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Rebuilding a Geoeconomically Secure Indo-Pacific Economic Order

11 May 2022
By Dr Naoise McDonagh and Sascha-Dominik (Dov) Bachmann
President Biden listens to Prime Minister Scott Morrison at a Quad meeting September 2021.
Source: Adam Schultz/Official White House.

A comprehensive and coherent package of investment aimed at “like-minded” partners is needed to rebuild prosperity and counter China’s growing economic leverage in the Indo-Pacific. While there are various existing frameworks, these are either narrowly aimed or underdeveloped, and require a bigger picture view of the regional security-economy architecture.

Future US-Australian cooperation to combat economic coercion by China in the Indo-Pacific was recently announced. Minister Tehan succinctly noted the reality driving the US-Australian cooperation: “Strategic competition is playing out increasingly in the economic sphere.” This implies that security and economics cannot be treated as separate policy issues, but rather must be integrated into a holistic “geoeconomic” framework. The new economic alliance is designed to counter China’s strategic use of economics in the Indo-Pacific, both as carrot (trade and investment) and stick (coercion). While a defensive approach to coercion is needed, this must be part of a broader and coherent geoeconomic framework for engaging “like-minded”— as far as possible – and strategic regional partners in ways that build prosperity and enduring relations that offer an alternative to China’s growing economic leverage in the region. While there are various existing frameworks in the region, including the Quad, the Resilient Supply Chain Initiative (RSCI), and Washington’s newly minted Indo-Pacific Economic Framework (IPEF), these are either more narrowly aimed or as yet underdeveloped.

The Quad, for example, comprising of Australia, India, Japan, and the US, is a maritime security dialogue in origin, one which China unsurprisingly paints as a tool for its containment and provocation. While the Quad has broadened its purview to include working groups on vaccines and climate change, its security-based origins dominate. This makes the Quad less suitable strategically as a vehicle for broad engagement a region where many nations prefer to avoid explicitly confrontational approaches to China, as this would close any opportunity for cooperation. Vietnam is one such example in regards to dealing with the challenges posed by China.

The RSCI, an initiative by three out of four Quad members — Australia, India, and Japan — does have a clear economic dimension. It is designed to respond to supply chain vulnerabilities resulting from overdependence on a single export origin. The risks arising from such overdependence become increasingly visible by a combination of rising geopolitical tensions with Beijing in particular, but also the effects of COVID-19 on supply chains which were dramatically highlighted during the early stages of the pandemic. For example, China exploited such overdependency by engaging what has been termed “Mask mercantilism,” whereby Beijing’s gifting of masks was strategic rather than altruistic.

A core goal of RSCI is to provide financial incentives to encourage businesses to relocate supply chains out of China. In Australia’s case, this involves grants of up to AU$2 million and linking suitability to projects that address Canberra’s Sovereign Manufacturing Capability Plan. A second goal is to foster trade and investment between the three participating countries to support supply chain resilience. Hence the focus of RSCI is on national grants to diversify supply of critical goods. While this may have economic benefits for other regional players, it is not necessarily targeted or intended for that purpose and is limited in scope.

While still nascent in its substantive approach, the Biden administration’s IPEF holds more potential than either the Quad or RSCI as a vehicle for regional economic engagement that can offer an alternative to Beijing’s Belt and Road Initiative (BRI). First, given IPEF’s clear broad-based economic focus, it avoids putting nations on the spot for “picking sides” in the US-China great power competition, unlike the Quad and RSCI which are explicitly security- and China-focused. Furthermore, while Asian nations welcome the direct security balancing against China provided by a US presence in the region, Washington will struggle to compete for overall influence without a simultaneous economic balancing. Given that domestic US politics currently prevents a re-entry to the existing high-quality regional trade agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Biden administration needs the IPEF to rebuild economic leadership, and it is keen to get partners on board to cooperate on its development. Canberra shares both the overall strategic goals of the IPEF and aligns with US views on trade rules and norms, making Australia a natural partner.

For IPEF to work it needs to offer a genuine and beneficial alternative to other competing initiatives in the region. Others have outlined in some detail the key economic elements the framework could usefully develop, including trade facilitation, infrastructure investment, and worker standards. These are all good ideas that can drive quality growth in the region. A key point we add to that position is that IPEF must simultaneously drive economic development while also supporting Washington and Canberra’s regional security imperatives, albeit in a tacit and indirect manner to allow regional buy-in. That is to say, IPEF must not be designed in a traditional policy context of strong separation between economic policy and security policy. One can be sure no such separation exists in the development of BRI projects, given China’s strict policy of civil-military fusion.

This requires a delicate balancing act, since there must be clear economic win-win outcomes for the region arising from IPEF, while at the same time it must serve to enhance security at a time when economic nationalism, economic coercion, and strategic uses of economic relations and resources grows. IPEF, and Australia’s engagement with IPEF, must unfold within an explicitly geoeconomic framework where economic efficiency is balanced by security needs, requiring constructive interaction between two very different policy cultures. That is the challenge set by the realities of the current strategic environment and its foreseeable future. From Canberra’s perspective, if IPEF can be the vehicle for a meaningful economic return to the region for the United States, then supporting it should be prioritised.

In sum, to compete strategically in the Indo-Pacific, the United States and its allies need to compete economically with initiatives such as the BRI. We argue for a two-pronged approach which requires domestic and regional initiatives. Domestically we call for a shift in policy culture to meet the challenges of the external environment. Regionally, we argue that the IPEF can be a tool to re-engage the Indo-Pacific effectively relative to China’s economic might and ambitions in the region. In that context, IPEF should embody the ethos of the United States’ post-war Marshall Plan, which viewed security and economics as intertwined. IPEF engagement should therefore be implemented by a whole-of-government approach that allows Australia (and also its partners) to identify, communicate, and counter any threat to its economic resilience in a timely measure. Such a comprehensive approach would incorporate stakeholders from government, academia, trade, and business, and civil society as part of a wider national response to economic dependency and vulnerability.

Dr Naoise McDonagh is a Lecturer at the Institute for International Trade, School of Economics and Public Policy, University of Adelaide, and President of the Australian Institute of International Affairs South Australia, a not-for-profit educational association.

Sascha-Dominik (Dov) Bachmann is Professor in Law and Co-Convener National Security Hub (University of Canberra), University of Canberra, and a Research Fellow with the Security Institute for Governance and Leadership in Africa, Faculty of Military Science, Stellenbosch University.

This article is published under a Creative Commons Licence and may be republished with attribution.