International Economic Law and Policy Blog

The IPEF Supply Chain Agreement: Commitments, Institutions, Labor, Monitoring, Security, and Consultations

I haven't been following the Indo-Pacific Economic Framework for Prosperity (IPEF) negotiations as closely as some other people have, but I see that the text of the IPEF's Supply Chain Agreement was released yesterday. I don't have any hot takes on all this, but here are a few things that jumped out at me.

Commitments

The parties make a lot of statements about what they intend to do in order to strengthen supply chains, including the following:

Article 2: Collaborating to Strengthen IPEF Supply Chains

...

2. The Parties intend to explore new ways and enhance existing efforts to improve the attractiveness of investment opportunities in IPEF supply chains.

3. The Parties intend to promote, facilitate, and encourage investment in: critical sectors; the production of key goods; the development, maintenance, and upgrading of physical and digital infrastructure; and transportation and workforce projects.

This may include:

(a) organizing investment missions and encouraging public-private joint efforts and other business matching activities to help enterprises identify potential partners in the economies of the Parties; and

(b) sharing expertise on project scoping, structuring, and implementation.

4. The Parties intend to foster improvements in logistics services and logistics infrastructure, as well as in the development of multimodal transport corridors, including by exploring the development, upgrading, or digitalization of ports, logistics hubs, roads, and freight railways.

5. The Parties intend to align guidance, procedures, and policies related to trade facilitation to the extent possible, and to share best practices to help enterprises benefit from such guidance, procedures, and policies.

...

The part about investments seems difficult to monitor and evaluate. I suppose we'll hear announcements about some new investments, and we can assume that the IPEF might have had something to do with them, but I'm not sure how much transparency there will be in relation to how the investments came about.

Institutions

The IPEF will involve some new institutions, such as the following on supply chains and labor:

Article 6: IPEF Supply Chain Council

1. The Parties hereby establish an IPEF Supply Chain Council composed of a relevant senior official from the central level of government of each Party.

...

8. The IPEF Supply Chain Council may, as decided by the Parties:

(a) explore opportunities to develop best practices in relation to policies, measures or actions impacting trade in critical sectors or key goods; or

(b) discuss any possible collaboration in relation to policies, measures, or actions to enhance the resilience, efficiency, productivity, sustainability, transparency, diversification, security, fairness, and inclusivity of IPEF supply chains.

9. The IPEF Supply Chain Council shall consider areas in which technical assistance and capacity building could increase the resilience, efficiency, productivity, sustainability, transparency, diversification, security, fairness, and inclusivity of IPEF supply chains.

...

 

Article 7: IPEF Supply Chain Crisis Response Network

1. The Parties hereby establish an IPEF Supply Chain Crisis Response Network composed of a relevant senior official from the central level of government of each Party.

2. The IPEF Supply Chain Crisis Response Network shall:

(a) serve as an emergency communications channel to rapidly disseminate relevant information among the Parties during a supply chain disruption;

(b) facilitate cooperation on responses to supply chain disruptions, including the actions described in Article 12;

(c) consider the use of table-tops, stress tests, or similar exercises simulating a range of possible supply chain disruptions to provide the Parties with an opportunity to prepare and test strategies for responding to supply chain disruptions, and may share any conclusions from those exercises with the IPEF Supply Chain Council;

and

(d) assess past experiences and existing policies and procedures to facilitate preparedness for, and responses to, supply chain disruptions and to minimize any negative impact of supply chain disruptions on IPEF supply chains, and may share any conclusions from those assessments with the IPEF Supply Chain Council.

...

Article 8: IPEF Labor Rights Advisory Board

...

2. The Parties hereby establish an IPEF Labor Rights Advisory Board composed of three representatives for each Party: (a) a senior official from the central level of government who is responsible for labor matters; (b) a worker representative; and (c) an employer representative. Each Party shall invite, consistent with its domestic laws and regulations, worker and employer organizations in its territory credentialed al the most recent ILO International Labour Conference to select the Party's worker and employer representatives, respectively, for the Board. Such worker and employer representatives may participate in the Board only if they are subject to appropriate confidentiality requirements consistent with the requirements set out in Article 13.

