IPEF as Economic Statecraft – What Supply Chain Agreements Should Do and Not Do

Dr. Takeyasu Fujiki
Associate Professor of Economics, Wakayama University

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Publications IPEF as Economic Statecraft – What Supply Chain Agreements Should Do and Not Do

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*This paper (published April 30, 2024) is derived from a presentation the author gave at a NEXT Alliance Conference workshop on March 1-4, 2024, in Tokyo. Dr. Fujiki wrote in his own personal capacity. The views and interpretations expressed by the author are solely his own.

Introduction

The post–Cold War era or the era of economic globalization and US-China engagement since the Nixon administration is over. As the underlying principle of US trade policy is shifting from promoting trade liberalization to strengthening economic security, the premises of the post-World War 2 international trade regime, such as “peace through economic interdependence,” “complementarity between security and economy,” “decoupling economic issues from security issues,” and “distinction between high politics and low politics” are also overturning. We face and must manage a new international trade regime, in which the logic of security is entangled closely with the logic of economy, and where sometimes the former conflicts with the latter.[1]

Based on this understanding, this article compares the World of Free Trade with the World of Economic Security, considering the theoretical assumptions for trade policy in a new era, especially on issues related to supply chains. In addition, the article presents a few points for discussion featuring the recently concluded IPEF supply chain agreement as a test case.

The World of Free Trade and the World of Economic Security

The table below compares the World of Free Trade and the World of Economic Security.

Two Worlds before and after Trump

(Source: Prepared by the author based on 久野 [2022][2], 藤木 [2022][3], and Baldwin [2020][4].

Let us consider the difference between two worlds, taking TPP of the World of Free Trade and IPEF of the World of Economic Security as examples. TPP is a multilateral agreement to realize free trade and economic prosperity among the countries in the Pacific region. Although the Obama administration saw it as a tool to compete with China regarding economic rules at the end-stage, concern about geostrategic issues generally laid below the surface. The main points of discussion were policy purpose, contents and power base, such as tariff reductions, development and harmonization of laws, and expectation of market access.

In contrast, trade agreements are not just tools for economic outcomes but also economic statecraft in the World of Economic Security. According to Baldwin, economic statecraft is an attempt to use economic resources to exert influence. It is relational power that works across several policy areas and has multiple vectors and targets.[5] [6]Therefore, Indo-Pacific Economic Framework (IPEF), especially its supply chain agreement, should be analyzed not as an agreement to realize economic benefits but as a component of economic statecraft to work across several policy areas such as security, diplomacy, and economy. According to Baldwin, economic statecraft should be applied based on the considerations of alternatives, counterfactual thinking, comparing costs to benefits. So, it is essential to design appropriate economic statecraft considering conflicting policy purposes and comparing complementary policy tools.

What then should and should not be done by the IPEF supply chain agreement? What policy purposes should be set? What policy tools should be combined?

Points for Discussion About the IPEF Supply Chain Agreement

The IPEF supply chain agreement came into force in February 2024, and it is the first multilateral agreement to strengthen supply chains with willing countries in both peacetime and emergency situations, in the latter case by defining specific coordination procedures in the event of supply chain disruptions. To achieve these objectives, the agreement will establish three organizations. First, an IPEF Supply Chain Council, which identifies critical sectors and critical goods in each country and develops action plans to improve their resilience and competitiveness. Second, an IPEF Supply Chain Crisis Response Network, a communication channel in case of emergency. Third, an IPEF Labor Rights Advisory Committee, composed of government, labor, and management from each country.[7]

As this agreement has only recently entered into force, the three organizations have not yet been established, so evaluating them is premature.[8] However, it is a good time to outline some key questions for the agreement going forward.

An initial set of questions is how to prepare for the potential risks and opportunities that a Trump 2.0 could bring? Trump has already made worrisome remarks such as “Knock out TPP 2,” or “Taiwan took our semiconductor business away.” While these remarks should be seen as rhetoric for the presidential election, they might become the real agenda depending on the reactions of his supporters and future administration personnel. Although IPEF has a provision that prohibits withdrawal for at least three years, is there any possible IPEF or supply chain agreement that would be acceptable to Trump 2.0? What powers or provisions should be given to IPEF? Reflecting on the past, Trump 1.0 shifted US trade policy and policy toward China drastically through the strong leadership of Trump (the unpredictable “Tariff Man”) and his US Trade Representative (USTR), Robert Lighthizer.[9] While both prioritized bilateral tariff negotiations to help eliminate trade deficits, in areas that Trump paid less attention to (such as high-tech export controls) the professional bureaucracy made quick progress by leveraging the inter-agency process and utilizing the “China-hawk” political environment created by Trump.[10] [11] However, regarding the supply chain, there will likely be a strong preference for reshoring rather than friend-shoring. Regarding this issue, for example, would it be possible to discuss adjusting the interests of each country or dividing up the semiconductor supply chain among countries at the IPEF forum? Furthermore, if there is an “IPEF without the United States” in the future, will the Japanese government be prepared to lead in IPEF as it did with the TPP after Trump 1.0 withdrawal?

