What is the Indo-Pacific Economic Framework and will it work?

Chad Bown: In May, President Joe Biden formally launched IPEF—the Indo-Pacific Economic Framework for Prosperity. On September 8, Trade and Commerce Ministers from 14 IPEF countries flew to Los Angeles. After two days of talks, they announced IPEF's negotiating objectives. These objectives described what the United States, Japan, Australia, India, and all of these other countries want in terms of resilient, clean, fair, and connected economies.

We're joined by Barbara Weisel. Barbara worked in the US government for over 30 years, most recently as the Assistant US Trade Representative for Southeast Asia and the Pacific. Barbara was the chief US negotiator the last time the United States was negotiating a major trade-related deal in the region. That means Barbara Weisel was the chief negotiator for the Trans-Pacific Partnership (TPP).

What is IPEF?

Barbara Weisel: First to say, it's not a trade agreement, or a traditional trade agreement. It's an economic agreement, and it has four pillars. They are: connected economy (or trade), supply chains, clean economy, and fair economy.

There are some objectives that they have set out for the trade pillar that could overlap with TPP. If you look at the chapters that they've set out in the scoping papers that were agreed in September, I think many of those are similar to the chapters that were in TPP.

You have labor, environment, digital trade, trade facilitation, SPS (sanitary and phytosanitary), TBT (technical barriers to trade), and good governance—a lot of overlap with what was in TPP. So it is possible that the administration decides that they're going to look to TPP for some of the commitments as a starting point and decide whether or not they want to update or change those to reflect their own priorities.

CB: What might be in the trade pillar? They've said they're not going to be focused on negotiating tariff cuts, so what are they likely talking about?

BW: What we know so far about exactly what it is they want to negotiate is very limited. But one would think that if they're setting rules, they're going to want to set high standard rules, building off of the last generation of agreements that were negotiated—TPP, United States-Mexico-Canada Agreement (USMCA), and other agreements. But there will be areas where they're going to want to go beyond what's in the last generation of agreements.

A good example there would be the environment. When we were negotiating the last generation of agreements, we were prohibited by Congress from negotiating anything to do with climate change. That issue now is something that will be very central to what the administration wants to do in this agreement, and other countries will want to cooperate with the United States to see what can be done on climate change, and what can be incorporated here that would be valuable.

IPEF Pillar One: Trade, Labor, and More

CB: The new US Trade Representative, Katherine Tai, has made clear the Biden administration will pursue a worker-centered trade policy.

Her previous job was as chief trade counsel for the House (of Representatives) Ways and Means Committee. And that meant she was instrumental in getting the USMCA passed through Congress, including by helping to negotiate, at the last minute, a new enforcement provision for labor, called the Rapid Response Mechanism.

The Rapid Response Mechanism has been used a number of times in auto plants in Mexico. The way it works is the threat that the United States can impose trade sanctions rapidly—stopping the plant’s shipments of car parts or trucks from coming into the United States—that helps empower Mexican workers to have new votes to unionize and to then bargain collectively.
What might a worker-centered trade policy mean for the trade pillar in IPEF?

BW: On labor, what I think could be the outcome is a mechanism that's like the Rapid Response Mechanism, but without all the rules surrounding it. So governments would consult, there would be engagement with the private sector, but not under a formal dispute settlement process or a formal Rapid Response Mechanism. I think they may have in mind something that looks like it without the formality of it.

We don't really know yet how they intend to reflect their priority of including worker-centric provisions in this agreement. We see that they've included language suggesting that it's important in all of the pillars. So they're clearly thinking about it.

You can imagine some areas where they would like to update the last generation of agreements—digital trade being one of them—where they might want to look at, for instance, gig workers, and if there are appropriate commitments that would cover gig workers in this negotiation.

IPEF Pillar Two: Supply Chain Resilience

CB: The second pillar in IPEF is supply chains. Is it fair to say that there's a supply chain pillar because of all of the supply chain disruptions? That this is the new buzzword, and every agreement from here on out is going to need to have a supply chain resilience component to it?

BW: For the foreseeable future anyway.

