The UK government has now launched negotiations with the 11 member countries of the Comprehensive and Progressive Agreement for Trans Pacific Partnership – or CPTPP for short. We’ve considered what it might really mean for business.
The CPTPP trade area is pretty vast. Spanning the Pacific rim from Malaysia to Chile, CPTPP countries are home to 500 million people, 13% of global GDP and already account for £110 billion of UK trade. Growth in recent years has averaged 8% annually and the government predicts UK exports to these countries will increase by £37 billion – or 65% – by 2030.
The trade agreement has resulted in 95% of goods being traded between members tariff-free. The countries also cooperate on regulatory issues but, unlike with EU membership, this is conducted on an equivalence basis rather than through harmonisation – so each member state often retains their own rules and practices.
The UK government has said membership of CPTPP will “open up unparalleled opportunities for British businesses and consumers”, particularly for services, automotive and the food and drink sectors. Why then, when the UK is soon expected to have bilateral trade agreements with 9 of the 11 member countries, is there extra benefit to the UK joining?
Goods: Some tariff provisions in CPTPP go beyond the UK’s bilateral trade agreements, many of which are based on FTAs previously negotiated by the EU. Under CPTPP, businesses could qualify for lower duties on some goods, benefit from a faster schedule of tariff reductions and flexible origin requirements.
Services: There are also more modern rules for trade in services, including on the free flow of data, e-commerce, financial services and easier business travel arrangements.
Scale: The terms of CPTPP are in many cases more straightforward and apply to a much larger area than most other trade agreements. Businesses sometimes do not fully utilise the tariff-liberalising measures within trade deals because the origin requirements are highly complex, so it can make commercial sense to simply pay the non-preferential tariff. This is particularly true of small firms or low volume orders, but CPTPP could well tip the balance.
Choice: Crucially, astute businesses will be able to choose whether to conduct trade under the terms of a specific bilateral FTA or CPTPP, depending on which offers the most favourable terms to them.
Example: Take a business whose supply chain intersects with multiple countries within the trade area. The flexible “rules of origin” in the agreement would allow businesses to claim preferential tariff treatment on products sourced from any location across the bloc. So if parts for a product are sourced from Japan and Singapore, manufactured by a UK firm and then sold into the Canadian market, that product could well qualify for zero tariffs – as long as a certain content threshold has been met (for instance, the good has at least 70% of its content from CPTPP countries).
All this said, we should point out that most economic forecasts have suggested the short-term gains from CPTPP membership will be modest. The small print of the UK government’s analysis shows the deal is only set to increase GDP by 0.1% over the next 15 years. However, the impact to UK trade increases as the commitments within CPTPP are developed further and the agreement itself grows to include new members. Taiwan, Thailand and Korea have each already expressed an interest in joining, which would result in the agreement covering almost 20% of world trade.
The agreement would cement relationships in this region by providing certainty over the long term, locking in high standards with major trading economies and underpinning important investment relationships. It helps to bolster existing trading norms at a time when the rules-based international order is coming under pressure and provides a platform for the UK to exert its influence more deeply in the important Indo-Pacific region.
CPTPP has been in place since 2018 but this is the first time a new country has applied to join, so the experience of the months ahead will set a precedent for the speed and ease of the accession process. It will also determine the extent of negotiation that current members are willing to undertake. The UK is aiming to join an existing trade agreement rather than negotiate a new one, so there is only narrow scope for changing parts of the agreement to suit British interests. The good news is, we already know what the terms are.
Some of the thorniest issues could include data flows and intellectual property, where the UK will seek to balance new commitments with maintaining an EU adequacy decision and its obligations under the European Patent Convention. There could also be complications arising from CPTPP’s “sanitary and phytosanitary” measures (regulations covering plant and animal health) and the investor-state dispute settlement (ISDS) mechanism which enables investors to resolve trade disputes directly with host country governments. None of these potential issues are insurmountable but will require dialogue and understanding between the signatories.
The UK government is optimistic about the progress that can be made during 2021 while Japan is in the rotating ‘chair’ of the agreement, but a final deal may not be struck until 2022, owing to the nature of complex, multi-party negotiations being conducted across multiple world regions and time zones.
That gives plenty of time for businesses to plan for CPTPP. Whether you’re in goods or services, large or small, you should evaluate your operations and supply chain which takes place – or could be taking place – with CPTPP member countries. Businesses should also be mindful of the increased levels of competition they could encounter in the domestic market following the removal of international trade barriers. Lower import prices and greater choice can be good for consumers, but businesses with an existing market share will want to anticipate any potential disruption to the commercial environment.
For support in assessing your trade and investment priorities, Deloitte’s specialists are on hand to help.