Labor

The labor provisions mirror the USMCA in the sense of dealing with labor practices in specific facilities, but they don't have the USMCA's enforcement mechanisms:

Article 9: Addressing Facility-Specific Labor Rights Inconsistencies

1. For the purposes of this Article, subject facility means a facility that is located in the territory of a Party and operated by an enterprise that is not a microenterprise.

2. The Parties recognize that labor rights inconsistencies in the economy of one Party can affect supply chains in the economy of another Party and recognize the critical role business practices play in protecting labor rights across IPEF supply chains.

3. Each Party intends to establish or maintain, consistent with its domestic law, a reporting mechanism to receive, including through electronic means, allegations of labor rights inconsistencies at subject facilities located in the territory of another Party, in accordance with this Article.

Monitoring and discussion

The commitments that have been made will be subject to monitoring on the basis of self-reporting:

5. Each Party shall provide to the IPEF Supply Chain Council, annually or as otherwise decided by the Council, a written report on its efforts lo implement Articles 2 through 5 and 11.

These reports will then be discussed in the institutions:

7. The IPEF Supply Chain Council shall meet in person or virtually on an annual basis, or as otherwise decided by the Council, to:

(a) review and discuss each Party's written report provided pursuant to paragraph 5;

(b) establish teams to develop Action Plans providing recommendations to increase the resilience and competitiveness of critical sectors or key goods from among those notified by at least three Parties in accordance with Article 10;

(c) review and discuss Action Plans submitted to the IPEF Supply Chain Council;

(d) review and discuss any labor rights concerns and recommendations of which it is informed by the IPEF Labor Rights Advisory Board pursuant to Article 8.7; and

(e) discuss opportunities to support skills and workforce development activities.

A key thing they are looking for with all this monitoring is "vulnerabilities":

Article 11: Monitoring and Addressing Supply Chain Vulnerabilities

1. Each Party intends to employ an evidence-based and data-informed approach to consider its supply chain vulnerabilities and to monitor import dependencies, prices (where appropriate and feasible), and trade volumes of its critical sectors or key goods.

...

Article 12: Responding to Supply Chain Disruptions

1. In the event of a supply chain disruption, or in the event that a Party expects an imminent supply chain disruption, a Party may request an emergency in-person or virtual meeting of the IPEF Supply Chain Crisis Response Network, which should meet as soon as practicable but no later than 15 days after the date when the Party requests such a meeting.

The only exceptions are security exceptions

While the obligations do not seem particularly burdensome, there are security exceptions that can get you out of them:

Article 15: Security Exceptions

Nothing in this Agreement shall be construed to:

(a) require a Party to furnish or allow access to any information the disclosure of which it determines lo be contrary to its essential security interests; or

(b) preclude a Party from applying measures that it considers necessary for the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security or for the protection of its own essential security interests.

Dispute settlement is just consultations

There is no dispute settlement chapter, but there are provisions on consultations:

Article 19: Consultations

1. If at any time a Party has concerns with another Party's implementation of a provision of this Agreement, the concerned Parry may request consultations through a written notification to the other Party's contact point, and shall set out the reasons for the request, and the other Party shall respond promptly in writing.

2. The concerned Party shall immediately provide a copy of the request to the other Parties' contact points.

3. If the concerned Party's request and the other Party's response do not resolve the concerns that are the subject of the request, consultations shall commence on a mutually decided date no later than 60 days after the date of receipt of the response.

4. The consulting Parties shall attempt to arrive at a mutually satisfactory resolution as soon as practicable.

Based on what I see in the obligations, including the existence of the security exceptions, I'm not sure there is anything too burdensome in the obligations, so we may not see a lot of concerns about compliance. If governments do have concerns, they can talk about it in consultations, but any resolution is going to be more power-based than rule-based because there is no adjudication mechanism. It's also not clear how transparent any of this will be. Will the request for consultations and response documents be made public? That would be nice, but I'm not counting on it.

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So what will be the impact of this IPEF agreement (and other IPEF pillars still being negotiated)? How much investment will be generated? Will labor rights be improved? Will supply chain vulnerabilities be addressed? That's very hard to say, and at this point I'm not at all sure how assessments of these questions will be done.

