IPEF Supply Chain Agreement
Significance and Background of the IPEF
On May 23, 2022, the United States launched the Indo-Pacific Economic Framework for Prosperity (the “IPEF”). The IPEF serves as a platform for economic security and economic trade cooperation body for the Indo-Pacific region, led by the U.S. Biden administration. Unlike FTAs, which focus on tariff reductions and the partial abolition of regulations, the IPEF aims for a broader range of economic trade cooperation, encompassing supply chain issues, digital commerce, green energy, and more.
The “Block Economy” refers to the integration of several national economies into one regional block, fostering economic exchange among economically closely related countries within the region while adopting discriminatory and protectionist trade practices toward external countries. Prominent examples include the North American Free Trade Agreement (NAFTA), the Asia-Pacific Economic Cooperation (APEC), and the Association of Southeast Asian Nations (ASEAN). The IPEF is also part of the U.S.-led Block Economy initiatives, where not just the U.S., South Korea, and Japan, but other various countries, such as Australia, New Zealand, Brunei, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam have expressed their willingness to participate.
While the IPEF officially promotes itself as an open and comprehensive economic trade cooperation body, it is primarily assessed as part of the U.S. policy of exerting pressure on China's expanding economic influence in the Indo-Pacific region. In particular, experts analyze it as a countermeasure against China's leadership in the Regional Comprehensive Economic Partnership (RCEP), a multilateral FTA involving ten ASEAN countries (Thailand, Vietnam, Singapore, the Philippines, etc.), as well as South Korea, China, Japan, Australia, and New Zealand, while pushing for joining the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).
Significance of the IPEF Pillar II
Specifically, the IPEF comprises the four main pillars as follows, and IPEF partners can engage in a specific pillar if they wish to do so.
① Pillar I: “Trade” — Seeks to establish fair trade market standards in seven primary areas, including the digital economy, environment and climate, and labor.
② Pillar II: “Supply Chains” — Seeks to create a more resilient supply chain.
③ Pillar III: “Clean Economy” — Seeks to foster a clean economy by facilitating the advancement of infrastructure and transition to clean energy and decarbonization.
④ Pillar IV: “Fair Economy” — Seeks to facilitate a fair economy through taxation and anti-corruption measures.
Pillar II specifically focuses on supply chains, aiming to address international supply chain reduction issues resulting from the COVID-19 pandemic. Pillar II includes measures to (i) expand investments to enhance supply chain resilience; (ii) share information more efficiently and proactively to secure response mechanisms; (iii) improve supply chain transparency to elevate trust among partners; and (iv) strengthen logistics support to enhance efficiency in supply chains among participating countries.
Under such pillars, the IPEF plans to establish an intergovernmental platform to address global supply chain crisis situations that may arise due to issues such as health crises like COVID-19, climate problems like hurricanes, and geopolitical events like wars. Through this platform, Pillar II aims to respond to the supply chain crisis by sharing crucial information regarding the current status of the demand and supply of supply chains, establishing an early warning system for the global supply chain crisis, and jointly stockpiling essential goods such as semiconductors and batteries.
Details of the Supply Chain Agreement
The 14 participating countries in the supply chain sector reached an agreement during the ministerial meeting of the IPEF held on May 27, 2023. Accordingly, the U.S. Department of Commerce released a draft of the supply chain agreement for the IPEF Pillar II on September 8, 2023. Below are the main contents of the agreement, which consists of a total of 27 articles:
1) Establishment and Operation of Mechanisms Enabling Cooperation in Crisis Situations
This agreement aims to stabilize supply chains by establishing an emergency cooperation network (crisis response network) that can be operated in times of supply chain crisis. For example, South Korea heavily depends on imports of critical minerals, making it vulnerable to supply chain crises when existing supply chains are disrupted due to events like COVID-19, natural disasters, wars, etc. (See Articles 7 and 12(3) of the Agreement). In the past, it took considerable time to find alternative suppliers. However, with the IPEF crisis response network, partners will be able to receive support, such as joint procurement, identification of alternative shipping and aviation routes, quick customs clearance, and connections between consumers and suppliers from other IPEF partners (14 countries), within approximately 15 days.
