AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies
NPIRIPS

Nakasone Yasuhiro
Peace Institute

The Japan Institute ofInternational Affairs(Secretariat)

Research Institute for
Peace and Security

No. 299
6 October 2022

BUILDING RESILIENT SUPPLY CHAINSTHROUGH IPEF: THE POSSIBILITIES AND
CHALLENGES
Arata Kuno

・ The IPEF's intergovernmental crisis response
mechanism proposed in the ministerial
statement can significantly strengthen theregion's supply chain resilience if adequately
designed.
・ On the other hand, the IPEF's mechanism isnot a panacea. There may be cases wherethe adverse effects of supply chain
disruptions cannot be mitigated.
・ Moreover, it may take a considerable amountof time or be challenging to create China-free
supply chains for some critical goods.
Attempting to contain China through the IPEF
aggressively is not constructive, even fromthe perspective of economic security.
The views expressed in this piece are the author’s own and should not be
attributed to The Association of Japanese Institutes of Strategic Studies.

AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

As the world experienced shortages and price spikes in critical goods such assemiconductors, medical supplies, energy and food due to increased US-China
strategic competition, the outbreak of the novel coronavirus and Russia's invasion ofUkraine, the credibility of the existing global supply chains, which had been built with apriority on economic efficiency, was significantly undermined. Furthermore, increased
attempts to put diplomatic pressure on other countries through economic coercion haveforced governments to recognize the risks of over-dependence on a particular country,
especially an unfriendly country, for critical goods.
Amidst this backdrop, ministers from 14 countries in the Indo-Pacific region
gathered in Los Angeles on September 9, 2022 to declare the launch of negotiations for
the Indo-Pacific Economic Framework for Prosperity (IPEF). The IPEF is an attempt by
the US, which withdrew from the Trans-Pacific Partnership (TPP) in 2017, to reassert
economic engagement in the region while keeping China in check. In addition to Japanand the US, the 14 members include Australia, Fiji, India, New Zealand, South Korea,
and seven ASEAN countries, excluding Cambodia, Laos, and Myanmar.
The IPEF consists of four pillars: trade, supply chains, clean economy, and faireconomy. The supply chain pillar, which aims to build resilient supply chains among
like-minded countries, is of particular interest to the members, and all 14 countries havepledged to participate in negotiations on this pillar.
What’s in the ministerial statement on the supply chain pillar?
In what way do the members intend to build resilient regional supply chains?
We can deduce some of the directions they are taking from the text of the IPEF
ministerial statement, which outlines the future course of the negotiations.
The most noteworthy feature of the IPEF is establishing an intergovernmental
crisis response mechanism. This attempts to mitigate the impact of external shocks that
could disrupt supply chains by facilitating timely information-sharing among members
and the smooth movement of critical goods among them.
In the long run, the IPEF tries to strengthen industrial competitiveness in criticalsectors, promote and support investments to improve infrastructure and logistics, andboost technical cooperation and capacity building to diversify suppliers in order toovercome the vulnerabilities of the region's supply chains.
One piece of good news is the commitment expressed in the ministerial
statement to ensure the consistency of the IPEF with WTO rules, as "a rules-based
economic order" that disregards WTO rules will not win the understanding or support of

http://www.jiia.or.jp/en/commentary2

AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

non-member countries. On the other hand, as discussed below, there may be cases
where it is difficult to build an effective (but exclusive) crisis response mechanism in theregion while at the same time ensuring WTO consistency.
Another positive element the ministerial statement clearly states is that, inbuilding a resilient and transparent supply chain, careful attention will be given toavoiding imposing unnecessary regulatory costs on micro-, small and medium-sizedenterprises (MSMEs). If the costs faced by the private sector rise excessively as a priceof building resilient supply chains, MSMEs will be forced to leave the supply chains andthe dynamism of the supply chains in the region will be lost.
What’s NOT in the ministerial statement?
What elements are missing in the ministerial statement on the supply chain
pillar? First, it does not contain any remarks evoking aggressive measures against
China. Judging from the ministerial statement, it is unlikely that IPEF members will
introduce mechanisms to, for example, restrict imports of goods manufactured withforced labor or to collectively retaliate against those who attempt to weaponize theireconomic power. This is an inevitable consequence given the reality that, contrary to US
expectations, many ASEAN countries do not want to be part of either the US or Chinese
camp.
Second, no commitments were made regarding trade liberalization either in thesupply chain or trade pillars. If intra-regional trade can be expanded through tariff
reductions, this may help members reduce their economic dependence on China anddiversify their suppliers. However, as anticipated, a commitment to initiate negotiations
on trade liberalization was not made mainly due to political reasons within the US. Still,
the supply chain pillar emphasizes the importance of promoting and supporting regional
investment. If this leads to an expansion of investment in emerging members, such as
some ASEAN countries and India, the long-run economic gains may outweigh those oftariff reductions.
Finally, while US Trade Representative Katherine Tai once suggested that amechanism to ensure enforcement of the IPEF was needed, no commitment appears tohave been made to negotiate provisions regarding penalties and dispute settlement
procedures.