The administration picked the topics they picked because those are the topics that are on the minds of countries around their region. Those are the priorities for every government. Supply chain resilience is one of those priorities. Therefore, I think the governments wanted to figure out if there's a way to work together to reinforce the resilience of each other's supply chains.

CB: One of the supply chain issues out there is the concern of excessive geographic concentration of certain supply chains in China, and getting more geographic diversification for things like critical minerals, personal protective equipment, and things like that.

BW: I do think they're talking about geographic diversification. They're all acutely aware of the risks of having supply chains with single nodes.

One of the issues is first of all, “mapping” supply chains in some areas that they think are critical, and they'll have to define what those are. And then to determine whether or not there are ways to support cooperation between the countries in ensuring supply in those areas.

CB: By “mapping,” we mean data collection—I know as an economist we have very bad data on supply chains—so understanding who's shipping what to whom, and where in the process you are.

Then, beyond that, are we talking about data sharing? Market surveillance and, “we see that somebody just suffered a flood or a fire or drought and that seems to be impacting the supply of this critical input,” and we know because we've got this supply chain mapped, that that's going to be a problem? And we can start to share that information with each other?

Businesses understandably want to keep their information private. There's a question that government policymakers face of how do we convince businesses and the private sector to share some of their information with us (policymakers) that we need to ensure that the supply chain is going to continue to function without threatening their competitiveness, turning it over to their competitors, and things of that nature.

Maybe one of the goals here is to try to develop better systems and cooperation with other governments about keeping that information of the private sector safe so that it's more likely to be shareable when it's really needed.

BW: I think that there's a lot of work to do to figure this question out. The only area where this has really successfully been done is in agriculture. You're talking about commodities there, and companies are much less concerned about sharing data related to commodities than the kinds of products that we're talking about here. So the limits of what they can do need to be tested.

CB: Critical minerals—we mentioned those earlier, but they are another example for the supply chain pillar, given they're essential for all of these new electric vehicles and the massive private sector investments in battery plants that are now coming online.

One current concern is that some of those critical minerals are being processed almost exclusively in China.

BW: So if you're a country that would like to produce critical minerals but is currently not a major manufacturer of critical minerals, like the Philippines or Indonesia, you want to link into those supply chains. You would like to have investment in your production of those inputs, but then you want to have an assured supply chain throughout the process that links to the auto manufacturers.

CB: We do have this new Inflation Reduction Act, which has lots of tax credits for electric vehicles, if you can meet very complex supply chain requirements—one of those is not to source things like critical minerals or components needed for batteries from China. So those sorts of (IPEF) countries might be looking at pieces of domestic legislation in a country like the United States and saying, we want to be able to satisfy those criteria.

BW: I do think that's the way some of the countries are thinking about it. There are two issues that have come up in that conception.

One is that it's a very hub-and-spoke kind of an approach, with the United States being the hub and everybody else being the spoke. And for this to work, I think many of the countries would like to see a model that allows them to trade across the region without having the US have to be at the center.

The second is that there are limits on what they can sell to the United States under not just the Inflation Reduction Act, but under our Buy American rules, and other rules that would limit their ability to sell into the market. If they're going to be able to participate in these kinds of supply chains and hope that they're going to benefit, they want to know that ultimately, if they go through this whole effort to do this, that there's a high probability that they're going to be successful in the US market.

CB: Ultimately you get back to negotiating rules on government procurement and rules of origin.

IPEF’s Third Pillar: The Clean Economy

CB: The third pillar of IPEF is the clean economy, including cooperation over climate. How would we describe what's in the clean economy pillar?

BW: There's a lot of discussion of cooperation on R&D and sharing best practices, promoting low and zero emission goods, and agricultural sustainable practices. And I think that what you come away with there is that we all are looking to support each other's climate transition. How can we best do that through this agreement?

But the question is, are they going to simply be sharing best practices? Or are they going to be trying to develop standards that countries would have to meet to promote those goals?
The more difficult question in this negotiation is that, in the United States, we're still figuring out what those regulations ought to be in a lot of these areas related to climate, just as they are in many of these other countries.

CB: This clean economy pillar could also be one where the United States is open to learning from those agreements that other partners are already negotiating between themselves.

