IPEF Ministers Outline Negotiating Objectives, Setting Stage for Formal Negotiations

On September 9, 2022, trade ministers from the United States and thirteen other countries adopted joint Ministerial Statements on their negotiating objectives for the four "pillars" of the Indo-Pacific Economic Framework (IPEF): (1) Trade; (2) Supply Chains; (3) "Clean Economy;" and (4) "Fair Economy."¹ The Ministerial Statements are an important milestone in the IPEF process, marking the conclusion of the initial scoping exercise launched by the participants earlier this year. The participants finalized the Ministerial Statements at their first in-person Ministerial meeting in Los Angeles, which followed a series of virtual meetings this summer. Now that the participants have agreed on the general scope and objectives of the IPEF, they will begin formal negotiations on the text of the agreement.

The Ministerial Statements set out broad political commitments regarding the scope and objectives of the IPEF, while largely avoiding discussion of specific trade rules and commitments. However, the statements provide important clarifications regarding the scope and structure of the four pillars, as well as the roster of participants for each pillar. Key themes and takeaways from the Ministerial Statements include the following:

• Negotiating objectives. Though the United States has described the Ministerial Statements as outlining "negotiating objectives" for the IPEF, the statements read more like scoping documents, stating that parties will pursue "provisions and initiatives that relate to" various subjects. Most of the proposed provisions and initiatives are described in very general terms, particularly in sensitive areas such as digital trade: for example, the parties will pursue unspecified provisions to "facilitate digital trade" and "promote. . .trusted and secure cross-border data flows[.]" The ambiguity of the statements raises questions about the level of ambition and coherence among the participants.
• Incentives. Throughout the IPEF process, some developing countries have questioned whether the Framework offers sufficient incentives for participation, given the United States' decision to exclude market access commitments from the Framework. The United States appears to have made progress toward assuaging this concern, given the better-than-expected country participation across all four pillars (discussed below). The Ministerial Statements discuss a range of potential incentives, including various forms of development financing for clean energy projects in the Indo-Pacific region. However, the statements provide few details on these proposals, and it remains to be seen whether they will provide sufficient incentive for countries to undertake high-standard trade commitments.
• Country participation. With the exception of India, which declined to join the Ministerial Statement on the trade pillar, all fourteen countries have indicated that they will participate in negotiations for all four pillars, at least initially. Given the varying levels of development and divergent policy approaches of the IPEF countries, this level of participation was not expected, especially in the trade pillar. However, it remains to be seen whether all countries participating in the negotiations will sign on to the resulting agreements.
• Emphasis on labor and environment. The Ministerial Statements reflect the Biden Administration's prioritization of labor and environmental issues. This is evident across all four pillars, including trade, where the scope language on labor rules is more ambitious than expected. The United States' demands in this area may require difficult tradeoffs, both in terms of country participation and the level of ambition that can be achieved in other sensitive areas. India has cited the discussions around labor and environment as a factor in its decision to abstain from the trade pillar.
• Enforcement. Throughout the IPEF process, US stakeholders have questioned how the IPEF's trade commitments can be enforced effectively. This concern stems from the Framework's lack of market access commitments, which historically have played an essential role in binding dispute settlement under free trade agreements (FTAs) and the WTO Agreements. The Ministerial Statements are silent on this question, and US officials have indicated that the issue of enforcement will require further discussion among the parties. The lack of clarity around this issue will raise questions about the IPEF's commercial significance and durability.

We summarize the key elements of the four Ministerial Statements below.

Pillar I – Trade

The participants in the trade pillar "seek to craft high-standard, inclusive, free, fair, and open trade commitments that build upon the rules-based multilateral trading system." As expected, the participants will not seek to negotiate market access commitments, and instead will pursue "provisions and initiatives related to labor, environment, digital economy, agriculture, competition policy, transparency and good regulatory practices, trade facilitation, inclusivity, and technical assistance and economic cooperation." Notable objectives in this pillar are as follows:

