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The IPEF Supply Chain Agreement Is a Win for U.S. Industrial Policy
Article

The IPEF Supply Chain Agreement Is a Win for U.S. Industrial Policy

The new Indo-Pacific supply chain deal demonstrates how the Biden Administration's new approach to foreign and economic policy furthers its industrial strategy.

President Joe Biden delivers remarks alongside members of the Indo-Pacific Economic Framework at the APEC Leaders' Week in San Francisco on November 16, 2023. (Getty/Brendan Mialowski)

The Biden administration’s industrial strategy took a major step forward last week with the signing of the new supply chain pact under the Indo-Pacific Economic Framework for Prosperity (IPEF). The signing commits the United States, along with 13 partner countries, to the agreement’s broad goals and its three new IPEF bodies—all designed to enhance supply chain coordination, increase investment, and improve working conditions in a region critical to U.S. national security, as well as a key source of inputs for U.S. manufacturers and a key export market for U.S.-made goods.

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Although much of the media’s focus has been on the negotiations concerning the trade pillar of IPEF, the significance of the IPEF Supply Chain Agreement, as well as agreements on the clean economy and the fair economy, should not be overlooked. It is a clear demonstration of the Biden administration’s effort to align U.S. international economic policy with its focus on rebuilding American manufacturing. It signals a notable rethinking of traditional trade policy as well as a movement toward using negotiated economic arrangements to advance priorities critical to a modern economy. In short, the IPEF Supply Chain Agreement is an important development and worth considering in detail.

Understanding IPEF

The Biden administration facilitated the launch of IPEF in 2022 with the express desire to expand the scope of traditional trade negotiations to include topics such as supply chains, climate change, and anti-corruption that are essential to modern, successful economies. IPEF was constructed around four “pillars”: trade, supply chains, the clean economy, and the fair economy. Each pillar was designed as a separate potential agreement, allowing negotiations on each pillar to move at different speeds and conclude at different times. IPEF partners were also allowed to determine which pillars they wanted to join.

In September 2022, the IPEF partners agreed to ministerial statements that provided negotiating objectives for each pillar. The U.S. trade representative led Pillar I (trade), while the U.S. Department of Commerce was placed in charge of pillars II (supply chains), III (the clean economy), and VI (the fair economy). Text-based negotiations for each of the four IPEF pillars began in Brisbane in December 2022 and have continued since, with negotiating rounds in India, Indonesia, Singapore, Detroit, Korea, Thailand, Malaysia, and San Francisco.

The IPEF Supply Chain Agreement was signed in San Francisco after negotiations were substantially concluded in May 2023. The IPEF Clean Economy and the IPEF Fair Economy agreements were substantially concluded last week. Negotiations are set to continue on Pillar I.

The importance of a supply chain agreement under IPEF

A strong domestic industrial base requires U.S. manufacturers to have access to resilient and reliable supply chains for the component parts and materials needed to make products here at home. For example, semiconductor shortages emanating from production cuts in Asia and backlogs at U.S. ports have resulted in closures of U.S. manufacturing facilities—not just limiting the supply of cars and other consumer goods, but also furloughing U.S. workers.

The IPEF Supply Chain Agreement must be viewed as the next step in the implementation of an industrial strategy designed to rebuild American manufacturing, grow the middle class, and strengthen communities across the country.

However, fixing these issues is not as simple as the government buying more products or shifting production from one place to another. Governments do not directly control most supply chains, which is why the IPEF Supply Chain Agreement is so important: It is a first-of-its-kind effort to utilize public sector tools to improve the functioning of something that is largely driven by the private sector. And as with many other challenges of the 21st century, supply chains are inherently global. The agreement must therefore be viewed as the next step in the implementation of an industrial strategy designed to rebuild American manufacturing, grow the middle class, and strengthen communities across the country.

The agreement supports, and is reinforced by, the Biden administration’s generational investments in American infrastructure, clean energy, and manufacturing; regional technology hubs; a focus on improving the productivity of American manufacturing facilities; and on both developing and producing cutting-edge products in the United States. Taken together, these actions have resulted in more than $600 billion of new private-sector investment in American manufacturing, establishing a strong foundation for U.S. industrial competitiveness for decades to come and reinvigorating a traditional generator of good-paying, middle-class jobs.

A novel approach to international economic policy

Since its launch, the IPEF partners—Australia, Brunei Darussalam, Fiji, India, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand, the United States, and Vietnam—have made clear that their work is different than past multilateral trade negotiations. None of the IPEF agreements include tariff reductions, taking market access off the table and allowing negotiators to focus instead on less zero-sum provisions.

For example, the IPEF Supply Chain Agreement is written not as a rulebook to dictate the terms of competition among signatories, as a traditional trade agreement does, but rather as a playbook for how its signatories will collaborate to address common challenges together. It is designed to allow the relationships among signatories to evolve over time, providing partners a platform to focus their collective attention concurrently on timely challenges and on building long-term resilience in sectors such as critical minerals, semiconductors, and pharmaceuticals.

The agreement recognizes that previous trade deals, with their focus on securing ever-cheaper goods for American consumers and ever-larger profits for U.S. corporations, have often facilitated a hollowing of the American middle-class. In fact, the first acknowledgment of the IPEF Supply Chain Agreement states clearly that “resilience, efficiency, productivity, sustainability, transparency, diversification, security, fairness, and inclusivity are indispensable considerations in the development of resilient and robust supply chains, in addition to cost.”

