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How the UK beat Brexit with a new Pacific Rim trade deal

Japan has been a key supporter of the UK joining the CPTPP. Photo: Koukichi Takahashi/EyeEm

In her garden outside the British embassy in Tokyo, Julia Longbottom poses for a photo with cherry blossoms in the background.

The British Ambassador has much to smile about, not least about the current blossoming of relations with Japan and other key allies. in this part of the world.

Just hours after Kemi Badenoch, Secretary of State for Business and Trade, completed negotiations for the UK to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), a massive new trading bloc that will soon rival the European Union in size.

Foreign policy experts hailed the move as a veritable diplomatic victory, reinforcing yet another pillar of the government's «tilt» toward the Indo-Pacific. Meanwhile, Brexiteers see this as the first step towards the global Britain they have long dreamed of.

“The UK was the first country to join us after the initial partnership was established,” says Longbottom, “so this is really a groundbreaking moment.”

However, there was no reaction at home. just like warm.

Critics have dismissed the deal on the grounds that the UK already has trade agreements with nine of its 11 members — Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam — and according to the official estimate, which predicts that over a decade it will add less than 1% to GDP.

Notably, the first article published by the BBC about the deal was simply titled: «UK-Asia trade deal to boost UK economy by 0.08%».

But experts say focus on that alone prediction, which is doubtful in any case, is somewhat missing the point.

The real benefit for the UK, Longbottom said, will be geopolitical: the CPTPP will give London a seat at the negotiating table in a region that is set to become the world's center of gravity, both economically and diplomatically.

Countries in which the UK has a post — Trade Brexit is about the rise of China — and how other countries should respond — is an issue that dominates everything here, while Russia's attack on Ukraine has upended perceptions of conflicts elsewhere, including Taiwan.

This put Japan, Australia and other countries on high alert, sparking support for Britain's growing role in the Indo-Pacific, not only in Westminster but also in Tokyo and Canberra, where the UK is seen as an important ally.

Japan in particular has been a key supporter of Britain's accession to the CPTPP, helping to smooth over differences during negotiations. Tokyo has already concluded a number of defense agreements with the UK.

“One thing I would say about the UK is that often when we look at ourselves, we tend to be very… What should I say, gloomy?” — says Longbottom.

— But it is worth thinking about how the UK is seen from the outside.

“The vision laid out for the post-Brexit role of the UK – how we will use our foreign policy, our trade agreements, our defense and security capabilities to become a force for good along with like-minded people – was music.” for our Japanese. ears of friends.

“They see and expect us to play an active role in the international arena. We are valued as a partner.”

Enormous economic impact

There are plenty of reasons not to look away from the Indo-Pacific region, not least because it is so intertwined with the rest of the world.

Half the world's population lives in this region, including 1.7 million British emigrants, as well as the shipping lanes that carry 60% of world trade.

Since 2000, it has accounted for 53% of global GDP growth, according to the International Monetary Fund, and is expected to generate 54% of profits until 2050, when countries become richer.

Expected to be half China will account for this growth, with India projected to play an increasingly important role. too.

In 2021, output in the 11 CPTPP countries was $11.7 trillion.

Including the UK, this figure would be $14.8 trillion, or about 15% of global GDP. That compares with the EU-27's output of $17.2 trillion, or 18% of global GDP.

And experts say there's great potential for what the CPTPP is trying to achieve.

Growing value — trade between the UK and CPTPP

Like other free trade blocs, CPTPP countries face no tariffs on 99 percent of the goods sold, including everything from cars and cars to dairy products and chocolate .

But they also seek to open up their economies by acknowledging each other's rules and not setting up barriers that discriminate against foreign companies.

Shanker Singham, a trade expert and former adviser to Liz Truss when she was Secretary of International Trade, believes this is better than the EU model where the whole bloc adopts common laws because it allows countries to experiment and find the best rules to achieve their goals. goals.

“The philosophy of the CPTPP organization, if you will, is that countries can have their own rules, as long as they don't distort or harm trade,” he says.

“Regulatory goals can be achieved in different ways, and if these goals are the same, we must mutually recognize each other's systems.

“This is a very different approach to the harmonization model that the UK has been following for over 40 years. And I think that's incredibly important because it's more likely to create a system that releases a higher level of GDP per capita into the economy.»

