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Supply chains: trade war also compromises the region

In the context of the “trade war” with the People’s Republic of China (PRC) and with the experience of the bottlenecks in international supply chains during the Covid-19 pandemic, the government of the United States of America is focusing its trade and economic policy precisely on the integrity and functionality of these chains. The dissemination of this concept is revealing, as it replaces the concept of “global value chains”. The use of this term gave globalization a virtuous character (“value chains”), since its purpose was to highlight the participation of goods and services originating in various national economies in the generation of world income. In its place, a defensive conception emerges that favors the preservation of productive archipelagos and logistic corridors in the context of a geopolitical fracture that seems to be deepening day by day.

It is under this strategic orientation that the new schemes under which the U.S. seeks to reformulate its links with Asian countries in the Indo-Pacific Economic Framework for Prosperity (IPEF); with Latin American countries in the Alliance for Economic Prosperity in Latin America (APEP), and under a bilateral format through mechanisms such as the “high-level” economic dialogue with Mexico, should be interpreted.

Warnings regarding free trade agreements

The new modality emerges from a questioning of the latest generation of free trade agreements (FTAs) that have been intertwining national economies.

The arguments for doubting the usefulness of FTAs concluded by the United States were presented by Secretary of Commerce Katherine Tai at the Open Markets Institute on June 15, 2023 under the suggestive heading: “In the next world system, can U.S. trade policy provide us with more security, democracy, and prosperity?

On that occasion, Ambassador Tai highlighted some shortcomings observed in the FTAs. In particular, she alluded to those that would allow non-signatory third countries to indirectly take advantage of their benefits through deflection, that is, by introducing goods or services into the markets regulated by such FTAs, thus unfairly circumventing agreed provisions on sensitive issues such as forced labor and environmental protection.

This interference by third countries can only be possible by maneuvering at the expense of the rules of origin. In this respect, recent history records at least two reactions from the US. In order to avoid the use of inputs originating in PRC in the Mexican production of automobiles destined for the US, stricter rules were introduced when renegotiating the Agreement with Mexico and Canada. And discrepancies in the design of the origin regime in the Trans-Pacific Partnership Agreement (TPP-11) led to the withdrawal of the negotiations.

The Indo-Pacific project

Despite objections to FTAs, the U.S. government does not intend to replace them. Due to the internationalization of markets, negotiations on numerous subjects and with specificities that can hardly be addressed by instruments more limited than FTAs are required. However, the U.S. government itself is developing a new format in line with the strategy to preserve its supply chains.

The first and so far most advanced experience in this area is related to the choice of India as a privileged partner. Hence the name Indo-Pacific Economic Framework for Prosperity. The scheme was presented by President Biden during a visit to Tokyo in May 2022. It incorporates seven member countries of the Association of Southeast Asian Nations (ASEAN): Indonesia, Brunei Darussalam, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. It also includes Japan, South Korea, India, Australia, New Zealand and Fiji.

The IPEF initiative does not aim at concluding an FTA but envisages negotiations on different “pillars” (in the sense that separate agreements could be agreed upon). In response to its main strategic objective, in September 2023 the US published the text that formalizes the conclusions reached under Pillar II. It is the Indo-Pacific Economic Framework for Prosperity Agreement Relating to Supply Chain Resilience. This project deserves special attention. In principle, it can be seen how the precautions to cope with a state of threat from the geopolitical perspective are projected onto economic and trade relations. And here the main threat is the “disruption of international supply chains”.

In order to guarantee the operation of international logistics circuits, the proposed regulations require the greatest possible transparency in the exchange of data on supply chains and their links between the states that assume the commitment; and, on the other hand, the greatest possible confidentiality or the least possible exposure of these chains and links outside the scheme.

A crucial problem is the qualification of “critical sectors” and “key assets” in relation to disruptions. Nevertheless, such concepts could take on different contents depending on the circumstances. In any case, as the states involved in the planned activities are carried out, they would tend to strengthen their cohesion. This can be seen, for example, in the exhaustive requirements for the provision, processing and management of data to prevent or counteract disruptions.

The Plurilateral Initiative for Latin America

Adopting the IPEF mechanism as a guide, on November 3, 2023, the USA took a first step to replicate this format with Latin American countries, although implementation still seems hypothetical. It is the Alliance for Economic Prosperity in Latin America (APEP), whose founding instrument was disclosed as the East Room Declaration. It was signed by President Biden together with the presidents of Chile, Colombia, Costa Rica, Ecuador, Peru, Dominican Republic, Uruguay, Canada and Barbados and the foreign ministers of Mexico and Panama. The appearance in Washington of government authorities from so many Latin American countries, the invitation to other governments of the region and especially the characteristics of a text based on the IPEF model suggest that for the U.S. government this format would have a more effective binding quality than that of the FTAs.

Instead of the thematic “pillars” referred to in IPEF, here they are called “tracks” to channel activities assigned to ministerial authorities. Yet, as in IPEF, the central thematic axis runs through all three tracks. It is the coordination of actions to deal with possible disruptions in supply chains.

The “High-Level” Economic Dialogue between the U.S. and Mexico

This device, relaunched between 2021 (U.S.-Mexico Level Economic Dialogue (HLED), has conceptual characteristics similar to IPEF and APEP. Regarding the essential objective of the Dialogue, the Executive Office of the President of the United States reported on October 2, 2023 that from the meeting held the previous year, governments had implemented recommendations for increased coordination in trade and supply chain cybersecurity through information and communications technologies (ICT).

Among the four “pillars” that, in the IPEF style, organize the activities envisaged by the scheme, three of them are related to international supply chains.

Doubts and precautions for the new scenario

The IPEF is the most advanced test of this new format proposed by the US. Regardless of its qualification (“integration” or just “cooperation”?). The plans are aimed at establishing strategic alliances that will inevitably fall within the geopolitical framework.

As actions and financing are concentrated around international supply chains, some questions arise for developing countries which, like those in Latin America, suffer from internal disparities and inadequacies in their economic and social structures that are only incidentally linked to supply chains. These questions remain pending because the validation of a world segmented by different productive archipelagos and protected circuits for the international distribution and marketing of products and services that, depending on the circumstances, can be classified as “essential” is being insinuated.

Analysts warn of the global dysfunctionality of these fragmentations due to the trade war, but tend to pay less attention to their impact on living conditions in the peripheries. More and more populations are subjected to an ambivalent condition: local marginality but simultaneous exposure to digital stimuli and offers that know no borders.

It is precisely the latest generation of FTAs that were designed to address the internationalization of markets through mechanisms of agreement on an extensive and detailed negotiated subject matter and, therefore, allow developing countries to expand their already limited room for maneuver to process compensation from their larger economic counterparts.

In this sense, the case of the high-level economic dialogue between the U.S. and Mexico invites us to reflect on the possible conditionalities that could be imposed on Latin American countries through commitments made outside the FTAs that remain in force.

For these reasons, developing countries, and particularly Latin American countries, should consider the advisability of strengthening their ties with developed countries through FTAs, while avoiding the risks inherent in commitments that are limited to the operation of international supply chains.

*Translated by Micaela Machado Rodrigues from the original in Spanish.

Autor

Sociólogo. Doctor por la Univ. Nacional de Córdoba (Argentina). Consultor de organismos internacionales de integración y cooperación. Investigador y docente en el Instituto de Integración Latinoamericana de la Univ. Nacional de La Plata.

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