BW: You can see in the language of the documents that were released that there were some proposals that were drawn from the green economy agreements that Singapore and Australia are planning to negotiate. Other countries have thought about what they can do in the trade space that's related to green economy. One of the things that they've talked about potentially is rules of origin for green goods, so that you would look at the carbon content in supply chains and measure it, and then maybe have some sort of facilitated trade for green supply chains, or maybe you're just promoting green supply chains that way.

IPEF’S Fourth Pillar: The Fair Economy

CB: The fourth and final pillar of IPEF is the fair economy. The negotiating objectives language here involves transparency and also cooperation to tackle things like corruption and tax evasion.

In the United States, tax and anti-corruption policies are usually handled by the US Treasury.

IPEF Is Being Negotiated Differently

CB: Stepping back, this points to another different feature of these IPEF negotiations.

In IPEF, the US side is now being led jointly by two different agencies—the Office of the US Trade Representative (USTR) and the Department of Commerce. This is very different from the approach in trade agreements like TPP, where USTR took the lead all by itself.

In what ways might it matter that there's now a different approach, from the US government side?

BW: It will certainly add to the challenges that the administration is facing in successfully concluding this agreement.

In TPP, USTR was established as the coordinating office on trade for the government. You have the leads for all of the issues under the chief negotiator within USTR. Everybody is working together as a team, really effectively, within the building.

Other agencies are part of the negotiating teams and in some of the chapters were co-leading. In financial services, Treasury co-leads, in labor, the Labor Department co-leads—so they do play a very significant role. But there, you still had one agency coordinating the negotiation, the way it was conducted, and how you were interacting with other countries.

Now you have two agencies negotiating. They may be negotiating each of their pillars separately, and they will move forward with that pillar without regard to what the other agency is doing on those pillars. But at some point, all of this does need to come together and it's going to be more complicated to have it between two agencies.

That isn't to say that they can't figure it out, but it's certainly more complicated.

CB: Getting the right rules into IPEF may also require a new type of engagement with stakeholders—like companies in the private sector and workers, as well as NGOs and civil society.

BW: I think there is a distinction between previous trade agreements and the approach being taken here. In previous trade agreements, you would consult with stakeholders, you'd develop the rules, and then the rules get put in place, and companies use the rules as they have been agreed and implemented.

But here what you're doing is saying—in order for us to have supply chain resilience or to have diversity in our supply chains, we need the private sector as a fundamental actor in coming up with the approaches and sharing information or mobilizing the capital to build the infrastructure that we need.

Their role is now much more central than it is in a traditional trade agreement. So another area that they're going to need to think about is the process, the mechanisms, the tools that they're going to use to encourage the private sector participation and to make that participation effective.

How Do Trading Partners Feel about IPEF?

BW: Countries want to negotiate with the United States because they want to ensure that the US continues to play an active role in the region, and by participating in this negotiation, they're encouraging that.

They also recognize that this is a different kind of trade agreement so there may be more flexibility than what they would have in a traditional trade negotiation, and for many of them that's a very positive thing.

CB: Why do you think, at this stage at least, that trading partners seem to be reasonably excited about IPEF?

BW: I think that they see this as an opportunity to participate in the development of these initiatives or these commitments in new areas that haven't been included in previous trade agreements. The United States clearly is still thinking through its approach and what kinds of proposals it wants to put forward. But it is being presented as a very collaborative process where they're looking for input from all of the countries, and I think the countries that are participating in IPEF probably find that very attractive.

Secondly, it doesn't look like the Biden administration is intending to put forward a traditional dispute settlement chapter. They are saying, at least for the trade pillar, that it will include binding commitments, but exactly how they intend to enforce those commitments is not clear yet.

Some are saying that they would like to use a more incentive-based approach. I'm not sure that the administration has decided, but this may be something that they discuss with other countries, and a more cooperative approach to dispute settlement is something that many of the IPEF countries probably find appealing.

CB: In IPEF, the elephant in the room is clearly China.

BW: What the countries are trying to do here is to strengthen their own competitiveness in these areas that are next generation issues—i.e., climate change, supply chain resiliency, and the digital economy.

