Stronger Cooperation
The Indo-Psacific Economic Framework (IPEF), a U.S.-led economic cooperative formed to counter China, has released its first significant result: a supply chain agreement involving 14 participating countries. The main aspect of this agreement is a joint response by the participating nations to supply chain crises, similar to the “Diesel Exhaust Fluid Incident” in 2021 that originated from China.
Experts suggest that as South Korea depends on overseas imports for 95% of its key mineral demands it stands to gain from this agreement, since resource-rich countries such as Indonesia and Australia are significant participants in the IPEF. However, they also highlight the need for meticulous diplomacy to avoid agitating China. There are also concerns about the practical impact of the agreement given that ten of the participating countries heavily rely on trade with China.
According to the Ministry of Trade, Industry, and Energy, the 14 IPEF nations announced the conclusion of a supply chain agreement at the IPEF Ministerial Meeting held in Detroit, USA, on May 27 (local time). This agreement is the first among the 14 IPEF nations since its inception in May of the previous year, and the first international agreement concerning supply chain matters.
The IPEF comprises the United States, South Korea, Japan, Australia, India, Thailand, Malaysia, Indonesia, Vietnam, the Philippines, Singapore, Brunei, New Zealand, and Fiji. Negotiations in the other three key areas - trade, clean economy, and fair economy - are still underway, apart from the recently concluded supply chain agreement.
The new agreement emphasizes cooperative efforts to secure alternative supply chains during crises such as the 2021 Diesel Exhaust Fluid export restrictions implemented by China. In normal circumstances, it proposes the establishment of a Supply Chain Council to strengthen cooperation between the participating nations.
Experts interpret the exclusion of China from the Supply Chain Council as a clear intent to restructure crucial supply chains, focusing on non-Chinese countries. The Council will oversee whether the 14 participating governments restrict any actions that negatively impact the supply chains, expand investments for diversifying supply chains, improve logistics, and carry out joint Research and Development.
China has criticized the establishment of the IPEF. The state-owned Global Times claimed on May 28 (local time) that the IPEF supply chain agreement is a “Crisis Response Network” lacking substantial trade agreements. It added that most countries participating in the IPEF are also members of the China-led Regional Comprehensive Economic Partnership (RCEP), hinting that these countries should follow the supply chain rules outlined by the RCEP.
China continues its attempts to check the so-called “dollar hegemony” and enhance its global influence through the yuan. As reported by Bloomberg, the yuan’s share in global foreign exchange trading has risen from virtually zero 15 years ago to 7% as of March this year. Brazil agreed in March to use the yuan instead of the dollar in its trade transactions with China, while Saudi Arabia is considering accepting payments for oil exports in yuan instead of dollars.
However, some believe the IPEF supply chain agreement is milder than expected as it lacks explicit language to reduce dependency on specific countries. Observers speculate this is due to China being the top trading partner for 10 out of the 14 IPEF countries. A high-ranking official from the Ministry of Trade, Industry, and Energy said, “There's nothing in the agreement that could incite backlash from China,” and added, “There's a considerable possibility that China could decide to join the IPEF, and if it fosters synergy, there is no reason for our government to object.”
There are concerns about the practical impact of the IPEF agreement, considering the slow progress of negotiations outside the supply chain sector and the fact that IPEF is an “executive agreement” that doesn't require congressional approval. Song Young-gwan, a Senior Research Fellow at the Korea Development Institute (KDI), commented, “The IPEF does not signify market liberalization like a Free Trade Agreement. Given the uncertainty around President Joe Biden's re-election, if the administration changes next year, the IPEF could become a mere declarative measure.” He added, “Since it’s uncertain how long the IPEF, even if enacted, will retain its effectiveness, there’s limited motivation to expedite the negotiations.”