Biden Administration Hosts the First Indo-Pacific Economic Framework Ministerial: Updates, Outlook, and Remaining Questions

Biden Administration Hosts the First Indo-Pacific Economic Framework Ministerial: Updates, Outlook, and Remaining Questions

August 4, 2022, Covington Alert

On July 26-27, 2022, the Biden Administration hosted a two-day virtual meeting with top trade officials from the 13 other partners of the Indo-Pacific Economic Framework for Prosperity (“IPEF” or “Framework”)—Australia, Brunei Darussalam, Fiji, India, Indonesia, Japan, the Republic of Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. This was the first ministerial meeting since the 13 initial participants[1] agreed on May 23, 2022 to launch "collective discussions towards future negotiations" on the Framework. The IPEF currently focuses on four “pillars”: (1) Trade; (2) Supply Chains; (3) Clean Energy, Decarbonization, and Infrastructure; and (4) Tax and Anti-Corruption. Touted as a “21st century economic arrangement designed to tackle 21st century economic challenges,” the IPEF is said to offer what Commerce Secretary Gina Raimondo calls a “innovative and flexible approach,” and is “internationally designed not to be a ‘same old, same old’ traditional free trade agreement.”

The Framework’s novel approach, however, has raised a flurry of unanswered questions. Key U.S. stakeholders, for instance, have questioned the Biden Administration’s decision not to discuss tariff reductions or market access as part of the IPEF negotiations. Concerns have been raised about the enforceability of any agreements concluded among Framework partners. Potential agreements within each pillar remain largely unknown or undisclosed, even though the Framework partners have spent months engaged in a “scoping exercise” to define the components of each pillar.

This latest ministerial meeting added little clarity. No joint statement was released at the end of the meeting, suggesting that more remains to be done before formal, text-based negotiations begin. But as negotiators approach the one-year anniversary of President Biden’s announcement of the initiative at the October 2021 East Asia Summit meeting, there is growing expectation of more concrete outcomes. The dates for the next ministerial meeting have not been formally announced, though informal reports speculate that the Framework partners may hold the next meeting in September 2022, possibly as the first in-person ministerial.

This alert outlines the scope and objectives of the IPEF’s four pillars, the progress to date and next steps, key remaining questions, and stakeholder reactions thus far.

As the Biden Administration’s flagship initiative to reassert U.S. economic leadership in the Indo-Pacific region, the IPEF is broadly considered an alternative approach to the Trans-Pacific Partnership (“TPP”), a trade deal that was negotiated during the Obama Administration. By 2015, the TPP had drawn considerable criticism from across the U.S. political spectrum; in February 2017, President Trump withdrew the U.S. from the TPP, before Congress had ratified the agreement. The Biden Administration has made clear that it does not intend to re-join that trade pact, which is now renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”). In 2021, China formally applied to join the CPTPP, though current members are divided over whether to support exploratory accession negotiations with China. China already plays a leading role in the region’s largest trade grouping, the 15-member Regional Comprehensive Economic Partnership (“RCEP”), and would expand its influence if able to join CPTPP. Facing competition from China, the U.S. sees the IPEF as a vehicle to buttress its geopolitical and economic influence in the region—but with a more “innovative and flexible approach” that focuses on a smaller and somewhat different set of issues compared to traditional trade agreements, whose key objective is typically to expand market access.

One novel feature of the IPEF is its pillar structure. As described in the Joint Statement issued by IPEF countries in May 2022, the IPEF currently envisions four pillars, although the participants have agreed to “continu[e] to identify additional areas of cooperation.” The Framework has been operating with a modular approach that allows countries to decide to participate only in select pillars. This approach ensures a broad membership for IPEF, which includes countries with varying levels of interest in different IPEF pillars. Although Commerce Secretary Gina Raimondo had previously indicated that most IPEF members would join most pillars, it has not been announced which countries will participate in which negotiations. This Section provides an overview of each of the four pillars, along with a summary of the stated objectives of the Framework partners and the Biden Administration on each pillar.

Trade (Connected Economy)

The Trade pillar focuses on a range of trade-related issues that are not necessarily covered in traditional trade agreements. These include digital economy, labor and environmental issues, trade facilitation, transparency and regulatory practices, and corporate accountability provisions.