What is a Free Trade Agreement, Anyway?

This is the second of two posts on trade agreements in the news over the last ten days.

During the holidays, Treasury and the IRS confirmed what many had already been discussing since President Biden signed the Inflation Reduction Act in November: that they might take an expansive definition of “free trade agreement” when determining if the “critical mineral requirement” is met for the new clean vehicle tax credit.  

In their White Paper, Treasury and the IRS track the statutory language and describe the requirement:

… the critical mineral requirement will be met if the percentage of the value of the critical minerals in the vehicle’s battery that were extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, or recycled in North America, is equal to or greater than 40 percent for a vehicle that is placed in service in 2023 after the date on which Treasury and the IRS issue proposed guidance.

The White Paper then states:

The term “free trade agreement” is not defined in the Inflation Reduction Act (or in any other statute).  Treasury and the IRS expect to seek comment in the proposed guidance on what criteria should be used to identify free trade agreements for the purposes of the critical minerals requirement and expect to propose that these criteria include whether an agreement reduces or eliminates trade barriers on a preferential basis, commits the parties to refrain from imposing new trade barriers, establishes high-standard disciplines in key areas affecting trade (such as core labor and environmental protections), and/or reduces or eliminates restrictions on exports or commits the parties to refrain from imposing such restrictions, including for the critical minerals contained in electric vehicle batteries.  Treasury and the IRS also expect to propose that the term encompasses, at minimum, the comprehensive trade agreements of the United States with the following countries: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru and Singapore.  Further, Treasury and the IRS expect to propose that the Secretary may identify additional free trade agreements for purposes of the critical minerals requirement going forward and will evaluate any newly negotiated agreements for proposed inclusion during the pendency of the rulemaking process or inclusion after finalization of the rulemaking.

Although this was unsurprising – this already came up in various conversations among scholars and among governments in November and early December – some on social media appeared dismayed by what they saw as the diminution of a statutory and household term and a questionable-to-them workaround. 

Readers of this blog will know that, in addition to not being defined in U.S. statute, “free trade agreement” is not used in the GATT.  Rather, GATT Article XXIV refers to “free-trade area”.  (Last year, I asked students in my Law of Trade Agreements class to determine whether the arrangement created by IPEF -- or what we knew of it at the time of the class exam -- was consistent with Article XXIV of the GATT.  This was of course partly a trick question.  And implicit in the question was the issue of whether it mattered….)   

Apart from these rather academic affairs, we all know what we mean when we say “free trade agreement”.  We also know that the Biden Administration is not inclined toward those “comprehensive” agreements, to use the White Paper language.  As with the Administration before it, other forms of trade-related deals are in vogue.  Treasury and IRS go so far as to suggest that “newly negotiated agreements” could be coming.  (Query here under what authority those agreements would be negotiated, but we’ve already had that conversation.)

More may not be needed, however. When it comes to the more than 1200 trade-related agreements that the United States maintains covering over 100 countries, they very often “reduce or eliminate trade barriers”, just not all of them.  Consistent with what Treasury and IRS suggest in their illustrative list, these mini-deals or trade executive agreements could still be considered free trade agreements or at least “free-ing” agreements: they almost always make the exchange of goods and services easier.  The United States has 107 such agreements with Japan and about 60 with the European Union, despite not having a comprehensive trade agreement with either partner.  These agreements cover everything from avocados to zoning.  The set of countries with which the United States has no agreement accomplishing what Treasury and IRS propose is quite small (check out the map).

That said, the matter may not be so easily resolved with members of Congress pushing back and the potential for litigation. 

This is certainly not the first time trade-relevant rules have faced multidirectional challenges on implementation.

The new fisheries import rule followed a somewhat similar path.  (The rule was intended to become effective on January 1 but recently was pushed back another year.)  According to this rule, and generalizing considerably, the only foreign fisheries permitted to export fish and fish products to the United States will be those that the United States has approved.  Approval turns on whether the fishery has sufficient protection in place, in the view of the United States, for marine mammal bycatch.  Over the last several years, trading partners raised significant concern about the details of the rule while environmental groups put pressure on the executive branch to implement the law as Congress intended in the 1972 Marine Mammal Protection Act. The result has been a very long implementation process during which Commerce and USTR have worked hard to avoid ruffling feathers – or scales? – among major fish-exporting partners.

