The United Kingdom left the European Union with the explicit aim of having its own trade policy and agreements. Britain is in business now.
The biggest challenge will be handling the domestic politics of farming, procurement, environment and devolution to make London’s emerging trade policy strategy bear fruit.
London aims to have 80% of its trade covered by FTAs within the next three years.
In parallel to what are in fact trade ‘de-liberalisation’ negotiations with the European Union, and to the related renegotiation of close to forty ‘continuity’ trade agreements inherited from its time as member of the EU, the UK has embarked on bilateral free trade agreement negotiations with the United States, Japan, Australia and New Zealand.
Why these four countries?
“We want the UK to be linked to the Pacific region. We want to diversify our trade away from solely trading with our traditional partners,” said international trade secretary Elizabeth Truss.
The ultimate prize is joining the Comprehensive and Progressive Transpacific Partnership, the eleven-country trade pact in the Asia Pacific that includes Japan, Australia, New Zealand, but also Canada, Mexico, Peru, Chile, Vietnam, Brunei, Singapore and Malaysia.
Seeking a meaningful market
Liz Truss held a meeting with London-based ambassadors to the UK from these countries last Friday. “We are engaging with CPTPP members to prepare for UK accession to this modern, high-standards, free trade agreement that covers 13% of global GDP,” Britain’s trade chief tweeted.
“We see CPTPP as a very high-standard agreement with very ambitious provisions in areas such as digital, services and data. And also we see it is a free trade area that has a significant size in itself,” said Truss.
Last and not least: “There is no ECJ and there is no harmonisation of domestic regulation and there is no seizing of our sovereign power,” said Truss during a webinar hosted by the Policy Exchange think tank early July.
“Together with having an arrangement with the United States that would cover a significant amount of the UK’s trade alongside getting a good deal with the European Union,” explained the UK’s chief trade negotiator.
In total in 2019, CPTPP absorbed about £ 29 bn of the UK’s goods exports, with Japan taking almost one quarter of that (£ 7.3 bn) and Australia one sixth (£ 4.7 bn). New Zealand absorbed an a very small amount of UK goods exports (£ 0.9 bn).
The United States absorbed £ 61 bn UK goods exports last year. CPTPP and the US would represent an export market of ca. £90 bn for British goods, a bit more than half the value of goods exports to the EU (£ 170 bn in 2019).
In 2019, UK exports of services to Australia amounted to £ 6.9 bn and to £ 0.8 bn to New Zealand. In 2018, the UK exported £5.6 bn worth of financial and business services (the two main UK services exports apart from transport and tourism) to Japan. In comparison UK services to the United States were £ 43.4 bn in 2018 and to the EU £ 72.6 bn.
While its market size is meaningful, joining the CPTPP and concluding an agreement with the US will – by far – not compensate for the rise of trade friction with the EU after 2020.
And the process is expected to last several years.
A move welcomed across the board
Nonetheless, the move is welcomed across the political spectrum in Britain and among outside observers.
Peter Mandelson, a former senior cabinet member under Labour prime ministers Tony Blair and Gordon Brown who also served as EU trade commissioner said: “I think that the UK aligning itself with such a Pacific Rim agenda is a good thing.”
Mandelson thinks that there is a “strategic medium term gain” for Britain to do so. Most importantly, British accession to the Pacific trade pact “might be a helpful way in drawing the United States back in”.
Stephen Harper, Canada’s former prime minister who oversaw the conclusion of the TPP, the precursor to the CPTPP which included the United States before a freshly elected Trump administration pulled out of it in 2017, also thinks the UK joining has major global advantages.
“There would be a lot of interest in seeing the UK join this particular deal, which is an important part of a new global rules-based trade order, one that respects national sovereignty, and is also outside of Chinese influence,” said Harper.
“This would be turning an originally regional pact into the beginning of an alternative global order. Britain is not only a large economy, but it is not an Asia-Pacific economy. So there would be a qualitative change in the deal,” Harper continued.
This matters even more as the World Trade Organization, the fulcrum of multilateral trade rules, is currently mired in crisis.
Early stages
There still are many gaps in the UK’s CPTPP strategy.
“We look forward to facilitating your discussions with other CPTPP partners,” said Chan Chun Sing, Singapore’s minister for trade and industry in early July.
“We should be realistic in the pace with which we deal with this. If doing an FTA with eleven countries is difficult, than the UK might consider having the building blocks with other Asia Pacific countries which will make it easier to build momentum, ” the Singaporean official added.
Discussions with CPTPP members are in early stages. “We have in principle agreement for support from the eleven countries. We are now in the stage of working that through in more detail,” said Britain’s Liz Truss. Following preliminary discussions, a more structured process would ensue followed by a formal UK application to join.
Meanwhile, formal bilateral negotiations are in progress.
The negotiation with Japan was not framed as a ‘continuity’ negotiation by the British authorities. A continuity deal would try to replicate as much as possible existing terms concluded under the EU Japan Economic Partnership Agreement – a wide-ranging trade agreement in force since February 2019.
JEEPA continues to apply to the UK until the end of the exiting status-quo transition period with the EU that expires at the end of this year. Instead, at the insistence of Japan, this is a re-negotiation, with the EU deal as a reference point.
Japan insisted the deal must be finalised by the end of July 2020 in order to be ready for ratification in the Diet in Tokyo and to come into force on 1 January next year. This week, however, it has become clear that the deadline is unrealistic – it was pushed back another few weeks. The talks are stumbling on agriculture.
