31 Mar UK accedes to CPTPP, but what does it mean for the UK?
The UK has reached an agreement in principle to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). It is a landmark move reaffirming the UK’s commitment to the Indo-Pacific region. The Trans-Pacific trade partnership, which came into force at the end of 2018 in six nations – Australia, Canada, Japan, Mexico, New Zealand, Singapore – and was subsequently ratified by Vietnam and Peru, and most recently by Malaysia and Chile, reduces trade barriers between these nations. The UK’s accession to CPTPP will therefore support tariff-free trade with a number of nations with which the UK does not currently have full FTAs. The move reflects the emphasis placed on the Indo-Pacific region in the Integrated Review and its subsequent Refresh (which we’ve summarised here), with the region seen as a key economic and security priority for the UK.
But how much does accession matter for the UK? What will the economic and geostrategic consequences of the move be?
Economic Implications of Accession
Most directly, the UK’s accession to CPTPP means that more than 99% of UK exports to member countries become eligible for tariff-free trade. With current CPTPP economies accounting for 15% of global trade and 13% of global GDP, tariff-free access to such a vast market provides important new trading opportunities for the UK. It provides ripe opportunities for the UK to compete with the dominant regional exporters Australia and New Zealand in the distribution of goods such as pork, poultry and dairy; increased trade in fields like the automotive industry, capitalising on closer trading relations with major car export destinations such as Japan, Mexico, Canada and Australia; and to gain preferential access to previously inaccessible or under-tapped markets within Asia. According to UK Government modelling, long term this could increase UK GDP by £1.8 billion.
It will provide particularly significant benefits to highly-taxed industries such as financial services or spirits, where tariffs will either be significantly reduced or eliminated. Tax on Scotch Whisky in Malaysia, for example, could drop from 165% to 0%, opening up new trading opportunities for this key UK export and soft power asset.
Increased ease of exporting can also play a key role in helping UK businesses build trusted supply chains, amid growing concerns about overreliance on China, and the fallout from supply chain shortfalls during the COVID-19 crisis. The trade facilitation provisions, as well as enhanced services commitments and other common rules, all offer the potential to strengthen supply chain links between member countries, not least given the increased blurring of the line between goods and services as a result of technological advances.
The Rules of Origin provision in the deal allows for greater diversification of manufacturing and production processes, increasing the ability for UK firms to procure materials from fellow CPTPP members and vice versa. For the automotive to services to tech industries, these provisions open up the potential for easier imports and exports to and from CPTPP markets, and the manufacturing of higher quality goods. This will, of course, pose challenges, opening the UK market to cheaper, and in some cases lower quality, imports from overseas. This could particularly disadvantage sectors like agriculture which are unable to compete with the economies of scale available to producers in countries such as Australia and New Zealand. There will no doubt be adjustment required by UK businesses to meet these challenges. There are also concerns, similar to those raised recently around a number of UK free trade agreements, not least around the UK-Australia FTA and the for-now shelved US-UK FTA, that the agreement could lead to the relaxing of food regulations, for example on hormone-treated beef. We are yet to see the detail of what has been agreed, though the UK Government would have some explaining to do if it has accepted contentious agricultural terms in CPTPP which go significantly further than in the Australia FTA.
One of the most interesting opportunities presented by accession though is around the deal’s ambitious language on the digitalisation of trade which should also culminate in benefits for British industry. Bans on data localisation requirements and the forced disclosure of source code would reduce costs and allow businesses to deliver services more efficiently. Provisions laid out in the customs chapter of the deal could also help ensure an easier import process for technology goods from Asia, particularly Vietnam. Moreover, the deal includes promising provisions on services, an area where the EU and even the World Trade Organisation have traditionally lagged behind, which, through greater coherence of regulatory regimes, could help services organisations (legal, financial, professional and technology) to overcome regulatory barriers and serve to expand on the £30 billion worth of services exported to CPTPP countries in 2021.