Yes, there are implications on China and relations with China—there are commercial implications and there are strategic implications. But the way that I looked at it when we were doing TPP, and I think applies very much here as well, is to focus on what it is we are trying to achieve and not on the implications for others.

Where IPEF Might Go Wrong

CB: We're both optimists. You were a trade negotiator, so you have to be an optimist in that kind of job. But let's play devil's advocate. What are some of the ways in which this thing could potentially go wrong?

BW: The first issue that may be a concern is how you define success. Previously, when we had Trade Promotion Authority (TPA), the definition of success was agreed before you started. That is not the case here.

The challenge that may emerge here is that, because it's not a TPA-type of agreement, there's no floor to what the US needs to achieve. If Congress was part of this negotiation, the US would have a limited amount of flexibility in what those outcomes could be. But here, if there's pushback from some of the other countries, the United States may be in a position of having to negotiate weaker commitments in order to reach agreement, or they might lose some of the other countries.

I think there's also some concern about the fact that it's an Executive Agreement and whether, if there's a change of administration, there will be either withdrawal from this agreement or a new administration takes a completely new direction.

CB: There is also a worry that countries are choosing to negotiate IPEF as four separate and discreet agreements.

BW: A traditional trade agreement would be negotiated as what we call a single undertaking, so nothing is concluded until everything is concluded, and everything is linked across chapters and there are tradeoffs across chapters that allow countries to find solutions to things that they have as priorities and trade them off between one chapter and another.

But here, because this is not being negotiated as a single undertaking, those tradeoffs don't exist. You're going to need to reach agreement within each pillar, independent of what's done in the other pillars. That gives you less flexibility and room to negotiate in ways that you do when it's a single undertaking.

So if you wanted to achieve a high standard outcome on labor in the trade chapter, and another country was looking to get benefits, and those benefits are in the clean energy pillar, that country could decide that they'll take the benefits in the clean energy pillar—e.g., we mobilize capital, we support infrastructure development through that pillar—and they'll take that benefit, but they withdraw from the trade pillar.

CB: What’s your bottom line, as of today, on IPEF?

BW: I think they have a lot of work to do to fill out the details of the proposal. But having been a trade negotiator myself, where people are constantly doubting your ability to develop the proposals in a way that make them meaningful, I feel like I need to give them time to do that.

There are a lot of important elements of this agreement and some of these are really groundbreaking new areas that have not been included in previous trade agreements. So let's give them the room to succeed. Let's support them where they can and hope that they're successful.

Piecing IPEF Together

CB: To wrap things up, overall, I too am optimistic. There's a lot to like about a new approach that's inclusive, collaborative, and where countries are not just getting a take-it-or-leave-it offer from the United States.

But trading partners should be clear that this approach carries its own risks. They have newfound responsibilities.

In the old days, under TPA, what the US wanted from other countries was clear almost from the beginning. Here, if objectives turn out poorly defined or misunderstood, IPEF could fail.

The worry is IPEF ends up being like the WTO’s Doha Round of negotiations, which went nowhere for 15 years before they were ultimately scrapped.

From the American side, there's also some concern about the market access issue. US exporters continue to face relatively high tariffs from countries in the region like Vietnam, Malaysia, and certainly India.

IPEF negotiations may deliver amazing new rules and standards to underpin resilient supply chains for a cleaner and fairer economy. But in order for American companies to take advantage of those fantastic new rules, they need market access. And if you don't reduce other countries’ tariffs, American companies may not be able to fully participate in the region’s supply chain.

The last worry involves this approach of separating the four pillars. A benefit of the old approach—of a single undertaking—is that it allowed for tradeoffs across pillars. (I lose a little in this pillar, but it's offset by massive gains in this other pillar.) But today, if the pillars are not linked, maybe none of the key countries participates in that first pillar.

Those concerns aside, it is a great thing that the United States is now trying to build something rather than simply seeking to tear something down without a vision for how to replace it—which was seemingly the US approach during the last administration.

I too think the Biden administration is headed in the right direction. Though, of course, there's still a lot of work to be done.