Digital economy issues are expected to feature heavily in this pillar. The Biden Administration has pledged to seek, among other things, "high-standard rules of the road in the digital economy, including standards on cross-border data flows and data localization,” “ensure small and medium sized enterprises can benefit from the region’s rapidly growing e-commerce sector,” while “addressing issues such as online privacy and discriminatory and unethical use of Artificial Intelligence.” U.S. Trade Representative (USTR) Katherine Tai confirmed that digital economy will be a priority in negotiations, owing in part to the lack of—and the visible need for—a harmonized regime in the region. It is unclear whether developing country IPEF partners will see value in some aspects of this agenda, which are a higher priority for the U.S. and other advanced economies.

Supply Chains (Resilient Economy)

The Supply Chains pillar seeks to facilitate cooperation in anticipating and preventing disruptions in supply chains, with an aim to make them “more resilient and well-integrated.” Issues in supply chain security and reliability have been a particular focus of the Biden Administration and other IPEF nations in the wake of the COVID-19 pandemic, when production shutdowns and transportation challenges highlighted certain vulnerabilities in supply chains for critical products. To address these and other issues, the Framework partners agree to “seek to coordinate crisis response measures; expand cooperation to better prepare for and mitigate the effects of disruptions to better ensure business continuity; improve logistical efficiency and support; and ensure access to key raw and processed materials, semiconductors, critical minerals, and clean energy technology.” The Biden Administration pledges to accomplish these and other goals “by establishing an early warning system, mapping critical mineral supply chains, improving traceability in key sectors, and coordinating on diversification efforts.”

Clean Energy, Decarbonization, and Infrastructure (Clean Economy)

Under the Clean Energy, Decarbonization, and Infrastructure pillar, the Framework partners seek to “accelerate the development and deployment of clean energy technologies to decarbonize our economies and build resilience to climate impacts.” According to the partners, the efforts would involve “deepening cooperation on technologies, on mobilizing finance, including concessional finance,” and “supporting the development of sustainable and durable infrastructure and by providing technical assistance.” The Biden Administration has pledged to “seek first-of-their-kind commitments on clean energy, decarbonization, and infrastructure that promote good-paying jobs,” including potential agreements on “renewable energy, carbon removal, energy efficiency standards, and new measures to combat methane emissions.” Developing country IPEF partners will likely see this pillar as a channel through which to seek more assistance to help them meet their climate goals.

Tax and Anti-Corruption (Fair Economy)

The Tax and Anti-Corruption pillar aims to tackle the problem of corruption by developing effective tax, anti-money laundering, and anti-bribery regimes. According to the Joint Statement issued by Framework partners, this would involve "sharing expertise and seeking ways to support capacity building necessary to advance accountable and transparent systems." The U.S. has indicated it will seek commitments "to enact and enforce effective tax, anti-money laundering, and anti-bribery regimes that are in line with our existing multilateral obligations[.]" Potential provisions may cover the exchange of tax information and/or the criminalization of bribery under UN standards. The inclusion of “tax” is notable, given that tax issues are largely excluded from existing trade and investment agreements. In his introductory remarks at the launch of the IPEF in May 2022, President Biden stressed that “tax and trade belong in the same framework, because if companies aren’t paying their fair share, it’s harder for to pay for Trade Adjustment Assistance or to fund … a range of public investments.” This is another pillar that may appeal less to some developing economies.

Ahead of the July 26-27, 2022, ministerial, senior officials from all 14 Framework partners met in Singapore July 13 -4, 2022, to discuss the Framework’s four pillars. According to a statement from the Office of the U.S. Trade Representative, the meeting in Singapore included “over 100 delegates and 65 virtual delegates,” who held “positive and productive discussions on the envisioned substance within the Framework and will continue to engage intensively in the coming months.”

Last week’s virtual ministerial sought to make additional progress to advance the IPEF following the senior official meeting in Singapore. According to a readout from USTR, “[t]he ministers had positive and constructive discussions and reaffirmed their collective goal to pursue a high-standard and inclusive economic framework through ongoing and intensified engagements.” The readout further notes that “IPEF partners are engaged in collective discussions to outline the scope of future engagement” on the Framework’s four pillars, suggesting that more remains to be done before formal, text-based negotiations on the Framework begin. No joint statement was released at the end of the meeting.

