Many lessons were learned over the course of the pandemic. The impact of a highly connected world demonstrated just how fast an infectious process might spread. It also showed how international collaboration and policies help curb its spread at times. But in terms of consumer goods, the pandemic also proved how dependent all nations are on the global supply chain. As manufacturing slowed due to closures and restrictions, supply chain failures escalated. And with only a handful of companies producing some specific goods, shortages accumulated quickly. The need for diversification in manufacturing was evident as was a more lasting diversification strategy.
With the business disruptions that occurred from the pandemic, efforts are now being made to adopt such a diversification strategy. (Tap into some workforce strategies for navigating a disrupted world–Bold has you covered.) It’s worth noting that China now supplies a sizable portion of manufacturing to countries throughout the world. While reductions on U.S. reliance on Chinese manufacturing have occurred, they remain significant. At the same time, access to other manufacturing areas, specifically the Asia-Pacific region, has not expanded. Understanding this, and the fact that 60% of the global population is in this region, a new diversification strategy is being pursued. This month, President Biden announced the formation of Indo-Pacific Economic Framework (IPEF). As a non-traditional agreement, however, it is questionable whether the IPEF will fulfill the evolving need for diversification in manufacturing.
“[The IPEF] is a broad plan designed to help expand the U.S.’ ‘economic leadership’ in the Indo-Pacific region. The group wants to set international rules on the digital economy, supply chains, decarbonization and regulations applying to workers.” – Ted Kemp Managing Editor, CNBC International Digital
A Look Back at the IPEF’s History
The need for diversification in manufacturing is not something that was just recognized in the aftermath of the pandemic. In fact, a political shift to develop a diversification strategy in the Asia Pacific region dates back to 2012. It was then that the U.S. sought to create free trade arrangements with Asian nations. This resulted in the creation of the Trans Pacific Partnership (TPP), which included the U.S., Japan, South Korea and others. But ultimately, the U.S. decided to pull out of the TPP due to its administrative slowdowns. The IPEF is the U.S.’ next attempt to make headway into this region to alleviate manufacturing and supply chain issues.
The challenge for the U.S. now is the dominant presence of China in the Asia-Pacific region. As the TPP dissolved, China and other Asian countries formed the Regional Comprehensive Economic Partnership (RCEP). China is now the lead manufacturer and supplier in the RCEP, and many countries are therefore dependent on China. Likewise, Japan took the lead after the TPP dissolved and has created the Comprehensive and Progressive Trans Pacific Partnership (CPTPP). It would make logical sense for the U.S. to rejoin this entity, but the support for this is low domestically. Understanding this, the decision was made to pursue a different kind of framework to address the need for diversification in manufacturing and trade. That framework is the IPEF.
“The United States needs to enhance its economic competitiveness in the [Asia Pacific] region…the Biden administration will work to gain maximal traction for the Indo-Pacific Economic Framework.” – Ali Wyne, Senior Analyst, Eurasia Group’s Global Macro Practice
What the IPEF Is and Is Not
Contrary to some perceptions, the IPEF is not a free trade agreement. It guarantees no specific market access or relief from existing tariffs. Thus, the incentive to participate in the IPEF is limited. Instead, the IPEF represents an agreement of cooperation among nations that hopes to address some key issues of trade. In essence, the IPEF has 4 key pillars that include trade, supply chains, decarbonization, and anticorruption. Notably, the need for diversification in manufacturing is hoped to be addressed in the trade and supply chain pillars. But because nations in the IPEF do not have to participate in all 4 pillars, its impact remains questionable.
As noted, resistance to a formal free trade agreement that provides market access exists in the U.S. Thus, the IPEF is a way to reach cooperative terms in trade and manufacturing with a formal Congressional vote. But this has its obvious downsides as well. For one, key nations may opt out of the trade aspects of IPEF. Likewise, even if agreements are made among nations, the IPEF has no way to enforce such commitments. Many critics therefore doubt this will provide the U.S. with the diversification strategy it wants. Not only might this flop in meeting the need for diversification in manufacturing and trade. But it might again limit the presence of U.S. trade in the Asia Pacific region overall.
“I think that the biggest problem with [a free trade agreement] was that we did not have the support at home to get it through.” – US Trade Ambassador Katherine Tai
A Diversification Strategy is Best for All
Despite critics, there is the potential that the IPEF could succeed. This potential pertains to the existing reliance many nations in the area to China’s manufacturing and trade machine. Currently, the IPEF membership involves 13 different nations including the U.S. Major economies include Japan, India, Australia and South Korea. Others include New Zealand, Thailand, Vietnam, and Indonesia. Each of these countries are concerned about their reliance on China, and they too seek a diversification strategy. Thus, the U.S. is not the only nation with a need for diversification in manufacturing and trade. The IPEF could provide such a strategy if member nations fulfill their obligations and participate in all four pillars.
Just because these countries favor a diversification strategy doesn’t mean the IPEF will succeed. Knowing this, the U.S. has chosen to leave Taiwan out of the IPEF given its political tensions with China. Presumably, this decision was made so that other countries would be more likely to consider joining the IPEF. Whether this will be enough to encourage broad participation remains to be seen. But in either case, the need for diversification in manufacturing and trade is a widespread. If the IPEF fails to achieve its goals, then new approaches will be needed. The bottom line is the pandemic proved how interconnected global markets and supply chains are. And modern trends of the post-pandemic world show that countries are painfully aware of this fact.