Early hurdles
The UK is seeking better terms than it has now in JEEPA for financial services. The talks are also stumbling on agriculture – the UK is understood to seek better deals for its beef and cheese exports. Geographical Indications – food names tied to a location – are cited on top of the list of intellectual property priorities set out in Britain’s negotiating objectives with Japan.
Japan balks at any notion of making an extra ‘effort’ on agriculture. Japan for its part wants better terms for its investors and temporary movement of persons. It wants a better deal than obtained from the EU on digital trade and free flow of data. The UK government is agreed in principle on this – but this makes the negotiations more complex to handle.
The ‘Mode 4’ issue on visas for employees – and their staff – is sensitive for Britain. “ In terms of visa access and temporary entry, those tend to have to be negotiated separately, but it’s certainly something we are looking at as part of a number of our trade agreements,” said Liz Truss.
Canada is silent on talks with the UK. And the UK is silent about Canada, the other major CPTPP partner (£ 5.7 bn UK goods exports in 2019). The terms of CETA, the flagship trade agreement between the EU and Canada will expire at the end of 2020 and no new negotiations have been announced to date.
Ottawa wants to know the terms of Britain’s future trading relationship with the European Union before agreeing any final arrangements with London. And those terms are still not settled.
The situation is also unclear with Singapore, Vietnam, Mexico and Chile, key CPTPP members with which the EU has signed trade agreements – though a safety-net ‘no-deal’ arrangement was agreed with Chile in 2019.
In a policy briefing released by the government in June, we read: “CPTPP membership will complement the bilateral FTAs we hold with CPTPP members, including (….) existing EU agreements with Canada, Chile, Mexico, Peru, Singapore and Vietnam.”
Adjusting ambitions and expectations
The final question is the issue of adjusting ambitions and expectations for an agreement.
The UK appears to be making difficult demands on some of its FTA partners. But it is not clear what it will be ready to “pay” in return in terms of offering potentially politically perilous concessions to them for the sake of agreeing a deal.
It is also not clear it is always acting according to well-recognised hard-nosed economic interests.
For example, the negotiating objectives for agreements with Japan, Australia and New Zealand in the area of public procurement – do not appear to be in line with what the EU has achieved with Japan. Nor does it appear to be in line with what the EU is currently demanding – and likely to obtain – with the countries ‘Down Under’, with which Brussels is negotiating free trade agreements in parallel: market access at municipal level.
EU procurement policy has greatly benefited British business and London has traditionally been a strong supporter of it as EU member. Instead, the UK government’s stated objectives post Brexit in that area remain very general and merely indicate London wants to build on existing commitments in the WTO. Contrary to other sectoral or policy areas where the UK spelt out ambitions – such as services market access – the benchmark in procurement is not EU market access.
Peter Mandelson appears to have noted this. “Our whole approach in Britain needs to focus as much on the investment strategy of UK corporates as much as the trade policy strategy of the UK government. This needs a consistent regulatory diplomacy to improve local regulatory and investment conditions and to improve the capacity and sophistication of local governments, courts, procurement markets and capital markets”.
As to talks with the United States: Britain has already given up on sealing a rapid deal, let alone an overtly ‘ambitious’ one.
For instance, the UK has not included the word “geographical indications” in its official negotiating objectives with the United States. Instead it the text says the UK wants to: “maintain effective protection of food and drink names in a way that reflects their geographical origins, getting the balance right for consumers to ensure they are not confused or misled about the origins of goods, and have access to a competitive range of products”.
The UK also appears not to be asking for any commitments related to the Paris Agreement on climate. The text includes no reference to improving market access in procurement or maritime services, nor does it name specific areas in the agri-food or textile and fashion sector where gains for the UK from a deal with the US would be significant. Language on technical standards spelt out in the UK’s official negotiation agenda – a major issue for industry across the Atlantic – is generic and refers to “international standards”. But the US and European – including British – interpretation of what is an ‘international’ technical standards is very different.
Handling devolution
The ultimate test for British trade strategy going forward is domestic.
The UK has turned ‘defensive’ on public procurement in its trade strategy. It has proven to be hesitant to take on strong commitments in this area with the EU, to the surprise of many, including in Britain. The domestic debate on procurement has fixated on ringfencing the National Health Service.
Procurement issues are also a ‘devolved’ matter in the hands of Scotland, Wales and Northern Ireland. Constitutional tussles are expected in the coming years over the respective powers of trade policy and their possible ‘encroachments’ on the devolved nations, the mightiest of which is a Scotland aggrieved by leaving the EU flirting with the idea of holding a new independence referendum.
There is also the issue of climate change. For its negotiations with Japan, Australia and New Zealand, the UK wants to include provisions on compliance with the UNFCC framework on carbon emissions and on the Paris Agreement on climate change. These two agreements do not appear in the CPTPP – although they are cited in the EU deal with Japan and will ultimately make it into any future Oceanian deal wit the EU.
Negotiations with Australia and New Zealand will ultimately be decided on the basis of how much extra market access Britain is ready to grant to – mainly but not only – meat and dairy producers from these countries. Any market adjustment costs related to such concessions in the UK would disproportionately fall on the devolved regions. The situation is comparable with the United States.
Scotland has threatened this week to go to court over new plans by the government to avoid domestic market barriers. Current plans would involve the devolved nations accepting terms of international agreements that encroach on their powers.
This is the stuff of difficult domestic politics on trade that London and the Tory government in Westminster – devolution is only twenty years old and was negotiated by a Labour government – has yet to learn to grapple with.
Excellent analysis Iana! Best, Pascal