• Labor. The labor objectives include "adopting and maintaining, and enforcing, national laws based on internationally-recognized labor rights, based on the ILO Declaration on Fundamental Principles and Rights at Work[.]" Such obligations have been a core component of US FTAs for the past fifteen years, dating back to the so-called "May 10 agreement" between the Bush Administration and congressional Democrats. However, the IPEF participants have established additional objectives, namely "encouraging corporate accountability in cases of national labor law violations" and establishing "cooperative mechanisms on emerging labor issues." This suggests the possible inclusion of a facility-specific enforcement mechanism modeled on the novel "Rapid Response Labor Mechanism" included in the US-Mexico-Canada Agreement (USMCA).
• Environment. The environmental objectives include "effective enforcement of our respective environmental laws and strengthening environmental protection; protection of the marine environment; biodiversity conservation; combatting wildlife trafficking and illegal logging and associated trade;" as well as "implementation of our respective obligations under multilateral environmental agreements[.]" These objectives align with the core environmental obligations included in recent FTAs, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the USMCA. The IPEF participants also intend to cover issues not commonly addressed in FTAs, namely: (1) "climate change solutions that build on existing commitments, including facilitating trade and investment in relevant clean technologies and environmental goods and services, and enhancing renewable energy, energy efficiency, and zero and low carbon sourcing"; (2) "green investment and finance;" (3) "circular economy approaches;" and (4) "promoting an environmentally sustainable digital economy." The statement does not elaborate on these proposed commitments.
• Digital economy. The Ministerial Statement describes the objectives for the digital economy in very broad terms, as follows: (1) "building an environment of trust and confidence in the digital economy;" (2) "enhancing access to online information and use of the Internet;" (3) "facilitating digital trade;" (4) "addressing discriminatory practices;" and (5) advancing "resilient and secure" digital infrastructure and platforms. The statement does not elaborate on the digital trade objectives, except to state that participants "will work to promote and support. . .trusted and secure cross-border data flows," while recognizing "the need for flexibilities to achieve public policy objectives[.]" The statement avoids clear references to the core digital trade disciplines found in the USMCA and similar agreements (e.g., prohibitions on data localization measures, restrictions on cross-border data flows, and customs duties on electronic transmissions). While this likely reflects the sensitives that some IPEF partners have in this area, the inclusion of such disciplines is a top priority for the US business community.
• Agriculture. Objectives for agriculture include avoiding "unjustified" measures that restrict food and agricultural imports and exports, advancing "science- and risk-based decision-making," and improving processes and cooperation regarding regulatory and administrative requirements. Additional objectives include "advancing food security and sustainable agriculture practices," including by promoting the use of "appropriate technologies." The statement does not elaborate on how the participants intend to achieve these objectives.
• Other issues. The objectives regarding transparency and regulatory practices, competition policy, and trade facilitation generally align with recent FTA practice (e.g., allowing opportunities for public comment on proposed regulations, maintaining competition laws, and simplifying customs procedures). The statement also includes an objective to support trade-related technical assistance and capacity building, in order to facilitate "the full implementation of high-standard trade provisions."

Importantly, the statement expressly recognizes the "different levels of economic development and capacity constraints" among the IPEF participants. Accordingly, the participants pledge to consider "flexibilities, where appropriate," when negotiating the trade pillar. Among other flexibilities, some IPEF partners have called for the trade pillar to include transition periods that allow developing countries additional time to implement their commitments.

Pillar II – Supply Chains

Through the supply chain pillar, the participants intend to make supply chains "more resilient, robust, and well-integrated," while also minimizing "market distortions" and respecting WTO obligations. Among other provisions and initiatives, the parties intend to:

• Establish criteria and processes for identifying "critical sectors and goods," as well as related inputs, capabilities, and "sole sources or chokepoints" within supply chains;
• Establish mechanisms for government-to-government coordination on supply chain disruptions and crisis response measures;
• Facilitate the development of unspecified "tools and measures" to advance transparency in critical supply chains;
• Facilitate "investments" in a wide range of areas, including physical and digital infrastructure, supply chain logistics, and "advanced manufacturing techniques and other modernization efforts" to strengthen and develop potential suppliers. The statement does not provide details about these proposed investments or how the IPEF will facilitate them.

