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CPTPP – The UK’s door to Trans-Pacific market

The UK recently signed a deal to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The UK’s signing of the trade agreement makes it the first non-founding and European country to join the 11 founding nations of Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam, who between them, generate 13% of the world's income.

The UK expects membership of the partnership to derive a number of benefits for itself through cuts in tariffs, access to a larger market for businesses, inward investment and reduced red tape for services firms. A boost in UK exports on goods such as dairy and meat products, cars, gin and whisky as a result of tariff cutting and access to market of over 500 million people are some of the economic gains that have been singled out.

The deal has received mixed reactions, mainly along the lines of the Brexit divide. Brexit proponents have hailed it as a huge post-Brexit achievement which will deliver many benefits. It is after all the biggest free trade agreement the UK has signed since leaving the European Union, making it a symbolic win for post-Brexit Britain.

Some have also cited interest in the significance of the deal for aspirational reasons such as the growing importance in global trade from the region. The Business and Trade Secretary, Kemi Badenoch pointed out that as the fastest growing region, the Asia Pacific region is expected to account for at least 50% of global growth between now and 2035.

Those opposed to Brexit have, however, pointed out that only two of the trade deals with CPTPP members: Brunei and Malaysia are new trading partners with the United Kingdom, with the others having their trade deals with the UK rolled over. The anticipated gains from joining the bloc are expected to be fairly small - around 0.08% of GDP over 10 years, according to the Government's own estimate, a contrast to the Office of Budget Responsibility’s estimation of a 4% loss in growth as a result of leaving the EU.

Outside of the debates above, additional arguments have been put across about the deal. Concerns about environment and animal welfare standards have been raised as have those regarding potential challenges of British policies by multinational firms. The government and trade experts have respectively proffered rebuttals to some of these points.

The deal is, however, significant for various reasons. The Indo Pacific has been identified by the UK as an area of strategic importance. Joining the CPTPP is thus important as it has members spanning the Indo-Pacific region. Importantly, it is the possibility of other countries joining the bloc that could make the rewards of joining even more appealing (or challenging). China for instance, is seeking to sign up, raising questions about whether the UK will either veto its membership or seek to influence its access and goals. The US which buys about double the amount of UK exports than the totality of current CPTPP nations would make membership of the pact a big deal if it were to join (although this seems unlikely under the current leadership).

Moreover, despite the arguably modest economic gains, there are some points worth noting. A key aspect of the deal is greater access to the markets of members and the commitment to eliminate or reduce 95% of import charges or tariffs, while enabling members to protect some sensitive domestic areas. In this sense, the opportunity to have access to various countries in a different geography and to boost trade through reduced tariffs is to be welcomed. Mutual recognition of certain standards including patents and a degree of relaxation of sanitary and phytosanitary rules on food items are also some of the benefits arising from the agreement. Crucially, the benefit of rules of origin means that manufacturers can source components of up to 70% from different participating countries, in order to qualify for preferential treatment. This has cost-cutting benefits for UK producers.

There are however limitations, some of which are of note particularly from the point of view of London. Despite the noted access to a market that’s geographically far, this same distance can be an issue whether for services or goods. There is a tendency for countries to trade more with those closer to them than those farther away. The cost, effort, language and cultural barriers involved means that even when time differences are factored in, it seems more practical to trade with closer neighbours. For the UK and London in particular, this underscores why despite the importance of opening up to more remote geographies, the need to continue ties with closer ones cannot be dispensed with.

Also, the deal, like most trade deals appears to be stronger on trade in goods and raises questions about the impact for the services sector. Despite attempts to reduce red tape and facilitate trade in services, it is questionable if its provisions are not simply a re-commitment to existing commitments as tends to happen with most recent trade deals which purport to be revolutionary for services firms such as in technology. In this instance, the Government rightly notes that services accounted for 43% of trade with CPTPP members last year. It has cited the potential for cuts to red tape and the opportunity for UK firms to operate without having to set up a local office or be resident to be beneficial for the services sector. These provisions seem to be insufficient for the UK, which the Government rightly notes as the second largest services provider in the world.

The significance of this is more acute for London which is hugely dependent on services, particularly financial and professional services, suggesting that the benefits it gets from this deal are likely to be modest. London’s unique sectoral makeup means that it requires concerted efforts through a trade policy that seeks to remove as many hurdles as possible for services-oriented firms to conduct business in other countries – by cutting red tape, harmonising regulations and ensuring mutual recognition of qualifications. The benefits of this would strengthen London’s reputation and the economic benefits arising would flow to the rest of the country.

Ultimately, the trade agreement while not the groundbreaking deal that it has been held up to be in some circles, is of significance because it renders benefits even if modest such as access to trade and a boost to trade through for example cut tariffs and custom origin rules. It is also of geopolitical importance to the UK. However, London needs more for its services sector. As the deal does not preclude the UK from striking deals with others, evident from its deal with the EU, there is arguably much to be done to complement it.

Ultimately, much of the discussions and debates will be proven or disproven with the use of the treaty. For now, it will be scrutinised and ratified by members before coming into force, which could take at least a year.