Environmental and Labour Standards in IPEF: Tough Pill to Swallow for Southeast Asia
The U.S. must ensure that it finds the right leverage within its IPEF scheme to make up for its lack of trade benefits or risk turning off prospective participants.
Analysts have described the Indo-Pacific Economic Framework (IPEF) as the Biden administration’s attempt at reigniting U.S. economic statecraft in Asia that was neglected by his predecessor. The U.S.’s engagement of Asian countries through the IPEF is also seen as a means to counter China’s strong influence in the region.
Trade agreements were historically used by the U.S. to build relationships with allies and partners, and to cement American international influence. However, the IPEF is not meant to be a traditional trade agreement as there are no new market access benefits on the table for participating countries. It instead opts for a modular approach where countries are free to select specific pillars of the IPEF in which they wish to participate while opting out of others.
Each pillar represents other non-market access related aspects of trade and economic cooperation. As it stands, the IPEF is organised along four pillars: (1) trade, (2) supply chains, (3) clean energy, decarbonisation and infrastructure, and (4) tax and anti-corruption. Instead of market access, the “trade” pillar encompasses other trade-related issues such as environmental and labour standards. On these two fronts, the U.S. looks poised to push for more stringent standards that Southeast Asian countries might find tough to accept. If the goal of the IPEF is to strengthen relationships with countries in the region and act as an alternative to what China has to offer, pushing for tough environmental and labour standards might prove to be a contentious issue that would detract from these broader geopolitical objectives.
In May 2022, U.S. Trade Representative Ambassador Katherine Tai had already signalled that the IPEF will involve the pursuit of strong labour and environmental standards. The expectation is that these standards will involve some emulation of the US-Canada-Mexico Agreement (USCMA), which Ambassador Tai hailed as “a new model for trade agreements”. The USCMA contains the most stringent environmental and labour standards in any trade agreement ever ratified, which Congressional Democrats had a hand in pushing through.
Congressional Democrats have historically made their support for potential U.S. trade agreements contingent upon the inclusion of environmental and labour protections. Even though the IPEF, in its current form, does not require congressional approval, the Biden administration would likely still face pressure from the Democratic Party to include such standards in the IPEF.
The USMCA contains several provisions that essentially allow the U.S. to withdraw trade benefits if environmental or labour standards have been breached. Labour standards include prohibitions on forced labour, respect for the right of association with a union and collective bargaining, and protection for migrant workers. On the environmental front, of note is the mention of obligations to combat illegal fishing and logging and the obligation to commit to seven multilateral environmental agreements, including the Montreal Protocol and Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES). Contravention of standards enumerated in the agreement would allow the U.S. to trigger a dispute settlement procedure which might ultimately lead to the imposition of coercive trade measures, such as raising tariffs or withdrawing other trade benefits. Additionally, the USCMA allows the U.S. to block imports from specific facilities found to have been in breach of labour rights obligations.
The U.S. seems determined to use the USCMA as a model for enshrining potential environmental and labour provisions in the IPEF. However, it is hard to see how these provisions might work considering that even if they were violated, the U.S. cannot withdraw market access benefits. Pushing hard to include these standards without commensurate market access offerings would likely raise contentions among Southeast Asian signatories of the IPEF.
There are already signals that labour rights issues will prove to be contentious for Southeast Asian countries. The U.S. has identified Vietnam’s textile industry as part of a cotton supply chain that uses forced labour from the Xinjiang region in China, which could trigger import blocks under the U.S.’s recently passed Uyghur Forced Labour Protection Act. Thailand may find itself in a similar position on its use of cotton imports from China. Earlier, two Malaysian companies, Sime Darby Plantation Berhad and FGV Holdings Berhad, had their palm oil exports blocked at the U.S. border in late 2020 on allegations of forced labour practices.
In the negotiations to come, several scenarios might play out. Market access has been the primary carrot that has historically incentivised the U.S.’s trade partners to swallow tough pills. If the U.S. is insistent on including strong environmental and labour standards in the IPEF, it might find itself hard pressed to design an alternative incentive structure to make these provisions more palatable for Southeast Asian signatories. Experts have speculated that this may involve improving trade facilitation such as removing technical and regulatory barriers to trade to boost exports to the U.S. Whether this would be enough to replace traditional market access benefits such as lower tariffs remains to be seen.
The U.S. could also take a softer approach by leaving out coercive enforcement and instead focusing on cooperative mechanisms such the provision of technical assistance and capacity building to work towards higher environmental and labour standards. Southeast Asian countries might be more willing to accept tough standards in exchange for such goodies.
If nothing can fill the void of market access benefits and the U.S. insists on including strong environmental and labour standards, the risk is that Southeast Asian countries may opt out of the IPEF’s “trade” pillar entirely. In this scenario, it is doubtful how the goal of strengthening economic engagement can be achieved, given that the “trade” pillar is likely to form the core of IPEF. Moreover, the IPEF is not only about trade and economic engagement but also about fulfilling the geopolitical objective of strengthening and cementing relationships with key partners in Asia amidst the U.S.’s intensifying competition with China. With this in mind, Biden’s administration will need to think through how to reconcile domestic pressures to include strong environmental and labour standards with the IPEF’s broader geopolitical goals.
Darren Cheong was Research Associate with the Regional Strategic and Political Studies Programme, ISEAS - Yusof Ishak Institute.