Kemi Badenoch, Minister for Business and Trade, compared the UK CPTPP deal to an investment. Credit: Leon Neal/Getty Images

The CPTPP agreement also contains up-to-date chapters on services, intellectual property and digital trade, which are the UK's key strengths, says Paul Baker, an economics and trade consultant based in Mauritius.

For example, all signatories must agree to levy no border taxes on digital services sold from one country to another. It's also illegal to force businesses to store country data locally.

«The Indo-Pacific is a very dynamic and fast-growing region,» adds Baker. “And so he can go in any direction. Potentially, we can use this growth.

“We are quite far away, so distance is a problem. But another problem with these estimates is that most of them are in the part of trade goods that is easier to measure.

“It is much more difficult to measure benefits and services – and this is where the UK could benefit more.”

For the UK, existing bilateral trade agreements with nine member countries — Canada, Peru, Chile, New Zealand, Australia, Brunei, Singapore, Vietnam, and Japan—meaning the only immediate trade gains from joining will come from Mexico and Malaysia, which have a combined GDP of $1.6 trillion.

But other countries are waiting in the waiting room, Baker notes. Current candidates include Ecuador, Costa Rica, Uruguay, China, and Taiwan, as well as South Korea, Thailand, the Philippines and, in the future, the United States, which are also considered future candidates.

Economic recovery — change in the long run UK GDP

If all of these countries, with the exception of the US, China and Taiwan, join, CPTPP's share of global output will rise to 18%.

And in the case of the US, that figure would jump to 43%, eclipsing the EU in size. With a stroke of the pen, after years of fruitless bilateral negotiations, this would also finally allow tariff tree trade between Britain and America to be established.

“These other countries are good opportunities,” adds Baker, “and this, obviously, can lead to an expansion of the market. If the US joins, it will really be a game changer for the UK.”

Clark Packard, a fellow at the free-trade Cato Institute in Washington, says there are other, less tangible trade benefits: “It's symbolic. And I think it's ultimately the right idea for the UK to join.

«This shows that democracies are willing to resist China's commercial practices, about which the United States shares much of the same concern as the UK.»

The appeal of the CPTPP has even spurred some into Europe to call for the entry of the EU itself.

Cecilia Malmström, a Swedish former EU trade commissioner and now an economist at the Peterson Institute for International Economics, says the bloc should stop «looking in the navel» and join the Indo-Pacific Club to «strengthen global trade rules.»

Separately, scholars at the Berlin-based European Council on Foreign Relations and the Lowy Institute in Sydney argue that membership would create a stronger bulwark against China, with which the EU has struggled to strike a trade deal.

Joining the CPTPP will add 0.3% to EU GDP in the «medium to long term» but represents «an opportunity with a real risk of marginalization if Europeans do not seize it,» the council said .

New Relevance

However, with tensions rising in the Indo-Pacific region, foreign policy experts believe that the UK's main motives for joining the CPTPP are geopolitical.

Concern was already growing as China under President Xi Jinping became more assertive on the world stage. But they have taken on new urgency since Russia's invasion of Ukraine.

Officers in Japan and Australia fear that failure to respond to Russian aggression with a tough and cohesive response will push China to seize Taiwan — the self-governing island that Beijing claims to own — by force.

Tokyo, whose closest neighbors are China, Russia and a divided Korea, is particularly concerned about its proximity. This prompted Prime Minister Fumio Kishida's administration to press allies like the UK tighter than ever before. Fumio Kishida aims to strengthen relations with the UK. Photo: Simon Dawson/No10 Downing Street

«The Ukraine crisis was a very sobering moment,» says Longbottom, the British Ambassador.

Everyone understands perfectly well that everything around is closely watching what is happening in Ukraine and Russia's actions. world.

“Japan feels very connected to Ukraine, and this has had a galvanizing effect… partly because public opinion has said: “If this can happen in Ukraine to ordinary people, what can happen to us or to other countries in the region? '”

Meanwhile, Beijing is trying to expand its already powerful sphere of influence.

The massive expansion of China's military was accompanied by vast territorial claims over much of the South China Sea, contested by Brunei, Malaysia, the Philippines, Taiwan, and Vietnam. China also has territorial disputes over the islands with Japan.

President Xi declined to criticize Russia's invasion of Ukraine, instead ushering in a new era of close «no limits» relations with the Kremlin and helping support Vladimir Putin's regime by buying discounted oil and gas avoided by the West.

