Vietnam: IPEF Supply Chain Agreement – What might be Imminent Impacts on Businesses for Supply Chain Management in Vietnam?

What is the IPEF Supply Chain Agreement?

The Indo-Pacific Economic Framework for Prosperity (IPEF) is a partnership launched in May 2022 by 14 countries in the Indo-Pacific region– Australia, Brunei Darussalam, Fiji, India, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand, the United States, and Vietnam. Together, the 14 IPEF economies represent 40 percent of global GDP and 28 percent of global goods and services trade.[1] The framework seeks to advance resilience, sustainability, inclusiveness, economic growth, fairness, and competitiveness for the 14 IPEF economies. Negotiations  focus on four pillars of Trade; Supply Chains; Clean Economy (Clean Energy, Decarbonization, and Infrastructure); and Fair Economy (Tax and Anti-Corruption).

On 27 May 2023, the IPEF partners announced the substantial conclusion of the negotiations of a first-of-its-kind international IPEF Supply Chain Agreement at the IPEF Ministerial Meeting in Detroit, Michigan. The proposed Agreement aims to increase the resilience, efficiency, productivity, sustainability, transparency, diversification, security, fairness, and inclusivity of their supply chains through both collaborative activities and individual actions taken by each IPEF partner.[2]

Key areas of the IPEF Supply Chain Agreement

IPEF members agreed to contemplate establishing three new bodies to facilitate cooperation among partners:

  • The IPEF Supply Chain Council, where countries will develop sector-specific action plans for critical sectors, diversify their sources, facilitate joint research and development (R&D) and develop the necessary infrastructure and workforce.
  • The Supply Chain Crisis Response Network, an emergency communications channel where members can seek timely support during a supply chain disruption. This is similar to the early warning system on semiconductor supply chains disruptions launched between the United States and the European Union.
  • A Labour Rights Advisory Board, which aims to promote labour rights across supply chains. The model for the facility-specific mechanism for addressing allegations of labour rights inconsistencies may follow the Facility-Specific Rapid-Response Labour Mechanism under the United States-Mexico-Canada Agreement (USMCA), only at a less binding enforceability.[3]

Implications for businesses

Following the conclusion of negotiations, the IPEF partners will have to undertake the necessary steps, including further domestic consultations and a legal review, to prepare a final text of the proposed IPEF Supply Chain Agreement. Once finalised, the proposed Agreement will be subject to IPEF partners’ domestic processes for signature, followed by ratification, acceptance, or approval.[4]

However, since the beginning, IPEF has not been considered (or as a matter of fact, intended) to be a free trade agreement, it is unclear how the commitments will be enforceable.

The Supply Chain Agreement is the first among four pillars of the IPEF. Negotiations will continue on the other three pillars, covering trade facilitation, worker rights, clean energy, and taxes and corruption. The IPEF however is not a traditional trade deal, thus there is no coverage on provisions of businesses’ interest such as tariff reductions. The Trade pillar will focus on digital trade rules, such as on cross-border data flows, data localisation, online privacy, ethical issues of Artificial Intelligence, as well as on labour and environment standards enforceable through trade.[5]

The final text on the IPEF Supply Chains Agreement is not yet available for a detailed analysis of its implications. There are however commitments on several technical and capacity building programmes, such as those on two-way trade missions and the establishment of Mutual Recognition Agreements (MRAs) to facilitate trade flows among partner countries. The areas for MRAs are yet to be defined, but some sectors could benefit from these schemes, including the machinery and medical equipment sectors. This would be of direct benefit to Vietnamese firms. Additionally, the due diligence requirements related to labour protection are heightened globally, with the European Union and the United States being two most active promoters. Vietnam has also signed up to higher labour protection standards via its membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – which covers an USMCA-style labour chapter. Given Vietnam’s current extensive participation in GVCs in sectors such as electronics, textile and apparel, Vietnamese businesses might already need to explore the requirements as will be applicable to them. It is important that businesses monitor developments in these trade deals to take advantage of new opportunities and make relevant changes to their corporate operations to remain relevant in the new context of the global supply chains.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about specific circumstances.

Authors:

Loan Le | +84 763 281 367 | le@tradeeconomics.com

Paul Baker | +230 263 33 24 | baker@tradeeconomics.com

References:

[1] U.S. Department of Commerce (2023-June-21). Indo-Pacific Economic Framework.

[2] U.S. Department of Commerce (2023-May-27). Press Statement on the Substantial Conclusion of IPEF Supply Chain Agreement Negotiations.

[3] CSIS (2023-May-31). Assessing IPEF’s New Supply Chains Agreement.

[4] U.S. Department of Commerce (2023-May-27). Press Statement on the Substantial Conclusion of IPEF Supply Chain Agreement Negotiations.

[5] The White House (2022-May-23). FACT SHEET: In Asia, President Biden and a Dozen Indo-Pacific Partners Launch the Indo-Pacific Economic Framework for Prosperity.

This article has also been published on the Mondaq website

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