CPTPP: What you need to know about the UK’s latest trade deal
In late March, the Government announced that the UK would be joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Read on to find out what this means for British businesses.
What is the CPTPP?
A free trade area of 11 countries spanning the Indo-Pacific. Existing members include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The UK will become the 12th member.
The CPTPP started life as the Trans-Pacific Partnership, with the US negotiating to join under President Obama. This would have made the bloc the world’s largest trade deal. Upon election, President Trump withdrew from the deal on his first day in office. The remaining countries continued to negotiate, forming the CPTPP in March 2018.
Why is the CPTPP significant?
The bloc is home to more than 500 million people and, once the UK joins, will be worth 15% of global GDP. For the UK, the deal is significant because:
- It’s the Government’s biggest trade deal since Brexit
- The UK becomes the first new member to join the bloc since it was created, and the first European member
- After Japan, the UK will be the largest economy in the group
Membership is considered a gateway to the wider Indo-Pacific region, which contains 60% of the world’s population and is set to account for most of the global economic growth and half of the world’s middle-class consumers in the years ahead.
CPTPP membership means the UK will have a free trade agreement with Malaysia for the first time, giving businesses far more access to an economy worth £271 billion in GDP in 2021.
There’s also symbolism – post Brexit, the Government has been keen to promote the idea of Global Britain. This trade deal helps to foster that idea. The UK would not have been able to join the CPTPP as an EU member.
What does CPTPP mean for UK businesses?
According to the UK Government, more than 99% of UK goods exports to CPTPP countries will now be eligible for zero tariffs, including key UK exports such as cheese, cars, chocolate, machinery, gin, and whisky. In the 12 months to September 2022, total UK exports to CPTPP countries were already worth £60.5 billion, and the hope is that reduced red tape and greater access to these markets will grow this figure.
The deal is considered to be strong on services, an area where the EU and even the World Trade Organisation have traditionally lagged behind. The UK won’t be required to set up a local office or be resident in CPTPP countries to supply a service and will be able to operate on an equal footing with local firms. Greater coherence of regulatory regimes could help services organisations (legal, financial, professional and technology) to overcome regulatory barriers and expand on the billions of pounds worth of services the UK exports to CPTPP countries. This is significant, given that the UK is the world’s second largest services provider and services accounted for 43% of UK trade with CPTPP countries last year.
Modern ‘rules of origin’ could make British businesses more competitive by allowing them to trade more freely across the bloc. For example, UK car manufacturers could sell car engines tariff-free to a car maker in the bloc who could then sell those cars tariff-free to any member country. Currently, this is not possible under all the bilateral trade agreements the UK has in place with CPTPP members and will help exporters diversify their supply chains and create new export opportunities.
Supply chain diversification is a key topic, amid concerns about over-reliance on China and the fallout from supply chain shortfalls during the Covid-19 pandemic. CPTPP offers the potential to strengthen supply chain links between member countries, especially given the increased blurring of the line between goods and services because of technological advances.
Digitalisation of trade is a key aspect of CPTPP
The deal has ambitious language on the digitalisation of trade which should have 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. The customs chapter of the deal could also help to ensure an easier import process for technology goods from Asia.
Will the CPTPP expand in the future?
CPTPP was designed to grow, which is why it has an admissions procedure. With the UK joining, this trans-Pacific bloc has now become trans-Atlantic, creating potential for further geographic expansion.
There are currently five other applicants in the queue to join. These are China, Taiwan, Costa Rica, Ecuador, and Uruguay. Taiwan’s political relationship with China complicates its potential membership. China, as the world’s largest non-market economy, faces a complex accession process. Many CPTPP members are reluctant to accept both economies into the agreement, nor is any member keen on accepting one before the other. Costa Rica, Ecuador, and Uruguay – which all applied between 2021 and 2022 – are less politically controversial.
The US had been negotiating to join the predecessor Trans-Pacific Partnership under President Obama only to withdraw its application under President Trump. While a US entry is unlikely in the near term, it could be a longer-term possibility.
What about potential drawbacks of this deal?
The deal could potentially expose the UK market to cheaper, and in some cases lower quality, imports from overseas. This could disadvantage sectors like agriculture which are unable to compete with the economies of scale available to producers in countries like Australia and New Zealand. There are also concerns, similar to those raised around recent UK free trade agreements, such as the UK-Australia FTA and the for-now shelved US-UK FTA, that the agreement could lead to reduced standards on food regulations, for example on hormone-treated beef. The full detail of this is not yet clear.
Doesn’t CPTPP only add a nominal amount to the UK’s GDP?
Some commentary highlights that the UK Government’s projected extra economic growth as a result of joining CPTPP adds just 0.08% of GDP over the next ten years. (This is partly due to the UK already having existing trade deals with 9 of CPTPP’s 11 members.) While it’s true that this is a relatively trivial increase, it overlooks two factors:
- As with any projection, it’s essentially an educated guess, in this case based on ‘gravity’ trade models weighted heavily to geographic proximity. However, geographic proximity is less relevant to services (which form the bulk of Britain’s economy).
- The projection overlooks the possibility of new members joining CPTPP in future.
Does joining the CPTPP make it harder for the UK to re-join the EU?
Alignment with one trading block 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 EU’s data adequacy decision – i.e. a provision under GDPR which allows the EU to determine whether third party countries have an adequate level of data protection. While other CPTPP members have succeeded in retaining their own data adequacy decisions with the EU, the EU may regard the UK to be a greater concern, both technically and politically. If the UK’s 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 to the UK’s accession to CPTPP is not yet clear.
Over time, regulatory divergences between CPTPP and the EU will move the UK away from trade alignment with the EU. Ultimately, this could make future membership of the EU Customs Union much more difficult.
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