The final text of the supply chain agreement (SCA) of the Indo-Pacific Economic Framework for Prosperity (IPEF) has now become available. This is even as the agreements on the other three pillars of IPEF relating to trade, clean economy and fair economy are still under negotiation. India is among the 14 IPEF members that will be signing these agreements. On the trade pillar, however, India is only an observer.
The supply chain pillar has attracted maximum interest considering that the IPEF launch came against the backdrop of severe supply disruptions following Covid, the Ukraine conflict outbreak and the uncertainties about China’s moves on Taiwan. Another unstated but compelling factor was the concern about possible coercive trade practices by China using to advantage its dominant manufacturing and trade status that has also led to calls for de-risking.
The SCA is the first regional trade agreement of its kind aiming to bolster supply chains in critical sectors and key goods. Such sectors and goods have to be identified by each party to the SCA depending on its circumstances and based on how significant or critical they are to that country’s security, public health and safety or for prevention of serious economic disruptions. The idea is this will also help in a shared understanding of global supply chain risks.
SCA is structured as a collaborative effort among the parties to increase the resilience, efficiency, productivity, sustainability, transparency, diversification, security, fairness and inclusivity of its supply chains. It aims to achieve the totality of these attributes and not just some. The initiative also seeks to foster greater investments in the region in related sectors and to bring about improvements in physical and digital infrastructure, logistics and trade facilitation.
Most of SCA, however, is not set in legally binding language. Nor does it have mechanisms to adjudicate disputes, beyond providing for consultations. Even so it has some striking features that can bring salience. Its main implementation mechanism will be its Supply Chain Council comprising all its members which will, among other things, establish teams to develop action plans for critical sectors or key goods of priority to its members to increase resilience and competitiveness.
The teams shall take inputs from key stakeholders in the region including from the private sector, the academia and the NGOs. Its recommendations could include needed diversification, joint financing of projects and acceleration of business matching.
Another mechanism is the establishment of a crisis response network that will serve as an emergency communications channel and a support system among the IPEF countries in the event of a supply chain disruption or its likely imminence. SCA commits its members to extend support to the affected members and lists an array of possible efforts to alleviate the situation. The crisis response network will also consider use of stress tests or similar exercises to prepare and test strategies for simulating a range of possible supply chain disruptions and minimise any negative impact.
Yet another mechanism, reflective of the labour centric trade policy of the Biden administration which has piloted the IPEF initiative, is the setting up of a labour rights advisory board under the SCA. It is apparently to ensure that efforts to improve resilience are undertaken consistent with labour rights. These are rights under the 1998 ILO Declaration on Fundamental Principles and Rights at Work which has also been updated in June 2022 to include those relating to acceptable conditions of work with respect to minimum wages and hours of work.
The labour board will be tripartite in character including not only a government representative from each IPEF member but also a representative each from the employers and the workers. As part of its tasks the board shall develop two sector specific technical reports annually on labour rights in IPEF supply chains. Additionally, SCA also includes a system for raising labour rights inconsistencies in a specific facility of one party that can affect the supply chains in the economy of another and elaborates a procedure for addressing and reporting them.
Another aspect given emphasis is for maintaining confidentiality of information provided by a party to another or to SAC’s different bodies as part of SCA implementation. This is understandable considering much of such information could be commercially sensitive.
On the possible impact that SCA could have in strengthening supply chain resilience it may be too early to tell. Some analysts have criticised, and this applies to the other pillars of IPEF as well, that there may not be much incentive for the parties to comply with the commitments unless accompanied by tariff liberalisation as in a free trade agreement. Secondly, without binding commitments, would members exert themselves in fulfilling stated intentions and objectives? Thirdly, will businesses be willing to share information about their respective supply chains, input dependence and other vulnerabilities?
Here one can perhaps draw a parallel with APEC, of which India is not a member but China is, that was conceived more than three decades back on the principles of open liberalism with no binding mechanisms. While the levels of tariff liberalisation brought about by APEC itself may have been limited it certainly proved a very effective forum, through peer pressure, in bringing about substantial improvements in the Asia Pacific region’s dynamism through its trade facilitation and investment facilitation action plans. It could also achieve this because of its system of annual leader summits and reviews of actions taken at the highest levels. Will IPEF, and SCA in particular, get similarly implemented for the regions’ good that can also bring about trusted integration?
Finally, for India, SCA could mean an opportunity of engaging with the region not only on easing supply chain constraints but also one which can attract business matching and investment possibilities. However, it may also be the first trade-related agreement in which it will be committing to labour standards, even if, without dispute settlement provisions.
The writer is a former Ambassador and currently Senior Fellow, Delhi Policy Group