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Most Favoured Nation: What Does CPTPP Actually Do?
The definitive take.
Welcome to the 89th edition of Most Favoured Nation. This week’s edition is free for all to read. If you want top-quality trade content in your inbox every week, please consider becoming a paid subscriber.
At some time, much later today/early tomorrow morning (depending on where in the world you live), the UK will probably announce its successful accession to CPTPP.
The hot takes are already starting to flow. John Alty, formerly of the Department for International Trade, summed up the various arguments in this amusing tweet:
So let’s start with the basics. CPTPP is a pretty decent free trade agreement between eleven countries, soon to be twelve. As per most free trade agreements, it does more for trade in goods (via tariff reduction/removal) than trade in services. Unlike deeper agreements, such as the EEA, it does not, in practice, do much to combat regulatory barriers to trade, but it does include some provisions relating to how members approach things such as conformity assessment.
So, what does CPTPP do for the UK?
[Note, I obviously have not seen the text of the agreement, so this is all based on my working assumptions as to where the negotiations landed.]
Look, in the first instance, the economic benefit of CPTPP accession will be very small. The government’s modelling suggests that in the long run, CPTPP will result in UK GDP being 0.08% larger than it would have been otherwise (there is a funny story relating to how we know this, and the figure accidentally being published in the climate section of the impact assessment, but for another time).
The reason this figure is low is that the UK already has (or will soon have) bilateral FTAs with all of the members, minus Malaysia and Brunei. And, if we’re being honest, the economy currently driving most of the benefit of the agreement is Japan, and as per the previous sentence, we already have a decent trade agreement with Japan.
However (!), the CPTPP could grow further. And as new countries join, for example China … (joking, see point 2), the economic benefits of the deal will do so also.
This is an interesting one, at least to my mind. We should ignore the people — waves at foreign policy types – who portray CPTPP as *the* China containment strategy, but there are some interesting geopolitical dimensions to consider.
China has applied to join, and it could probably convince/coerce quite a few of the CPTPP members into saying yes. This leaves those members such as Japan who want to say no pretty exposed. The UK joining helps here for two reasons:
First, the UK accession process has been fairly by-the-book. There will be a few derogations from the agreed CPTPP rulebook, but nothing major. This makes it harder for China to point to the UK’s accession as a precedent of flexibility.
Second, and more importantly, once a member, the UK will just say no to China. This provides cover for other members and effectively allows them to hide behind the welcome obstinance of the UK.
This dynamic is under-discussed in the UK, particularly given it is the reason some of the existing members are very keen for the UK to join.
As per point 1, given the UK has already negotiated tariff removal with most of the members, so there isn’t loads to discuss here. But there will be a bit of tariff elimination. As per the press, the Canadians have been pushing for better access for their beef and pork, so the UK will have had to do something there (although I do not expect it to be anything close to the full liberalisation seen under the UK-NZ bilateral FTA, for example).
As discussed last week in MFN, the UK will also need to remove tariffs on imported palm oil to satisfy Malaysia. The impact of this in terms of UK imports is hard to judge, because UK palm oil tariffs are already low. The other side of this is of course that UK exporters will, for the first time, have better access to the Malaysian market, which will continue to grow over time.
Finally, the rules of origin bit. From a goods perspective, the absolute main benefit of CPTPP for UK firms is the diagonal cumulation provisions.
To re-cap: for a product to qualify for the preferential tariffs of a trade agreement, the exporter must demonstrate the product is sufficiently “local”. And every trade agreement has different terms and conditions stipulating what counts as sufficiently local.
For example, a UK free trade agreement might say that for a car to qualify as local 45% of the value of the car must have been created in the UK.
The benefit of CPTPP is that it [broadly] allows for inputs sourced from any of the members to count towards your “is it local” assessment.
So, for example, a car UK car-maker could import a battery from Japan (a CPTPP member), insert the battery into a car, and then include the value of the battery when working out whether the car meets the rules of origin local content threshold (45%) of CPTPP when exporting to Mexico (a CPTPP member).
The practical benefit for UK exporters here is optionality. At the moment, most of the rolled-over post-Brexit free trade agreements (Japan, Mexico, Canada) include provisions allowing for UK exporters to account for EU inputs as local for rules of origin purposes. This means UK producers can continue to make use of pre-existing EU-wide supply chains. UK exporters will still have this option for as long as these provisions exist.
CPTPP will give UK exporters the additional option of sourcing parts and inputs from CPTPP members, which – as above – for something like EVs could be quite useful.
Throughout the accession process, there have been some questions regarding whether the UK is/was fully compliant with CPTPP’s regulatory approach. This was never precisely clear, given CPTPP doesn’t actually set regulations, just includes language setting out preferred approach and the like, but was certainly an issue. The Canadians, for example, have continually raised the UK’s ban on hormone beef as an example of unscientific, CPTPP non-compliant, UK rule-making.
Buuuuuuuuut, to be honest, I’ve never been convinced the members really cared about this stuff too much. Given nearly all of them have free trade agreements with the EU (the source of all of this concern about regulatory incompatibility), the revealed preference is that CPTPP members can live with it so long as the price is right. And that seems to be what has happened. Absent a completely shocking announcement tomorrow, I do not expect the UK to have changed its sanitary and phytosanitary rules to accommodate the concerns of CPTPP members. So no hormone beef.
At the margins, there will be a few interesting things, though. CPTPP includes national treatment obligations for conformity assessment bodies. This will require some tweaks to the UK approach.
For context: Most products are self-certified. A company will make something and certify that it is compliant with the relevant product standards. If something is found to be wrong, the company will get into trouble. However, some products — such as medical devices or heavy machinery – must be certified by an independent conformity assessment body before they can be placed on the market.
At the moment, unless there is a mutual recognition agreement in place (as exists with Canada, the US, Australia and New Zealand for example), the third-party certification of products must be carried out by a conformity assessment body physically located in the UK [or, in practice due to Brexit hangovers, the EU]. CPTPP will change this slightly. Once CPTPP is in force, certification bodies located in other CPTPP members will be able to produce these third-party assessment, subject to these bodies meeting the same establishment requirements as any UK-based certification body.
NOTE: THIS IS NOT THE SAME AS THE UK BEING REQUIRED TO AUTOMATICALLY ACCEPT THE PRODUCT STANDARDS OF OTHER COUNTRIES. Any certification body based in a CPTPP member would still be assessing the product for its compliance with UK standards.
CPTPP includes provisions on investment protection (ISDS). These provisions allow investors located in other CPTPP members to bring claims against governments in the event of direct or indirect expropriation or unfair treatment. In practice, I expect ISDS to be carved out of the agreement with some of the members, for example, New Zealand and Australia (given they did this previously with other members), but it will come into being for Japan and Canada, for example.
There was a question as to whether UK membership of the European Patent Organisation, which bans grace periods for patent applications, is compatible with CPTPP patent oglibations, which mandate the use of grace periods. The answer is on paper, no, it’s not compatible. But I think they have found a way to fudge it.
I assume the UK will have found a way to fudge a carveout for audiovisual services, given it always manages to do this.
I expect there will be something on rules of origin with Malaysia to make it easier to export cars (given there is no separate bilateral allowing for the inclusion of EU-value in the local content assessments).
As ever, do let me know if you have any questions or comments.
Subject to final sign-off in the summer, and the UK then completing the domestic ratification process.