However, there are potential challenges arising from the fact that, in the absence of comprehensive global trade regulations (which seem increasingly far away), alignment with one trading bloc can limit alignment with others. For example, the CPTPP’s requirement that members allow the cross-border transfer of data by electronic means, could conflict with the UK’s EU data adequacy decision, that allows EU data to continue flowing freely to the UK. While other CPTPP members have succeeded in retaining their own data adequacy decisions with the EU, the risk remains for the UK, which the EU may regard technically and politically as of greater concern. If the data adequacy agreement were to be revoked, British businesses would be required to set up more costly and bureaucratic systems to share data and could be restricted from handling EU citizens’ data. The EU’s response, in principal and (equally importantly) in detail, is not yet clear.
A Geostrategic Manoeuvre
Beyond the economic considerations, accession to CPTPP crystallises the UK’s long-term vision for strengthening relations with nations in the Indo-Pacific, putting some substance to its post-Brexit political and trading posture. In the context of growing tensions with China, defined as an ‘epoch-defining challenge’ in the recent refresh of the Integrated Review, strengthening relations with allies in the region has become increasingly important. As history tells us, strong economic ties will often lead to stronger geostrategic alliances. Given the significant dependence of nations such as Chile on China, for whom Bejing is their biggest trading partner and a major investor, particularly via the Digital Silk Road, stronger economic relations with CPTPP nations has significant geopolitical importance. The move ultimately provides tangible evidence of the UK’s commitment to the Indo-Pacific region and builds the necessary relationships to provide substantive alternatives to China for the UK’s allies in the region.
It also provides a more direct opportunity for the UK itself to diversify supply chains and reduce reliance on China, particularly in critical minerals. As outlined in our recent report, strengthening relationships with nations such as Chile and Vietnam who have access to rare earth metals is essential for the UK’s resilience and security.
There is also an important symbolic value in the UK joining CPTPP, especially in the context of creeping protectionism and onshoring, and accession will be viewed internationally as a sign of the UK’s ongoing commitment to the protection and promotion of a free and open liberal trade order. The UK’s position as a longstanding promoter of free and open trade has historically served it well in negotiating trade agreements. Maintenance of this posture is important for the UK as it continues to forge new trading partnerships. There is also something to be said for the benefits of being at the table; by joining CPTPP the UK gains the power to shape one of the world’s largest and growing trading blocs. In particular, it gains the ability to shape standards setting within the bloc and to maintain the strategic and soft power benefits it has historically reaped from leading on global standards setting. This is all the more important as the UK no longer sits around the EU table.
At the same time as recognising the benefits of CPTPP accession for the UK’s access to dynamic and growing markets, what it says about the UK’s future trading relationships with the EU cannot be ignored. Regulatory divergences between CPTPP and the EU will move the UK away from trade alignment with the EU and ultimately makes membership of the EU Customs Union virtually impossible. However, given neither the Conservative nor the Labour party are advocating for a return to the Customs Union, and given the UK’s accession to CPTPP has been on the cards for a number of years, accession may pose some additional challenges to the UK’s emerging relationship with the EU but it will not fundamentally undermine it, especially in the light of the recently concluded Windsor Framework on the Northern Ireland Protocol (see our commentary here).
Potential Future Growth
Assessments of the costs and benefits of trade agreements are rarely cut and dry and we should be wary of assumptions based on a static model. CPTPP nations are among some of the fastest growing in the world, and a key cornerstone of the Indo-Pacific market that is expected to generate 56% of global growth from 2019 to 2050. If that potential growth is realised, the UK will have gained a foothold in an increasingly important market and access to a fast-growing middle-class population.
Much of the benefit will also be contingent on whether the UK’s membership, as the first new nation to join the pact since 2018, triggers a domino effect in membership growth. China, Costa Rica, Ecuador, Taiwan and Uruguay have all already formally applied to join. Most importantly, the United States was a member of the predecessor Trans Pacific Partnership and had been negotiating to join under President Obama only to withdraw its application under President Trump. The future on this and other new members is unclear. It is assumed that de facto unanimity is required for a new member to be admitted: so far, both China (currently opposed by Australia, though Canberra’s position may have softened a little) and Taiwan are particularly contentious for different reasons. Nonetheless, it is important that CPTPP continues to have pulling power with the potential for a significant further growth in trading opportunities for members. Only time will tell on the true value of membership.