2) Strengthening Supply Chain Cooperation in Critical Sectors and Key Goods
IPEF partners will select critical sectors and key goods based on their respective situations and focus their investment and cooperation efforts on these areas. They will also operate early warning systems to monitor import dependency, prices, and changes in trade volume and share such information to cooperate in response to supply chain crises. In addition, if there is any sector or goods in which three or more partners desire enhanced cooperation, they can discuss various measures, such as establishing action plan teams to diversify supply and demand and resolve supply chain bottlenecks (see Articles 6(13), 10, and 11 of the Agreement).
3) Creation of Mutually Beneficial Supply Chains
In this agreement, IPEF partners have agreed to refrain from measures that could negatively impact supply chains against any partner countries, such as trade restrictions or barriers. Even in cases where such measures are initiated out of necessity, if there’s a possibility that these measures may negatively affect on partner countries, other participating countries can submit opinions, request specific information on exceptions or exemptions, and engage in mutual agreement within 60 days from the date of the request if concerns arise. In the past, when supply chains were negatively affected by measures caused by political or diplomatic stances towards specific countries, such as sanctions, opportunities for consultation between countries were severely limited and time-consuming. However, under the IPEF agreement, it is believed that opportunities for consultation can be swiftly provided to minimize supply chain crisis situations (See Articles 3(1), 4, and 19 of the Agreement).
4) Other Provisions
In addition to the above measures, this agreement includes provisions for the provision of information about laws and regulations for supply chains, exemptions that are applicable upon the request of participating countries and details of exemptions (Article 4), supply for the expansion of skilled workers for the key sectors and major products (Article 5), review and discussion on agreement action plans through supply chain council (Article 6), establishment of advisory board for labor rights (Article 8), and response measures to labor-management problems in individual workplaces (Article 9).
DR & AJU’s Comments
The IPEF represents a massive economic network, with its partners accounting for over 40 percent of the global GDP. Therefore, it is believed that the IPEF supply chain agreement can create significant synergy by establishing and operating mechanisms that enable cooperation in crisis situations, strengthening supply chain cooperation in critical sectors and key goods, and creating mutually beneficial supply chains.
However, as much as the IPEF was established to counter China, there may be repercussions, such as China’s economic retaliation, as seen in previous cases where the number of Chinese tourists decreased in South Korea in response to the deployment of THAAD and China’s coal import ban on Australia. Therefore, it is important for domestic export companies to carefully monitor China’s responses.
Furthermore, this supply chain agreement includes measures to expand and invest in the supply chain for critical sectors and key goods. Therefore, companies eligible to be selected to export goods in critical sectors and key goods should carefully examine the selection process and offered benefits. In addition, since this agreement plans to establish measures that secure alternative suppliers and rapid procurement methods within 15 days of the activation of the crisis response network, export companies should continuously monitor government policies that are driven by the IPEF agreement.
DR & AJU’s Global Compliance Group, Washington, D.C. Liaison Office and D&A Advisory, Inc. deliver accurate and crucial information to help both domestic and export companies to effectively and promptly respond to changes in China’s trade policies and our government’s policy implementation following the IPEF agreement and establish tailored strategies to ensure compliance with applicable laws by providing comprehensive advisory on implementing internal control strategies.
DR & AJU will continue to closely monitor movements of the United States and developments in the IPEF in order to respond expeditiously through close cooperation with businesses when necessary.
Introduction to GCG
DR & AJU’s Global Compliance Group (the “GCG”) was founded with the purpose to prevent and minimize corporate risks for companies in Korea. GCG's goal is to create a favorable business environment by providing strategic solutions to prevent, manage, and minimize various risks a corporate entity may face doing business domestically or globally.
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