Pillar III – Clean Economy

Through the clean economy pillar, the participants will seek to "accelerate our efforts in pursuit of greenhouse gas emissions mitigation and elimination, enhanced energy security, and climate resilience and adaptation, as well as sustainable livelihoods and quality jobs[.]" The Ministerial Statement contemplates a wide range of commitments in this area, including the following:

• Unspecified provisions and initiatives to "promote," "support," or "encourage": (1) sustainable agricultural practices, (2) "demand and supply" for carbon capture, utilization, transport, and storage, and (3) "policies, incentive frameworks, and infrastructure investment" to scale up low- and zero-emissions goods, services, and fuels; and (4) adoption of demand-side measures that contribute to the development of markets for low- and zero-emissions goods and services (including government and private sector procurement).
• "Enhanced cooperation" on mobilizing investment and sustainable finance for low- and zero emissions projects, as well as projects transitioning existing assets to low- and zero-emissions futures. This will include "mobilizing resources including private and institutional capital through public private partnerships and international blended finance instruments, with a focus on investments in developing countries in the region."

Pillar IV – Fair Economy

The proposed "fair economy" pillar will focus on "preventing and combating corruption, curbing tax evasion, and improving domestic resource mobilization." The Ministerial Statement emphasizes that the parties will undertake the proposed initiatives "within our domestic legal frameworks, consistent with international agreements and standards applicable to each IPEF member based on its respective commitments." Among other initiatives, the parties intend to "effectively implement and accelerate progress on the United Nations Convention against Corruption (UNCAC), standards of the Financial Action Task Force (FATF), and as applicable, the OECD Anti-Bribery Convention." Tax provisions will focus on supporting information exchanges between governments "pursuant to existing international agreements and standards," as well as supporting the work of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting's Two Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, as applicable.

Next Steps

The IPEF participants are expected to begin formal negotiations on the four pillars this autumn. The participants have not announced a date for their first negotiating round, but have indicated that they intend to hold negotiating rounds on a monthly basis. IPEF Ministers also plan to hold a virtual Ministerial meeting in November.

The participants have not announced a target date for concluding their negotiations. The Asia-Pacific Economic Cooperation (APEC) Leaders' Meeting, which the United States will host in November 2023, has been discussed as an informal deadline for finalizing the IPEF. However, this would be an ambitious target given the number and diversity of participants, the novel elements of the IPEF, and the pace of the discussions thus far.

Outlook

The decision to launch formal negotiations for the IPEF is an important development, but it remains unclear whether the Framework will produce commercially significant trade outcomes. Given the near-unanimous participation in the four pillars, the United States appears to have persuaded developing countries that the IPEF has the potential to deliver tangible benefits in exchange for trade concessions – particularly in the form of developed country support for decarbonization efforts in the region. However, it is unclear what level of support the United States and other developed partners are prepared to commit, and development financing is untested as a means of incentivizing countries to undertake and comply with trade commitments.

The US business community's reaction to the recent ministerial has focused on two core concerns: the implications of excluding market access from the IPEF, and the importance of including high-standard digital trade rules in the Framework. US business groups have expressed concern that the exclusion of market access will not only limit the IPEF's commercial value, but will also make any trade rules in the IPEF difficult to enforce.² They have also emphasized that the IPEF's digital trade rules should follow the approach taken in the USMCA and similar agreements by prohibiting data localization mandates, restrictions on cross-border data flows, forced technology transfers, and customs duties on electronic transmissions.³ The recent statements from IPEF participants provide little clarity regarding enforcement or the level of ambition on digital trade, which are likely to be among the most challenging issues for US negotiators to address

_{1 The countries participating the IPEF discussion are Australia, Brunei Darussalam, Fiji, India, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand, the United States, and Viet Nam.  The Ministerial Statements can be viewed here.  
2 "Indo-Pacific Economic Flourishing? Making a Success of IPEF,” US Chamber of Commerce, September 13, 2022.
3 Id.  See also "BSA Welcomes Indo-Pacific Economic Framework Ministerial Statement; Urges All Parties to Seek Strong Digital Economy Commitments," Business Software Alliance, September 9, 2022}. 

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

_{© 2022 White & Case LLP}