At the same time, China is seeking to expand its influence through the Belt and Road Initiative, lending to developing countries for infrastructure projects and rallying the Indo-Pacific into a trading bloc it can dominate. Beijing has orchestrated the establishment of the Regional Comprehensive Economic Partnership (RCEP) in 2020, a group that accounts for 30% of global GDP and includes several CPTPP members, including Japan and Australia.

Unlike the CPTPP, the RCEP agreement does not contain measures to curb support for Chinese state-owned enterprises and other government subsidies, an advantage that many countries have long complained about.

As tensions around Taiwan rise, many Western countries are looking to diversify their supply chains, especially in markets such as rare earths and microchips. According to George Magnus, an economist and research fellow at the China Center at Oxford University, CPTPP membership will give the UK a seat at the negotiating table as standards develop in the region and new supply chains are created.

“ We join CPTPP in a potentially very a good moment in terms of geopolitics,” he says.

“We will be able to mix and match with 11 other important countries and guide British companies, sitting in the front row, about where business opportunities can be in the future.”

The UK will also speak out on another thorny issue: whether China and Taiwan should be granted CPTPP membership.

Diplomats in some countries fear that Beijing will try to use the CPTPP for its own purposes, softening state aid provisions. There are also fears that he will veto to prevent the US from joining, making it impossible for Washington to participate in two major Indo-Pacific trade deals.

Under the CPTPP, the UK could join other countries that are skeptical of China, such as Japan, Canada, Australia and possibly Mexico, and help the US eventually join, Magnus says.

Trading Partners — Directions of China's Bilateral Trade

«The vote [to initiate negotiations] must be unanimous,» he adds. “Therefore, you will not be able to overcome the first hurdle without this. As things stand now… China’s statement will never be heard.”

Foreign policy error

The US was one of the original founding countries of the CPTPP (then known as TPP) under former President Barack Obama before Donald Trump pulled out of the deal, calling it a «potential disaster.» for Americans.

Many in Washington now see this as a foreign policy mistake, says Packard of the Cato Institute.

«It hurt US prestige and hurt us economically and geopolitically.» he says.

“This was a US initiative and the idea was to create this trade bloc to help divert trade away from China and strengthen supply chains with longtime allies.

«The withdrawal, I think, was a symbol that the United States had withdrawn from its post-war leadership.»

Trump's decision, however, was based on very real opposition to trade deals by American voters , with many believing that foreign countries had taken advantage of the US in the past.

Many people remember how, after China's accession to the World Trade Organization and the Nafta Free Trade Agreement with Mexico, jobs and manufacturing went abroad.

Ironically, the Obama administration wanted to address these issues with the high standards of the CPTPP, but by the end even Hillary Clinton opposed the pact when she campaigned for the presidency.

That leaves a tough spot for Joe Biden, who has instead made it a priority to improve trade ties with 12 Asian countries through his own «Indo-Pacific Economic Scheme» that doesn't fit with a trade deal but aims to remove barriers over time. .

Patrick Cronin, former US government official and Asia-Pacific Chair at the Hudson Institute of Washington, hopes IPEF will herald America's reunification with CPTPP and believes the UK can play a key role. in drawing Washington into their ranks.

“The administration considers this [UK accession] extremely important, the region as a whole welcomes it. And they also see it as a possible way to facilitate the return of the United States.» he says.

“It must be inevitable. But it's not because trade is extremely difficult in US politics.

“Americans feel victimized by this global trading system that we helped create. The reality is that the World Trade Organization has been a very successful enterprise. This has given us greater soft power and hard power appeal as an economic power trading partner.”

But with the WTO stagnating and China looking to fill the void, Washington is once again preparing for battle. ideas.

“We no longer talked in general terms about how to convince others that our vision of free and fair trade is the right way,” adds Cronin.

“But now China is sort of forcing this issue. What is it about China's approach to trade that we don't accept? And what positive vision do we want to offer to everyone, including China, if it is ready to abide by these rules?

“[Joining] CPTPP is the most tangible trade act that could allow us to restore our optimistic trade vision. And a win-win situation is not one that is «win-win» on China's terms, by which they mean they win twice.

“There is no closer or more reliable partner for the United States than the UK, so if all goes well, this could show a path the United States could also join.”

Regarding Taiwan, Magnus and Packard believe the most likely outcome is that the island country and China will be admitted to the CPTPP together or not be admitted at all, as was the case with the WTO.

