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Building back global trade

Ever since May 2023, when the 14-member Indo-Pacific Economic Framework (IPEF) reached an agreement on strengthening the resilience of global supply chains — a crucial aspect of the framework’s second pillar — an intense debate has been ignited regarding its feasibility and implications.

For obvious reasons, scholars and commentators have delved into the potential ramifications and explored various perspectives on the matter. Some have scrutinized the practicality of implementing the agreement, while others have examined the potential economic and geopolitical implications it may entail. While the final text of the IPEF supply chain agreement is yet to be unveiled to the media, initial indications have partially revealed its main features, suggesting the creation of comprehensive regulations and institutional mechanisms.

The success of this agreement hinges on its implementation, with a particular focus on delineating tangible measures and possibly establishing specialized projects to propel further advancements. Launched by US President Joe Biden in May 2022 during a Quad summit in Tokyo, the IPEF is a coalition of 14 member-countries — including India, Australia, Brunei, Fiji, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand and Vietnam.

The declared IPEF objective is to establish a shared framework based on four key pillars: connectivity and digital trade, resilient supply chains, clean energy and corruption-free fair trade. But the IPEF is generally viewed as America’s strategic response to its perceived retreat from the Asia-Pacific region during the Trump era, symbolized by the withdrawal from the ambitious Trans-Pacific Partnership (TPP), now known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Apparently, the IPEF is an assertive move by the Biden administration to counter China’s increasing sway in the Indo-Pacific region. With the IPEF, the US aims to expand its economic leadership in the region while advancing its foreign policy and economic interests. Through strategic partnerships with member-countries, the US seeks to enhance the development of supply chains and promote regional connectivity in both physical and digital realms.

By doing so, the US aims to solidify its position as a dominant economic force in the Indo-Pacific region, asserting its influence and securing its long-term economic and strategic objectives of encircling China.

As per media reports, the proposed agreement suggested the establishment of three bodies: a supply chain council, a supply chain crisis response network, and a labor rights advisory board. Additionally, the US has pledged to initiate technical assistance and capacity-building programmes, such as digital shipping pilot projects and an IPEF STEM exchange programme. But the response from the global business community, trade experts, and civil society has been a mixed bag.

While some hailed this agreement as a comprehensive accord aimed at tackling supply chain vulnerabilities, critics were quick to highlight its lack of substantial action and enforceable commitments. Instead of concrete measures, the agreement appears to prioritize a process-driven framework, raising doubts about its effectiveness in delivering tangible results. This disparity in reactions underscores the scepticism surrounding the IPEF’s approach.

Sceptics argue that a focus on building frameworks and institutions without substantive actions may fall short in addressing the pressing challenges faced by global supply chains. The absence of binding commitments raises concerns about the agreement’s ability to bring about meaningful change and protect labour rights in an increasingly interconnected and vulnerable economic landscape.

The current structure of the framework falls short in providing substantive specifics. This has lent weight to the prevailing belief among Washington insiders and regional power centres that the Biden administration faces challenges in fleshing out the substantive components of the IPEF.

The IPEF agreement on supply chain faces its most pressing challenge in its inability to offer tangible market access advantages to regional nations. Southeast Asian and South Asian developing countries eagerly anticipate exporting their agricultural and manufactured goods to the US. Under America’s pressure, the IPEF has deliberately omitted any discussion on market access, a matter of critical importance to the ASEAN countries.

Simultaneously, the Biden administration seeks to appease domestic labour unions and environmental organizations. This perplexes ASEAN countries, as regulations pertaining to labour rights and the environment appear largely disconnected from the realm of supply chains. However, the measure encounters fierce opposition from US labour unions as well as both Democrats and Republicans, who believe that tariff reductions would undermine domestic employment and manufacturing.

The congenital problem with the strategic intent of the IPEF is that it is driven primarily by geopolitical motives rather than economic considerations, while purposefully excludes China. However, regional nations are hesitant to be entangled in the predicament of choosing sides between the US and China, particularly since China stands as their largest trading partner.

Ever since the Obama administration, the US has sought to undermine the economic ties between China and countries in the Indo-Pacific region, which is perceived as a vital pillar of ‘China’s international influence’. American strategists contend that China’s close economic and trade relations with Indo-Pacific nations pose a challenge to America’s regional hegemony.

The US is trying to leverage the IPEF as a means to entice regional economies to detach themselves from China’s economic orbit and exclude the country from regional supply chains. However, these efforts are not likely to yield the desired results for Washington.

This is because China holds a pivotal role in Asian industrial and supply chains, boasting a comprehensive industrial infrastructure, robust logistics networks, and robust support systems. It is emerging as a critical market for manufactured goods produced in the Asia-Pacific region. China is also forging closer ties within the industrial chain, solidifying economic and trade relationships with the Indo-Pacific countries.

The IPEF suffers from a fundamental flaw: with insufficient access to the lucrative US market or other attractive trade benefits, partner countries lack the incentive to make significant commitments of their own. Consequently, the IPEF is destined to fail to divert value networks away from China or effectively counter Beijing’s geo-economic influence in any substantial manner.

Similar to the bilateral agreement reached with Japan, the Biden administration has the potential to engage in negotiations for a crucial minerals pact, either on a bilateral level or within the framework of the IPEF alongside relevant partners. The Biden administration should prioritize the creation of incentives to encourage global companies to invest in, extract, and refine critical minerals within resource-abundant IPEF nations. This concept of ‘friendshoring’ would address the concerns of the US electric vehicle and battery industry while also serving the broader security interests of the US.

Various shocks, such as the Covid-19 pandemic, the Ukraine conflict, and strained multilateral trade ties, have disrupted global supply chains. While the nature of the next crisis may differ, it is crucial to safeguard the continuous flow of essential commodities like food, energy, and medicines, and prevent significant disruptions in supply chains.

As the discourse continues, it remains to be seen whether the IPEF’s proposed agreement will be able to bridge the gap between lofty aspirations and practical solutions, leaving observers and stakeholders to grapple with the potential ramifications of this process-driven approach to addressing supply chains’ vulnerabilities.

Dr Imran Khalid, "Building back global trade," The News. 2023-07-08.
Keywords: Economics , Economic force , Economic interests , Export , Trading , President Biden , Ukraine , China , IPEF , ASEAN