On May 23, President Biden officially launched The Indo-Pacific Economic Framework (IPEF). This framework aims to prevent detrimental supply chain shortages (such as the chip shortage the automotive industry faced during the pandemic) and improve response time when supply chain disruptions occur across the partnered countries.
As of negotiations on May 27, the IPEF includes the US and 14 Asia-Pacific nations: Australia, Brunei, Fiji, India, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam—that together represent 40% of the world’s GDP. In this blog, we’ll look at the goals, recent negotiations, why it matters, and the supply chain impact of the Indo-Pacific Economic Framework.
Goals of the Indo-Pacific Economic Framework
In total, four pillars are covered under the framework: Connected Economy, Resilient Economy, Clean Economy, and Fair Economy. These pillars respectively correspond to trade, supply chain resilience, sustainability, and fair labor. Under the IPEF, the countries have agreed to expand supply chain cooperation to build more resilient supply chains in critical sectors such as clean energy, digital, and technology.
Here’s a snapshot of each of the four pillars:
- Connected Economy (Trade): Create high standards for the digital economy, e-commerce, and artificial intelligence.
- Resilient Economy (Supply Chain): Anticipate and prevent supply chain disruptions more efficiently, using mapping and diversification.
- Clean Economy (Sustainability): Tackle the climate crisis by accelerating renewable energy and decarbonization.
- Fair Economy (Fair Labor): Discourage money laundering and bribery to promote a fair economy.
While not explicitly stated in the framework, it also aims to reduce reliance on Chinese suppliers for essential commodities like semiconductors. Mitigating China’s growing influence on the region is of utmost significance to the US, given that the Indo-Pacific region is responsible for supporting over three million American jobs and generating almost $900 billion in foreign direct investment. As the Indo-Pacific region is projected to be a major global growth contributor for the next 30 years, the IPEF will only gain greater significance in years to come.
Is the Indo-Pacific Economic Framework a Trade Deal?
This framework comes in response to President Trump’s withdrawal from the Trans-Pacific Partnership (TPP) in January 2017. The TPP was a previously proposed free-trade deal that included the US, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The TTP and the IPEF are similar, in that they both aimed to promote high standards of fair labor and sustainability throughout partners’ supply chains.
However, there is one major difference: the IPEF is not a free-trade agreement or trade deal. US Trade Representative Katherine Thai noted, “[IPEF], from the very beginning, is not a traditional trade deal. We’re not just trying to maximize efficiencies and liberalization. We’re trying to promote sustainability, resilience, and inclusiveness.” Read more about the difference between the IPEF and the TPP in Resilinc’s blog: Spotlight on Trade Agreements.
Conversely, some lawmakers and businesses are worried the IPEF will impact American jobs. Over 30 businesses sent a letter to the IPEF administration, citing concerns that typical provisions in normal free-trade agreements, such as tariff reductions and market access, have been left out. According to the letter, adding commitments like these would help facilitate trade where anti-tariff barriers prevent U.S. competitiveness overseas.
What is the timeline for the IPEF?
On May 27, trade ministers met to discuss one of the pillars: supply chain resilience. Following negotiations, three groups were proposed to coordinate the IPEF and relay current supply chain issues across partners. The first group, The IPEF Supply Chain Council, will create action plans for building supply chain resilience in critical sectors. The next group, The IPEF Supply Chain Crisis Response Network, will create a channel for emergency communications during major supply chain disruptions. Finally, The IPEF Labor Rights Advisory Board will create a council to promote fair labor and sustainable trade.
According to the U.S. Department of Commerce, “The IPEF Partners have agreed to an aggressive negotiating schedule for 2023 in order to make substantial progress this year.” Going forward, countries plan to work together to discuss the remaining three pillars of the IPEF. Negotiations are expected to be finalized by November 2023—in time for the Asia-Pacific Economic Cooperation summit meeting.
How will the IPEF Impact Supply Chains?
Ultimately, the IPEF aims to promote American workers and businesses as well as workers in the Indo-Pacific region. This framework should help ensure that American workers can compete in the region while building more resilient global supply chains. With more resilient supply chains, costly disruptions can be avoided, resulting in lower prices for consumers.
Many are skeptical about whether the IPEF will be able to counter China’s influence—considering that the IPEF is not a trade deal—and view the framework as purely symbolic. According to Senior Economic David Dapice, however, the IPEF has the potential to make real changes in areas it focuses on, like sustainability and digital security. For example, the US could provide “green” loans for clean energy, which could help the IPEF countries meet lower carbon and pollution targets.
In the broader picture, the IPEF represents an overall shift toward the importance of supply chain resilience. President Biden even referred to the framework as “the new rules for the 21st-century economy.” As countries across the globe are starting to implement supply chain resilience strategies, now is the time for your business to start too. Learn more about how Resilinc can help you on your journey to supply chain resiliency.