With respect to next steps, there are reports that the next—and the first in-person—IPEF ministerial meeting may be held in September 2022,, although none of the IPEF member governments have yet confirmed these plans. Previously, Commerce Secretary Raimondo had indicated that the scoping work should be completed this summer. The aim then would be to negotiate substantive commitments within 12 to 18 months. The stated plan is to roll out the substantive agreements in pieces. For example, if countries agree to develop an early warning system for critical supply chains, that agreement will be rolled out even if other discussions or pillars remain contentious. While the various elements and pillars will move at different paces, they will all be incorporated into the larger, integrated framework.

High-Ambition vs Inclusivity

It remains unclear how the Biden Administration will strike a balance between its desire to secure broad participation in the IPEF and its aim to accomplish high-standard commitments, particularly given the divergent levels of development and political preferences of Framework partners. While the modular approach to participation may offer some flexibility, with partners able to choose which pillars to join, this approach could substantially limit the IPEF’s ambition and impact. During the latest ministerial, some Framework partners reportedly demanded that any commitments be accompanied by transition periods, which is indicative of the challenges that the Biden Administration may face in its efforts to achieve effective and robust commitments.

No Market Access?

Notably, the Framework will not seek tariff reductions. It will rather focus on creating “incentives and opportunities” for participating countries, the exact nature of which remains unknown. Speaking at an event in May 2022, USTR General Counsel Greta Peisch, explained that the Biden Administration is thinking “outside the box” to provide incentives that are aligned with the U.S. goals around labor, environment, and other key issues. Commerce Secretary Gina Raimondo has suggested that for the Clean Energy, Decarbonization, and Infrastructure pillar, "there will be sources of public and private capital flowing from the United States … into infrastructure projects in countries in the region," promising that “there will be … a very concrete benefit to countries in the region.” The details of any proposed arrangements are unknown.

With regard to tariff reductions, the Biden Administration has emphasized that the U.S. trade-weighted average tariff (calculated by tariff revenue divided by total good imports) is already a low 2.4%, and that the U.S. has little negotiating room to further lower tariffs on its side. During a hearing of the Senate Appropriations Commerce, Justice, Science and related agencies subcommittee, USTR Tai objected to the notion that IPEF will not enhance market access. While acknowledging that “it is not about tariff liberalization,” Ambassador Tai noted that “[i]t is about ensuring and building partnerships and confidence in each other’s markets through our regulators, through these conversations, and looking at assuring the quality of the access that we have granted to each other through existing rules on tariffs but also looking at new sets of rules that, frankly, go beyond goods trade.”

Prospects for Additional Members

IPEF is described as an “open platform,” with the current participants "invit[ing] participation from additional Indo-Pacific partners that share [the participants’] goals, interests, and ambitions for the region." However, after the announcement of the IPEF, China criticized it as exclusionary and intended to “scientifically decouple regional countries from China.” China publicly accused the U.S. of “destroying peace,” “weaponizing and ideologizing” economic issues, and coercing regional countries into taking sides. Some countries in the region may be hesitant to sign on to any agreement that does not include China, which is the largest trading partner for most Indo-Pacific governments. Before agreeing to participate, many countries in Southeast Asia asked the U.S. to leave the door open to potential Chinese participation. A senior U.S. official explained that the U.S. did not initially invite China to join the Framework because it “will be based on a set of standards the White House believes Beijing would have a hard time meeting.”

Expressions of interest in joining the Framework have met with strong opposition from Beijing. Despite a letter from more than 50 U.S. Senators urging Taiwan to be included in the IPEF, the Biden Administration chose not to do so and elected instead to pursue bilateral initiatives with Taiwan covering many of the same issues. China has also reportedly warned Bangladesh against joining the IPEF. The warning came just days after the country indicated interest in the Framework during the U.S.-Bangladesh High-Level Economic Consultation, where U.S. State Department officials briefed Bangladeshi officials on two of the Framework’s pillars: Supply Chains and Clean Energy, Decarbonization, and Infrastructure.