http://www.jiia.or.jp/en/commentary3

AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

Effectiveness of the IPEF’s crisis response mechanism
How well would the intergovernmental coordination mechanisms in the IPEFfunction in the event of supply chain disruptions due to unexpected external shocks
such as pandemics, natural disasters, or outbreaks of war? Three scenarios are
discussed below.
First, consider a situation where only one member faces a shortage of criticalgoods due to a natural disaster or economic coercion by an unfriendly country. In thisscenario, the impact of the disruption could likely be mitigated, to some extent, by theIPEF's crisis response mechanism. If some IPEF members are producing or stockpilingsufficient amounts of the critical goods concerned, it would not be politically difficult forthem to provide emergency assistance to the country facing shortages.
Second, consider a case in which all IPEF members, including producing andstockpiling members, face a shortage of critical goods, as in the case of a lack ofpersonal protective equipment (PPE) during a pandemic. In such a global supply chain
disruption scenario, the IPEF coordination mechanism may not function adequately.
This is because it would not be easy to create political incentives for producing or
stockpiling members to provide critical goods to other members on an emergency basis
when they themselves are experiencing shortages.
Finally, how about the case where there is a global shortage of critical goods
while an IPEF member (X) producing the goods has sufficient stocks of them at home?
Suppose a non-member country (Z) offers to buy the goods at a higher price than any
other country. Would X still prioritize exporting them to another IPEF member (Y)? If themarket mechanism is functioning, X will likely provide the goods to Z, which is willing topay more than any other country. Would it be possible, then, for the government of X toforce its private sector to export the critical goods to IPEF member Y instead of Z?
It would not be politically feasible for every IPEF member to adopt such asystem, as this would substantially restrict economic freedom. Moreover, to maintain theprinciple of prioritizing exports to IPEF members in the event of global shortages,
exports to non-members would have to be restricted somehow. However, given that theIPEF will not be a regional trade agreement under GATT Article 24, any attempt tocreate rules that restrict exports to non-members in a discriminatory manner would posea risk of being challenged in terms of WTO consistency.

http://www.jiia.or.jp/en/commentary4

AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

Policy implications
The importance of reducing economic dependence on specific countries andstrengthening supply chains for critical goods has undoubtedly increased. The IPEF's
crisis response mechanism may significantly contribute toward achieving these goals.
However, as discussed in the previous section, we should avoid expecting the process
to be a “cure-all” remedy that works for every circumstance.
Ultimately, the IPEF's investment and technical assistance schemes may
improve the capacity to supply critical goods in the region, diversify suppliers or develop
alternative materials. However, it may take a considerable amount of time to create
China-free supply chains for some critical goods through the IPEF. Furthermore, there
may be some materials for which it is unrealistic to exclude China from supply chainseven in the long run.
If these hypotheses are correct, attempting to contain China through the IPEF
aggressively is not constructive, even from the perspective of economic security. It canrisk costly retaliation by China before China-free supply chains have been put in place.
Furthermore, the private sector would not appreciate further geopolitical confusion anddecoupling of the global economy.
Granted that these considerations are woven into its design, the IPEF canbetter contribute to strengthening the region's supply chain resilience and ensuring theeconomic prosperity of its members.

Arata Kuno is Professor at Asia University.

http://www.jiia.or.jp/en/commentary5