After having substantially concluded the negotiations on the Supply Chain Resilience under the overall Indo Pacific Economic Framework for Prosperity (IPEF) in May, the 14 participant countries have formally signed the agreement on this issue on November 14. What are the objectives, substantial provisions and the implications of this agreement? Why is it important?

The IPEF, a US-led initiative, comprising 13 other countries including India, has the broad objective of negotiating rules for ostensibly tackling 21st century challenges and promoting fair and resilient trade. Based on each country’s identification and monitoring of its own critical sectors and key goods, the agreement on Supply Chain Resilience seeks to improve crisis coordination and response to supply chain disruptions.

This would enable the participating countries to work together to support the timely delivery of goods affected during a crisis. Another objective of the agreement is to help better prepare businesses in the economies of the IPEF partners to resolve supply chain bottlenecks. The agreement also seeks to promote labour rights in IPEF partners’ supply chains.

Turning to the substantial content of the agreement on Supply Chain Resilience, most of the provisions are worded as “each party intends to” and not “each party shall”. Thus, from a narrow legal lens, these provisions are non-mandatory and have to be implemented on a ‘best endeavour’ basis. However, from India and other developing countries’ perspective in the IPEF group, not all such provisions could be considered to be benign.

Labour issues

Consider the following provision: Parties intend that “efforts to improve supply chain resilience pursuant to this Agreement be undertaken in a manner consistent with labour rights”. This provides a legal justification to the US to impose restrictions on exports from other countries on the ground that they do not enforce labour rights effectively in their territories.

India’s exports of generic medicines are likely to be on the US hit list, as a 2021 report from the White House recommends that the US use pharmaceutical products with ingredients manufactured in “countries other than those with the lowest labour costs and least robust environmental frameworks (such as China and India)”.

On some key issues, the provisions in the agreement are worded in a language that is more legally binding than the rest of the text. It is important to understand two of these provisions and their implications.

First, even in the absence of supply chain disruptions, each Party has committed to “minimizing unnecessary restrictions or impediments creating barriers to trade” affecting 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, in accordance with its domestic law, respect for market principles, and the goal of minimizing market distortions”.

These provisions would prevent the IPEF countries from exercising their existing rights under WTO rules for imposing temporary restrictions and taxes on exports of minerals with the objective of nurturing value-added downstream processing industry. Countries rich in minerals, such as cobalt, nickel, lithium, etc, which are required for clean energy systems, are likely to be disadvantaged by this provision. This could hinder India’s quest to process its domestic reserves of lithium for transitioning to a low-carbon economy.

Health ‘scare’

One particular pernicious impact of these provisions needs to be highlighted. During a global health crisis, such as the recent Covid 19 pandemic, these provisions would provide the legal basis to the US and other powerful countries in IPEF to compel other countries to export medical supplies, even at the expense of their domestic needs. This would considerably jeopardise the health security of the latter countries.

Can India utilise these provisions for accessing raw materials and medical supplies from other IPEF countries during an emergency? This is unlikely as US, Japan and other rich countries in IPEF would be in a position to pay far higher prices than India for the scarce natural resources and medical supplies.

Further, India and other developing countries may not have the clout to use these provisions to their advantage vis-à-vis the developed countries.

An argument made by some experts is that as the agreement on Supply Chain Resilience is not subject to binding dispute settlement, India should not be worried about the implications of its provisions. This approach is problematic from several perspectives. First, absence of dispute settlement provisions does not diminish the right of the US to impose restrictions on exports on grounds of non-compliance with labour requirements.

Second, the US can use its considerable economic and political clout to compel other countries to comply with many of the provisions, while retaining the flexibility with itself not to abide by the commitments. Third, the agreement envisages establishing three new IPEF Supply Chain bodies to facilitate cooperation among the IPEF partners.

These bodies would provide the institutional mechanism for ensuring that India and other countries comply with their obligations under the agreement. These bodies are also likely to become the platform for deepening the commitments, which presently exist merely under a “framework”.

In conclusion, the agreement on Supply Chain Resilience will enhance the resilience of the US, while deepening the vulnerability of India and other developing countries. The US world view appears to be that national interests of other countries should be subservient to its interests of sourcing critical materials through imports.

Further, by getting India, Indonesia and other developing countries on its side on contentious issues such as labour and prohibiting export restrictions and taxes, the US has prepared the ground for smoothening the entry of binding provisions on these issues at the WTO. One hopes that the Central government is fully cognisant of the risks inherent for India in this agreement and is ready with suitable strategy to mitigate them.

The writer is an expert on WTO and international trade. Views are personal

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