Whether albacore or zirconium, or others that may be coming, these separation-of-trade-law-powers implementation issues are likely to continue.

Katherine Tai on IPEF Enforceability

At a WITA event yesterday, former USTR official Wendy Cutler had a conversation with U.S. Trade Rep. Katherine Tai about various trade issues. One thing they touched upon was the enforceability of the IPEF. Here was their exchange:

Cutler:

How about enforcement and the IPEF? It's not a traditional trade agreement. I've seen comments from you and your staff that, ... maybe we shouldn't expect a traditional dispute settlement mechanism, but other creative thinking is being given to this. And in that vein, I've heard this term of maybe including a corporate accountability element into the IPEF. What does that mean?

Tai:

Look, I think that traditional mechanisms still do have their place. We're not going to invent the IPEF out of whole cloth. So what still makes sense, we will work from there.

You know, I think that part of the challenge for folks to wrap their minds around is, if you're not doing tariff reductions, usually a traditional dispute settlement mechanism at the very end of it, if you lose a case, if ... on the winning side, if you win a case, the right that you win is to suspend your concessions. At the WTO that often means, well, ... that you get to suspend your tariff concessions and you can lay down some tariffs. I think over the course of this negotiation, there will be concessions, there will be commitments that we make to each other. Those also if they make sense can be suspended through a traditional dispute settlement mechanism. Let's think that through and ... design something that makes sense.

But I did want to raise awareness around some of the ways in which our US trade practice is already pushing the envelope on the dispute system, as it's traditionally been framed. And it really goes to just the fundamental issue of, what is the point of a dispute settlement mechanism? Well, ... you could think about it as it's a forum for us to fight each other. But ultimately, when you take it to what the point of an agreement is, it's a way to ensure that what's been negotiated has meaning, that you can't just promise something, say that you are going to do something, and then go do something completely different. It's an accountability mechanism.

And if we look at our trade practice -- starting with the Peru Free Trade Agreement, which has this very built out, very detailed logging annex, that's tailored to the deforestation concerns in Peru when we passed that agreement, to the USMCA's rapid response mechanism, which is looking at creating a mechanism for ensuring compliance with Mexico's labor reform and labor laws -- you see this evolution of our dispute settlement mechanism that flows into more cooperative modes, and is looking at holding accountable not just the other country, but also what is happening within the economic ecosystem and whether or not the participants, whether they are logging companies, or facilities that have set up operations, or operating in Mexico, that they also are abiding by the requirements, and the expectations, of the agreement itself.

So again, just highlighting that in our own practice, we have started to evolve away from a traditional dispute settlement mechanism to thinking about new ways of holding the different participants in a trade agreement accountable for creating integrity in the promises that are made and in the vision that's incorporated into the agreement.

This all raises a number of questions for me.

First, what Tai is focusing on here with "pushing the envelope" seems to be enforcement of social policy issues such as environment and labor. What I wonder is, would the U.S. agree to these sorts of provisions if they were designed to hold the U.S. government, and U.S. actors, accountable in these areas? Climate change would be an example where perhaps some other countries would be pushing the U.S. to do more than has been done so far; and "right to work" laws in certain states have been raised by trading partners in the past. If this kind of enforcement is a good model in general, does the Biden administration think it is a good model to apply against the U.S.? Or is it only to be used against others?

Second, if this applies mostly to other countries and not the U.S., what exactly is the incentive of these other countries to sign up for the IPEF? What are they getting out of it? My best guess at this point as to what the Biden administration has in mind is private sector investment backed by U.S. government lending. But can they deliver that, and will it be enough?

And third, with regard to more traditional trade issues, would these types of enhanced accountability provisions apply, or would those issues utilize traditional DS? In the case of the IPEF, there may not be a lot of traditional trade obligations, but the digital trade rules might fall into this category. Would enforcement of digital trade rules involve this new kind of accountability, or will there be traditional DS here instead? And if there will be traditional DS, is that something Congress will need to sign off on, given that U.S. laws will now be subject to international adjudication/enforceable dispute settlement?