The 14 member countries in the Indo-Pacific Economic Framework (IPEF), launched by the United States in 2022, achieved a significant milestone in May 2023, when they reached the substantial conclusion of negotiations on IPEF’s second pillar: strengthening the resilience of supply chains. The final text of the proposed IPEF Supply Chain Agreement is not yet available, but it appears to create general rules and institutional arrangements. Its success will therefore depend on its implementation, with an emphasis on specifying concrete actions and perhaps setting up a sector-specific project for further progress.
The need for resilient supply chains is driven by disruptions caused by Russia’s invasion of Ukraine and the global efforts to “de-risk” from concentrated vulnerable supply chains. China’s recent move to restrict exports of two rare metals, gallium and germanium, critical to semiconductor and other high-tech products underscores the urgency to turn the agreement into concrete actions to strengthen and diversify critical mineral supply chains.
Under the proposed agreement, IPEF negotiators have established three bodies: a Supply Chain Council; a Supply Chain Crisis Response Network; and a Labor Rights Advisory Board.
The United States committed itself to establishing several technical assistance and capacity-building programs, including digital shipping pilot projects and an IPEF STEM Exchange Program. The responses from the business community, trade experts, and civil society around the world have been mixed, however. Some praised it as a landmark, first-of-its-kind international agreement to address supply chain vulnerability, but others were quick to point out that the agreement seemed to lack substantive actions and binding commitments, instead focusing on process-driven framework building.
To address these concerns, IPEF partners should now tackle supply chain issues immediately and collectively, clarifying concrete cooperation mechanisms and follow-up actions and initiatives to operationalize the framework. The proposed Supply Chain Agreement is different from a traditional trade agreement in that the former is a general framework agreement to be made concrete with implementation whereas the latter is an actionable agreement to be followed faithfully as it is.
Recommended steps to turn agreement into action
To start with, IPEF partners can take at least three steps discussed here.
First, a sector-specific project—for example, on critical minerals and raw materials—would be a good starting point to see how the agreement can be implemented. India, Japan, and Korea have already experienced supply chain shocks in this critical sector to varying degrees. Now China is restricting exports of gallium and germanium, posing risks to global high-tech supply chains. What if IPEF were in place when Japan was hit by China’s sudden ban on rare earth exports in 2010, or when Korea was hit by China’s sudden export restriction on urea in 2021? How could governments and businesses have responded differently? Based on their actual experiences, IPEF partners should engage in a real supply chain simulation game and find ways to cooperate and develop workable solutions for future crises.
To accomplish this goal, each IPEF partner country should undertake mapping exercise to gather information on reserves and figure out supply chains in the critical mineral and raw materials sector. Some partners will need technical assistance and help with capacity-building. Through this IPEF-wide supply chain mapping and stress test exercise, members will gain a better sense of their strengths and weaknesses in certain critical materials and could develop a contingency plan on “where” they could source “what” material and “how” among IPEF partners when a need arises. Contingency sourcing could take diverse forms like business transactions, government purchases, or short-term drawdowns from stockpiles in the form of a “supply swap.” Such a trial-and-error project would enable countries to better understand their vulnerabilities as well as opportunities for cooperation and design contingency plans.
Second, tangible incentives should be adopted to “de-risk” and diversify concentrated supply chains in the region. The trade and industrial landscape has radically changed since IPEF was conceived in early 2022 with the emergence of US industrial policy, mainly in the Inflation Reduction Act (IRA) in August 2023, placing an urgent priority on diversifying the vulnerable critical mineral supply chain concentrated in China. But the IRA limits US tax incentives to critical minerals sourced within the United States and its free trade agreement (FTA) partners. Extending the incentives to IPEF partners, especially Indonesia, Vietnam, and the Philippines, which possess rich deposits of cobalt, nickel, copper, and rare earths, could be a powerful incentive.
The Biden administration could negotiate a critical minerals agreement, as it did with Japan bilaterally, or with relevant IPEF partners. Despite the political controversy surrounding the issue in the United States, the administration should value creation of incentives for global companies to invest in, mine, and refine critical minerals in resource-rich IPEF partners. Such “friendshoring” would alleviate the concerns of the US electric vehicle and battery industry and benefit the US security interest as well.
Third, IPEF should develop a new kind of public-private partnership model. In traditional trade agreements, governments make new rules and businesses follow them. But in IPEF, businesses are copartners with governments. As experience has demonstrated, supply chain disruptions can cause markets to fail. Public-private partnerships can help IPEF partners weather the supply chain storm. These partnerships can help them decide which information from the private sector can be shared with governments while maintaining confidentiality.
One promising area for such a partnership would be in facilitating coinvestment opportunities. IPEF partners can consider establishing a one-stop shop, a “Supply Chain Ombudsman” under the aforementioned Supply Chain Council. Investors in the region have complained about red tape, opaque regulations, irregular implementation and corruption as impediments to investment. An ombudsman from each country could encourage coinvestment opportunities and resolve investment grievances, diversifying supply chains in IPEF.
IPEF negotiators are scheduled to meet for the fourth round of negotiations in Busan, Korea in July 9-15 on the remaining three pillars of the framework: Connected Economy (Trade); Clean Economy; and Fair Economy. The trade landscape in the Indo-Pacific is moving fast and forward. The United Kingdom’s accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is almost complete, and it is now time for the CPTPP to deal with the next phase in accession: China and Taiwan. The Regional Comprehensive Economic Partnership (RCEP) is in its second year of implementation, accelerating intraregion trade. The region is welcoming the long overdue economic reengagement of the United States with IPEF at its core. The United States must not waste this opportunity.
1. IPEF partners as of mid-2023 are Australia, Brunei, Fiji, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, the United States, and Vietnam.
This publication does not include a replication package.