A second area of questions relates to managing the difference on supply chain issues between the US and ASEAN/India? While the United States prioritizes supply chains without China, ASEAN countries and India want to attract investments from both the US and China.[12] [13]How should this difference be reconciled and reflected in IPEF articles? First of all, how should be friendshoring of semiconductor industry? Should it be a strategic initiative pursued by countries sharing compatible norms and values or a means to deepen diplomatic relations through increased trade and investment?[14] How should we consider the scope and qualifications of “friends” in the semiconductor supply chain? In addition to IPEF’s supply chain agreement, countries in the Indo-Pacific region are also implementing CHIP4, the Quad Semiconductor Supply Chain Initiative, the Japan-Australia-India Supply Chain Resilience Initiative, the US-Malaysia Semiconductor Supply Chain Resilience Memorandum, and the US-India Semiconductor Supply Chain and Innovation Partnership. What are the differences in role and content among these initiatives? Where and how should IPEF fit in relation to other chip initiatives? Last but not least, how should the semiconductor supply chain resilience between IPEC countries and Taiwan? Can the US seek to link IPEF to the US-Taiwan initiative on 21st Century Trade?

Third, how should we address the overproduction of Chinese legacy chips? While October 2022 export restrictions on cutting-edge chips have significant effect on the development and the production of advanced chips in China, China is investing heavily in legacy chips to realize self-reliance for a wide range of economically important semiconductors.[15] [16] [17] The IPEF supply chain agreement envisages responses to supply chain disruptions and vulnerabilities, but is it also considering responses to the threat of overproduction and mass exports? Will exports of legacy chips made in China pose a threat to the semiconductor industry, which is being developed in ASEAN countries and India? What goals and methods should we consider to address these issues? Should the United States, which seems to regulate unilaterally, prepare countermeasures collaborating with IPEF countries? Should the supply chain agreement have a plan for Chinese overproduction? For example, if the US supported legacy chip production in ASEAN and India via IPEF, then IPEF countries could have aligned themselves against China, but does this plan make practical sense?

Dr. Takeyasu Fujiki wrote in his own personal capacity. The views and interpretations expressed by the author are solely his own.

The US-Japan NEXT Alliance Initiative is a forum for bilateral dialogue, networking, and the development of joint recommendations involving a wide range of policy and technical specialists (in and out of government) to stimulate new alliance connections across foreign, security, and technology policy areas. Established by Sasakawa Peace Foundation USA with support from the Nippon Foundation, the goal is to help improve the alliance and how it serves shared interests, preparing it for emerging challenges within an increasingly complex and dynamic geostrategic environment. Launched in 2021, the Initiative includes two overlapping lines of effort: 1) Foreign & Security Policy, and 2) Technology & Innovation Connections. The Initiative is led by Sr. Director Jim Schoff.

[1] Kuno, Arata [2022], “New Conflict between Trade and Investment Policies and Economic Security 1: Balance Point between Globalization and Economic Security and Its Prospects,” Trade and Tariff,

[2] Kuno, Arata [2022], “New Conflict between Trade and Investment Policies and Economic Security 1: Balance Point between Globalization and Economic Security and Its Prospects,” Trade and Tariff,

[3] Fujiki, Takeyasu [2022], “Great Power Competition between the U.S. and China and America’s Trade Policy: Beyond the U.S.-China Decoupling,” International Economy, 74.

[4] David A. Baldwin[2013]“Power and International Relations,” Walter Carlsnaes,

Thomas Risse and Beth A. Simmons eds., Handbook of International Relations, Second Edition

[5] David A. Baldwin[2013]“Power and International Relations,” Walter Carlsnaes,

Thomas Risse and Beth A. Simmons eds., Handbook of International Relations, Second Edition

[6] David A. Baldwin[2020]Economic Statecraft, New Edition, 2020

[7] Ministry of Foreign Affairs and Ministry of Economy, Trade and Industry [2024], “IPEF (Indo-Pacific Economic Framework) Supply Chain Agreement (Overview).”

[8] Takahashi, Toshiki [2024], “Is it Possible for Japan to Incorporate IPEF into Its Trade Strategy Similar to TPP?” Columns, 125-127, Institute of International Trade and Investment.

[9] Robert Lighthizer[2023]No Trade Is Free: Changing Course, Taking on China and Helping American Workers

[10] Sahashi, Ryo [2021], U.S.-China Confrontation: America’s Strategic Shift and the Divided World, Chuko Shinsho.

[11] Fujiki, Takeyasu [2020], “Trade Policy of the Trump Administration: Destruction of Consensus and Policy Process in Disorder,” International Economy, 71.

[12] Shiino, Kohei[2023], “Responses of India and Southeast Asian Countries to the Indo-Pacific Framework (IPEF): Challenges of Digitalization, Labor, and Supply Chains,” Overseas Situation, March-April.

[13] Nogimori, Minoru [2023], “Trends in Friend-Shoring as Supply Chain Strengthening and Its Impact on Japanese Companies,” Japan Research Institute.

[14] Inu Manak and Manjari Chatterjee Miller[2023]“Friendshoring’s Devil is in the Details,” Council on Foreign Relations, October 25

[15] Miura, Yuji [2023], “Future of China’s Semiconductor Industry: Success or Failure of Decoupling and Self-Sufficiency Strategy,” Pacific Rim Business Information RIM, 23:89, 2023.

[16] Megan Hogan[2023]“Export Controls Are only a Short-Term Solution to China’s Chip Progress,” War on the Rocks, December 22

[17] Sujai Shivakumar, Charles Wessner and Thomas Howell[2023]”The Strategic Importance of Legacy Chips,” Center for Strategic & International Studies

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