privacy and control of personally identifiable information, mainly to maintain control of data and unify regulations across the EU region. The US model mainly ensures free cross-border flow of information, stipulating that no organization may interfere with information flow, including personally identifiable information, or restrict use of electronic equipment. Second, it prohibits localization of data; no party may be required to store data locally or use local ICT equipment to execute business transactions. In China, the data flow and localization are controlled by the government, which completely controls the cloud. At present, the US model is regulated by the US-Mexico-Canada Trade Agreement (USMCA) and the US-Japan Digital Economy Partnership Agreement (USJDEPA), while the Chinese model is favored by some developing countries participating in the Belt and Road Initiative (BRI). About 70% of African countries use China’s Huawei for their 4G infrastructure. In fact, not only Africa, but other developing countries have less respect for personal data protection and privacy norms than Europe and the US, so their digital trade is based on the Chinese model. Trade agreements and expansion of digital sovereignty Given that current global digital economic agreements need to be updated, the US hopes to promote the American digital economy model, which has been widely adopted in the Asia-Pacific region. The original Trans-Pacific Partnership (TPP) accomplished this. Former president Donald Trump withdrew from the TPP due to populism, and current President Joseph Biden has no intention of returning to the current Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Thus, a digital trade agreement was added to the IPEF. CPTPP retains three clauses in the original TPP related to e-commerce: first involving free cross-border flow of data, second prohibiting localization of data, and third, prohibiting mandatory requirements to disclose source code. The Regional Comprehensive Economic Partnership (RCEP) also includes the first two of those three norms. However, during the negotiation process, China insisted that if there are “security” concerns, member states can ignore the freedom of cross-border data. At the same time, it insists that any disputes on the interpretation of “security” is controversial should not be included within the scope of the dispute settlement mechanism. In other words, in RCEP, China can restrict cross-border data flow due to “security” concerns, and insist on localization. According to the CSIS analysis, the US will select countries with the same ideals, democratic values, and strategic interests to participate in IPEF; countries that have similar strategic interests to the US but are not democracies, such as Vietnam, may also be invited. It is unlikely that Myanmar will be invited. Unlike a one-size-fits-all trade agreement, IPEF will include multiple packages. That is to say, participants may select any or all of these four pillars. Some scholars liken it to “a party with an open bar.” Participating countries may take what they need, although they must accept the constraints of the agreement in the areas in which they promise to participate. It is also difficult for the network infrastructure of some developing Southeast Asian countries to meet the requirements of the US model, unless the US provides some infrastructure assistance. Furthermore, the US is not offering any market access favors to participating countries. Thus, not all invited countries will be keen to participate. Aiming to bypass congressional scrutiny The US and the invitees to IPEF have different expectations for the structure. Some Asian countries trade more with China than with the US. They hope to be able to trade with both economies. Some countries have reservations about positioning IPEF as a way to resist expansion of Chinese power. In addition, some Southeast Asian countries are disappointed that even though the US hopes to become a trade rule-maker, it does not provide any commitment to open other goods markets. From the US perspective, however, its average tariff is only 2% (6.5% in Japan and 6.4% in the EU), so there is no need for further opening. In fact, if equal and reciprocal tariff concessions were adopted so that both sides open their own markets, because Southeast Asian countries have higher tariffs than the US, it would not necessarily benefit those countries. At the same time, any changes to existing regulations require review by Congress. The Biden administration wants to adopt a similar approach as USJDEPA, bypassing congressional review to avoid trouble. However, an executive agreement is of course not as stable as a formal trade treaty, allowing any arrangements to be cancelled due to political or policy changes. This is less favorable for participants, because the Trade Promotion Act of the US has expired. Without the authority of the Act, any trade agreement between the executive branch and a foreign country could be voted by Congress on a line-item basis. No trade agreement could be concluded under such legislative oversight. An important opportunity and role for Taiwan The world has recognized the democracy and freedom of Taiwan, located in the first island chain. Whether from a strategic or economic perspective, it should be invited to participate. Former US diplomat Kurt Tong pointed out that the US faces a balance between ambition and inclusiveness in terms of who to invite and the scope of the IPEF structure. As former Assistant USTR Wendy Cutler said, “TPEF was always going to be a balancing act.” Whether for the value of its democracy, or the strategic interests of the US in the Indo-Pacific, Taiwan should be first in line for an invitation. However, some Southeast Asian countries do not want to be treated as a tool to resist China. In order to avoid unnecessary complications and win participation from more countries, Taiwan had to be handled separately. On May 23, the US National Security Adviser told the media on Air Force One as President Biden traveled to Japan, “…we are looking to deepen our economic partnership with Taiwan, including on high-technology issues, including on semiconductors and supply chains. But we’re pursuing that, in the first instance, on a bilateral basis while we work with a range of other countries through the framework.” Prior to this, Secretary of State Blinken clarified to Congress on April 28 that the IPEF will be open and inclusive; the structure is currently in its inception phase, including dialogue with several potential partners. Blinken emphasized that the US “does not want to keep anyone out, including Taiwan.” According to Nikkei Asian Review, on May 4, following talks with US Commerce Secretary Raymondo and USTR Tai, Japanese Minister of Economy, Trade and Industry Koichi Hagiuda said, “IPEF will be inclusive and will include as many countries as possible.” When US President Biden and Japanese Prime Minister Fumio Kishida held talks on May 23, they could only make a declaration to promote IPEF. According to reports from the New York Times and the Nikkei Asian Review, some of the 13 participating countries were so-called “fence sitters.” The US finally excluded Taiwan from the first list in order to accommodate these countries. In fact, the country that the US most wants to participate in the IPEF, after Japan, South Korea, and Australia, is India. If India is included, the Quad will become a strategic and economic partnership agreement, but the attitude of the Modi government remains to be seen. Also, the ruling party lost Australia's general election on May 21, and the foreign policy of the new Labor cabinet is not yet known. These developments show that IPEF is not yet finalized. Not only are the details yet to be discussed, but it is unknown whether the invitees will in fact participate, and on which pillars. In addition to the previous 200 representatives who supported Taiwan’s participation in this trade structure in the US Congress, 52 senators also urged the Biden administration to invite Taiwan. Despite the strong pressure from Congress, Taiwan was not included on the first list of participants. Biden must find ways to allow Taiwan to meaningfully participate, otherwise, he will pay a heavy political price in the November midterm election. Of course, this is not Taiwan’s hope. Therefore, in the next few months, Taiwan and the US should actively engage Taiwan and try to make up for its exclusion from the first batch of participants. The bilateral trade agreement should not only be about the resilience of the semiconductor supply chain, but should also expand the four pillars covered by the IPEF. Only when Taiwan participates in the IPEF will the gap in coverage of the latter in democratic values ​​and strategic interests be alleviated. At the same time, after inclusion, Taiwan can use the framework to ensure resilience of its industry chain and guarantee intellectual property rights, strengthening its efforts to reduce carbon emissions and develop digital trade. Follow-up developments deserve close attention. The author of this article is Professor of Economics at the City University of New York.