The IPEF is an initiative led by the US and comprised of 13 other countries, including India, Australia, Brunei Darussalam, Fiji, Indonesia, Japan, the Republic of Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. Objective is to negotiate rules that address 21st-century challenges and promote fair and resilient trade. The agreement on Supply Chain Resilience aims to enhance crisis coordination and response to supply chain disruptions by encouraging each participating country to identify and monitor its critical sectors. The Supply Chain Resilience Agreement is aimed at reducing dependence on China and enhancing the manufacturing of essential goods within member nations. The agreement will set up three IPEF supply chain bodies – IPEF Supply Chain Council, the Crisis Response Network, and the Labour Rights Advisory Board.
To reduce reliance on China and promote the production of essential goods within member countries, on November 14, 2023, the Minister of Commerce and Industry of India signed the Indo-Pacific Economic Framework’s (IPEF) Supply Chain Resilience Agreement (Pillar 2) with 13 other countries. The agreement aims to strengthen global supply chains and improve their resilience, stability, and sustainability. The agreement is considered the fastest-concluded plurilateral economic cooperation agreement. The countries in the agreement include India, Australia, Brunei Darussalam, Fiji, Indonesia, Japan, the Republic of Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, the USA, and Vietnam.
The IPEF is an initiative led by the US and comprised of 13 other countries, including India. Its main objective is to negotiate rules that address 21st-century challenges and promote fair and resilient trade. The agreement on Supply Chain Resilience aims to enhance crisis coordination and response to supply chain disruptions by encouraging each participating country to identify and monitor its critical sectors and key goods. It would enable the participating countries to work together to support the timely delivery of goods affected during a crisis. The agreement also seeks to help businesses in the economies of the IPEF partners prepare better to resolve supply chain bottlenecks, as well as promote labour rights in IPEF partners’ supply chains.
The Supply Chain Resilience Agreement is aimed at reducing dependence on China and enhancing the manufacturing of essential goods within member nations. It provides a framework to build a collective understanding of significant supply chain risks, supported by each partner’s identification and monitoring of its critical sectors and key goods. The agreement is expected to make the supply chain robust and well-integrated through crisis response measures, cooperation for mitigating supply chain disruptions, improvements in logistics and connectivity, and mobilizing investment.
It aims to protect and benefit labour by adhering to the ILO Declaration on Fundamental Principles and Rights at Work (1998), as amended in 2022. The agreement also intends to guarantee the availability of a large number of skilled workers in crucial sectors and goods, including upskilling and reskilling workers. It targets to pinpoint opportunities for technical aid and capacity building in bolstering IPEF partners’ supply chains. The agreement will set up three IPEF supply chain bodies to enable cooperation among the IPEF partners on supply chain matters. These are the IPEF Supply Chain Council, the IPEF Supply Chain Crisis Response Network, and the IPEF Labour Rights Advisory Board.
Provisions Are Not Generous
The agreement on Supply Chain Resilience contains provisions that are mainly phrased as ‘each party intends to’ rather than ‘each party shall’. It means that, from a legal standpoint, these provisions are not mandatory and must be executed on a ‘best endeavour’ basis. However, from India and other developing countries’ standpoints in the IPEF group, not all such provisions could be considered to be generous.
Parties have agreed that all efforts to improve supply chain resilience under this Agreement should be carried out in a manner consistent with labour rights. This provides a legal basis for the United States to restrict exports from other countries if they fail to effectively enforce labour rights within their borders. India’s exportation of generic medicines may be targeted by the US, as a 2021 report from the White House recommends that the US utilize pharmaceutical products with ingredients made in countries other than those with the lowest labour costs and least robust environmental frameworks, such as China and India. The provisions in the agreement are worded in a way that is more legally binding than the rest of the text on certain critical issues. Two of these provisions and their implications must be understood.
First, even in the absence of supply chain interruptions, each Party has committed to minimizing unnecessary restrictions or impediments that create trade barriers that affect IPEF supply chains. Second, each IPEF country has committed to supporting another Party’s response to a supply chain disruption or an imminent supply chain disruption, to the extent possible, by its domestic law, respect for market principles, and the goal of minimizing market distortions. These provisions would prohibit IPEF countries from exercising their current rights under WTO rules to impose temporary restrictions and taxes on mineral exports to nurture downstream value-added processing industries. This provision could disadvantage countries rich in minerals like cobalt, nickel, lithium, etc., which are necessary for clean energy systems. This provision could impede India’s efforts to process its domestic lithium reserves to transition to a low-carbon economy.
Negative Impact of Certain Provisions
It is important to highlight the negative impact of certain provisions. In times of global health crises, such as the recent COVID-19 pandemic, these provisions could allow powerful countries in the IPEF to force other countries to export medical supplies, even if it means compromising their own domestic needs. This puts the health security of the latter countries at risk. India may not be able to utilize these provisions to access raw materials and medical supplies from other IPEF countries during an emergency. This is because the US, Japan and other wealthy countries in IPEF would be able to pay much higher prices for these scarce resources compared to India. Additionally, developing countries like India may not have the necessary influence to use these provisions to their advantage over developed countries.
Some argue that India should not be concerned about the implications of the Supply Chain Resilience agreement because it is not subject to binding dispute settlement. However, this view is problematic for several reasons. Firstly, the absence of dispute settlement provisions does not prevent the US from imposing export restrictions on non-compliant countries. Secondly, the US can leverage its economic and political power to force countries to comply with the agreement’s provisions, while retaining the flexibility to not abide by the commitments itself. Thirdly, the agreement proposes the creation of three new IPEF Supply Chain bodies to facilitate cooperation, which may become the platform for deepening commitments beyond the current framework. In conclusion, the Supply Chain Resilience Agreement will improve the resilience of the US, while exposing India and other developing countries to greater vulnerability.
It appears that the US prioritizes its interests in sourcing critical materials through imports over the national interests of other countries. Furthermore, by gaining the support of developing countries like India and Indonesia on contentious issues such as labour and export restrictions, the US is paving the way for binding provisions on these issues at the WTO. The Central government must recognize the risks associated with this agreement and develop a suitable strategy to mitigate them.
What Lies Ahead?
The real challenge for the bloc will now be to establish the decisions through their domestic processes. The IPEF members need to take the announced decisions to the private sector to make them active stakeholders in the implementation of the decisions. The supply chain and clean economy pillars of IPEF visualise the active participation of enterprises and private investors. There is a lot of work that members will need to do in this regard.
Businesses are still confused about the character of IPEF. They are unsure whether it is selectively binding or entirely flexible, how widely applicable its standards will be, and how much countries can ‘pick and choose’ among its various provisions. The next two years will determine the extent to which the IPEF experiment will be a path to follow for new-generation rules-based trade frameworks. It will also depend on whether the US, even if there is a change in government, stays committed to the framework.
