Think Tank Program on IPEF Says Sourcing Diversification Could Result From Deal

A National Security Council representative pitched the Indo-Pacific Economic Framework as a "modern economic engagement," different from past free trade agreements, and one that will "reduce supply chain dependencies in a way that brings prosperity to all involved."

Christina Segal-Knowles, senior director for international economics at the NSC, told an audience at the Center for Strategic and International Studies that in the 1990s, the U.S. was "overly focused on market access as the only element of a partnership agreement," and that IPEF is different, not a set of negotiations that concludes, but the beginning of continuous work to partner with IPEF countries.

Japan, an IPEF participant, supports the goal of diversifying supply chains through IPEF, but Todo Yasuyuki, a political science and economics professor at Waseda University's Graduate School of Economics, said there are hurdles to increasing friendshoring in developing countries in Asia.

"Japan and the U.S. need to provide the Global South more benefits" to make economic integration more attractive, he said, such as more foreign direct investment. He recommended that the U.S. and Japan not be too rigid on who qualifies for friendshoring, and accept that political and economic freedom will improve gradually in these countries.

Todo said that while Japan's total trade with China is down 30% since late 2021, Japan still is heavily dependent on Chinese imports in key sectors -- for instance, Japan imports 40% of its auto parts from China.

"The private sector is not clear on what the risk is from importing Chinese products, so that means too much reliance on Chinese imports of critical products," he said. At the same time, he said, businesses are over-reducing exports to China, as they are nervous about national security restrictions.

The Nov. 1 event, which centered on supply chain resiliency and economic growth in the region, was co-hosted by CSIS and the Japan External Trade Organization, or JETRO. JETRO CEO Ishiguro Norihiko told the audience that among Japanese companies operating in China, just a third are planning on near-term expansion in that country. He noted that JETRO has helped support 129 projects to move production from China to Southeast Asian countries.

In contrast, 72% of Japanese companies operating in India intend to expand there, he said, though India has challenges in customs clearance, ports infrastructure and providing a stable power supply.

V.S. Seshadri, a senior fellow for international trade at Delhi Policy Group, said there are mixed opinions on the supply chain pillar in IPEF, even as India has signed on to the text.

"Whether companies will share data is a concern," he said. "Also, concerns about labor [standards] provisions, whether they will be used for undermining wage competitiveness."

He said the countries in IPEF will have to build trust for it to be effective. But, he added, if products from IPEF countries were to qualify for Inflation Reduction Act benefits linked to free trade agreements, "that would make IPEF much more attractive."

Shanti Shamdasani, CEO of S. ASEAN International Advocacy & Consultancy, said working groups and implementation will be critical for IPEF to be productive.

In the Q&A after the panel, a student asked Shamdasani about the anti-corruption pillar, and if it would be effective. She said the text is on the right track, but explaining the benefits of suppressing corruption will be critical for it to take hold.

"Really, look at the example of the digital transformation we had in the customs area" in India, she said. "We had a lot of resistance, and at some point the customs officers would pretend that the machine is broken, so they can go back to manual and they can go back to their own thing."