Enforceability

The Biden Administration aims to achieve binding agreements under the Framework, with Secretary Raimondo explaining that under each pillar there will be “signed agreements” with “high-standard commitments that will be enforceable.” When asked about dispute resolution within the IPEF, USTR Tai explained that, while “traditional mechanisms still do have their place,” she expected any such mechanism to reflect an “evolution” away from litigation and toward what she characterized as “more cooperative” models. Ambassador Tai mentioned two such examples: (1) the cooperative Annex on Forest Sector Governance in the 2009 Peru Trade Promotion Agreement (PTPA), which addresses deforestation concerns, and (2) the Rapid Response mechanism in the U.S.-Mexico-Canada Agreement, which addresses labor issues.

Congressional Approval and Consultation

It appears that any agreements created under the Framework would likely be executive agreements that would not require formal Congressional approval. However, when Ambassador Tai was asked in the press briefing “Does Congress vote on these or not,” she responded, “let’s see where these negotiations take us,” acknowledging that negotiators will “have to keep Congress close and Congress needs to be a part of shaping” the IPEF agreements. House Republicans wrote a letter on May 23, 2022, emphasizing that Congress is vested with constitutional authority to regulate commerce with other nations. In the letter, House Republicans highlighted that going forward they expect a higher standard of communication from the administration in trade negotiations. Another letter on August 1, 2022, from Democratic lawmakers stressed that the IPEF “mark[s] a significant and concerning expansion” of the “executive agreements” approach to trade negotiations and warned the Biden Administration against “seeking to negotiate trade agreements without undertaking robust consultations with Congress and outside stakeholders and without respecting Congress’ constitutional authority to set the terms of foreign commerce.”

The IPEF has generated mixed reactions from key stakeholders:

• On June 23, 2022, prominent business groups from nearly every Framework country issued a joint letter in support of the IPEF, stating that “[d]one correctly, the IPEF presents a significant opportunity to forge more resilient global supply chains, high-standard digital rules of the road, and energy transition outcomes that will drive prosperity on both sides of the Pacific.” The letter states that “for the IPEF to be most effective,” however, the Framework partners must “put all incentives on the table—including those that may require closer consultation with Congress.”
• While congressional reaction to the IPEF has generally been positive, some Democrats and Republicans have questioned the value of an initiative that does not include a goal of negotiating mutual tariff reductions. For example, Senators Tom Carper (D-DE) and John Cornyn (R-TX) released a joint statement supporting the IPEF while advocating for a more traditional, tariff-focused free trade agreement in the long run.
• Senate Finance Committee Chair Ron Wyden (D-OR), during a hearing on March 15, 2022, stated that the U.S. should pursue enforceable labor provisions as part of the IPEF, “build[ing] on” the “progress with enforceable labor obligations” in the U.S.-Mexico-Canada Agreement “to fit the region and the task.” In response, Michael Wessel, staff chair of the Labor Advisory Committee for Trade Negotiations and Trade Policy, which advises USTR and the Labor Department, agreed that the U.S. should “include a similar concept in the IPEF that defines the [labor] rights and couple it with an enforcement mechanism that is accessible, timely and as possible, facility-specific.”
• Leading trade associations and business groups that generally support the Framework as "a positive step toward strengthening economic ties in the region,” also have expressed concerns that the IPEF does not intend to cover market access.
• Other groups, such as the United Steelworkers Union have stated that support for the IPEF would “depend on the substance of any agreement and the results it provides to our workers,” cautioning that “workers will not hesitate to oppose bad trade and economic initiatives.”
• On July 22, 2022, more than 100 civil society, labor, and religious groups urged President Biden to ensure a “transparent and participatory” process for IPEF negotiations. Noting that “[t]he novel ‘a la carte’ nature of the four-pillared IPEF negotiations raises particular concerns around process,” the groups asked that “the U.S. publish draft versions of its proposals and solicit public comment upon them prior to tabling them.”

Companies will want to closely follow negotiations on all four IPEF pillars, including the upcoming announcements of which countries will participate in each pillar. It is possible that Commerce and USTR may roll out a formal process for engagement with industry and other stakeholders. The trade pillar, in particular—because it aims to deal with cutting-edge issues—could have wide-ranging effects for labor and economic regulations, corporate accountability, the digital economy, and more. We will continue to monitor these developments and provide guidance to clients seeking to evaluate the potential impact of IPEF negotiations and agreements.

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If you have any questions concerning the material discussed in this client alert, please contact the members of our International Trade practice.