This will allow member countries to avoid difficult confrontations over admission alone one of them.

«If you close the door on China, should you close the door on Taiwan as well?» Magnus asks.

“There is a very complex policy involved in how all of these collaborative applications will be managed.

“The safest thing to do for countries is to throw it all into the long grass and hope it will be like Turkey joining the EU – no one has ever said no. , but that will never happen.”

Potential for growth

How much will the UK ultimately benefit from CPTPP? The answer is complicated.

Kemi Badenoch, Minister for Business and Trade, compared joining to investment.

«What we're doing is watching the future,» she told BBC Radio 4's Today program.

«A lot of people say, 'It's only 0.08%' . . Imagine that we are buying a startup.

«It's not about what it does today, it's about growth potential tomorrow.»

«CPTPP countries now have over 500 million people and we're starting a trade relationship with them that will carry over into the future and drive significant growth in the UK.”

She criticized the civil service «analysis», which projected 0.08% growth, as substantially out of date, saying it was based on data from 2014.

UK Current Trade Deficit — Balance of Trade

Trade Expert Singham agrees, arguing that this kind of modeling is «very imprecise science at best» and cannot fully explain scenarios in which countries lower trade barriers over time.

A prime example of this, he says, is the New Zealand-China free trade agreement, which quintupled trade in 11 months rather than 11 years as expected.

“In the 1960s you could have agreements to lower tariffs because the tariffs were very high,” he says.

“Now it’s all about border barriers and distortion measures” such as burdensome licensing requirements, weak IP protection or biased government procurement “and it’s very difficult.” measure».

Another less discussed but important factor, which is also difficult to model, is how many UK companies will actually take advantage of their new trade freedoms.

Less than 10% of UK businesses currently export goods and services overseas, a figure that the government has been trying to increase for decades.

Among those who have recently moved east is Octopus Energy, which has established a fast-growing retail business in Japan and a new regional headquarters for its investment arm in Singapore.

Octopus joint venture formed with Tokyo Gas, 138- a summer company that hopes to leverage its UK partner's advanced software and experience in the electricity markets to expand its market share.

Japan, a major retail electricity market, is currently undergoing electricity reforms that were implemented in the UK many years ago. Together, Octopus and Tokyo Gas add more than 10,000 customers per month.

Elsewhere, UK companies including BP are hoping to capitalize on Japan’s early offshore wind power deployment, while defense companies including BAE and Rolls are Royce is expected to be part of a joint project with the UK to develop a new fighter.

Greg Jackson, chief executive of Octopus Energy Group, says going to Asia can be daunting, but more UK companies need to take the plunge.

«If you're really ambitious as a company, the UK is a medium-sized country» he says, so if you want to make a difference on the global stage, you need to expand internationally.

“The secret to good growth is great partnerships around the world. Relations with the state are of great importance, especially in sectors such as energy, in which the state is actively involved.

“I think there are parallels to the 1980s when Mrs Thatcher started to revive the British car industry with the help of Japanese companies like Nissan and Toyota.

“Like these partnerships, these are win-win situations that create good jobs and export industries. We can look forward to a new set of opportunities in the Pacific — I wish more UK companies were doing that.»

However, he cautions that firms should open their eyes: to get rich quick, you will have to flounder in more cautious cultures, such as Japan, which at first may seem strikingly different from others.

To create a joint venture, Jackson and his colleagues met almost weekly via Zoom with colleagues from Tokyo. Gas for about a year, building trust.

«You really have to make sure it's not just a business relationship, but a deep relationship,» he adds.

Some problems with CPTPP can still arise.

A disagreement with Canada over hormone-treated beef that arose during the talks was postponed to another day, while green campaigners expressed outrage that deforestation-related palm oil tariffs in Malaysia would be relaxed as a result of the deal. .

But from a broader perspective, joining the UK to the CPTPP looks like a clever strategic move at a time when France, Germany and other EU countries are trying to formulate a coherent strategy for China and the Indo-Pacific region. .

This should be seen in the context of the government's «tilt» towards the Indo-Pacific, along with the 2021 tour of Asia by the aircraft carrier HMS Queen Elizabeth — Britain's most powerful warship — and the signing of the Submarine Agreement with US and Australia,» says British Ambassador Longbottom.

«This is a really important step,» she adds. “We don't tilt anymore, now we're committed. So, tilt is ready.”

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