See also

The agreement creates a baseline of policy coordination that reflects lessons learned from the COVID-19 pandemic and subsequent supply chain shortages. Among other things, it calls for partners to improve logistics infrastructure, collaborate on investment attraction for critical sectors, help companies diversify their sourcing, share best practices on cargo risk assessment, increase supply chain monitoring capabilities, and remove restrictions on warehousing near ports of entry. Significantly, the agreement also requires partners to establish a reporting mechanism to receive allegations of labor rights inconsistencies at production facilities located in the territory of another party and to work with that party to resolve any issues once identified.

The pact contains a commitment from each partner to monitor supply chain vulnerabilities and import dependencies and to share information with other partners. Information sharing is critical because although most countries have a good sense of what products are coming into their market and what is being exported abroad, they have far less intelligence regarding the component parts and materials that a trading partner has imported in order to support its production of a product destined for the U.S. market. As such, to strengthen the resilience of its most critical supply chains, the United States must work closely with its trading partners to better understand potential vulnerabilities and bottlenecks by comparing data, sharing information, and planning together.

The agreement also establishes three new bodies designed to facilitate cooperation among IPEF partners on supply chain issues going forward: The IPEF Supply Chain Council to develop sector-specific “action plans” designed to promote diversification, address workforce challenges, and improve resilience; the IPEF Supply Chain Crisis Response Network to provide an emergency communication channel during a supply chain disruption and to enable a faster and more effective response that minimizes negative effects on partners’ economies; and the tripartite IPEF Labor Rights Advisory Board to support IPEF partners’ promotion of labor rights in their supply chains, promotion of sustainable trade and investment, and facilitation of opportunities for investment in businesses that respect labor rights.

Each of these bodies will create a regular and routine cadence of senior-level engagement among the 14 IPEF partners focused on different aspects of supply chain resilience and competitiveness. They will build relationships, increase public-private engagements, and improve information sharing. This in itself is a major geostrategic achievement for the United States, but it also lays a foundation for using U.S. foreign policy to strengthen the resilience of America’s supply chains.

The importance of implementation

The ultimate success of the IPEF Supply Chain Agreement cannot be judged by its signing or even entry into force, but rather by how it is implemented. Fortunately, early returns are quite positive. Since announcing the substantial conclusion of negotiations, partners quickly completed a legal scrub and publicly released the text of the agreement in September 2023. The 14 IPEF partners also began discussing implementation at the most recent IPEF negotiating round. The United States has announced that it will support the agreement through actions by several U.S. government agencies, including the launch of an IPEF STEM Exchange Program; hosting multiple trade missions specifically targeted at IPEF markets where partners are seeking to increase supply chain diversification; and providing support for several new feasibility studies and reverse trade missions. Other governments have also announced similar efforts, including an Australian announcement of new financial support for supply chain diversification and a symposium on supply chain monitoring for IPEF officials hosted by the Republic of Korea.

Once the agreement enters into force, partners will have 120 days to identify the sectors they deem critical and the goods they deem key to their national security, public health and safety, and the prevention of widespread economic disruption—and to share this list with the other partners. The United States and each of its IPEF partners will need to determine how to staff each of the new IPEF supply chain bodies. For the United States, this will mean determining the appropriate role for the U.S. departments of Commerce, State, and Labor, as well as other interagency partners that have expertise in different aspects of supply chain policy.

As a group, the partners will need to determine how to best utilize the new tools created by the agreement. This should include the development of sector-specific action plans where the IPEF club can be an important driver of supply chain diversification. Since the agreement includes a provision that prohibits withdrawal for three years after signature and requires a general review of the agreement every five years, all this work and more will have time to both demonstrate its value and be calibrated to meet the needs of an ever-changing world.

Moving past outdated policies and false starts

The IPEF Supply Chain Agreement is not without its critics. Some have pointed to the fact that the deal does not include a binding dispute resolution body, ignoring the fact that without market access to grant or take away, there is no need for one. The agreement is written as a playbook for how countries can cooperate. If a partner chooses not to do its part, its lack of participation means that it will not enjoy the benefits of cooperation.

Like criticizing a football team for gaining a first down, this charge overlooks the fact that most successful touchdown drives are the result of several productive plays.

Others have downplayed the significance of the agreement, suggesting that the “intends-to” formulation of many of its provisions is an indication of weakness. These critics argue that the supply chain deal is only “aspirational” compared with the more binding nature of what has been discussed under the trade pillar of IPEF. Like criticizing a football team for gaining a first down, this charge overlooks the fact that most successful touchdown drives are the result of several productive plays. Additionally, criticism that suggests that the IPEF Supply Chain Agreement is not sufficiently successful is especially ironic since—to continue with the football metaphor—past U.S. action in the Indo-Pacific has been characterized by a series of fumbles and false starts.

Reestablishing the United States’ presence—and credibility—in the region will not be a one-trick endeavor; it will take a concerted, consistent, and positive approach that strings together multiple wins over many years. The supply chain deal, along with the IPEF deals related to the clean economy (Pillar III) and the fair economy (Pillar IV), is best viewed as a first step toward this type of reinvigorated relationship with the region. It is a foundation on which future collaborative, alliance-strengthening activities can—and will—be based.

Conclusion

The Biden administration is bringing a new perspective and approach to international economic policy—and moving past the outdated policies of old. If implemented effectively, the IPEF supply chain deal can be a cornerstone of this effort, demonstrating that past notions that only trade deals with market access and tariff reductions can effectively bring economies together are outdated and that other, more collaborative arrangements can best address the modern 21st century problems faced by most economies.

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Author

Ryan Mulholland

Senior Fellow, International Economic Policy

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