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The UK Joins CPTPP

17 July 2023

Following two years of negotiations, the UK has signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership – or CPTPP for short. The signing follows agreement in principle, which was reached back in March.

Britain will be the first new country to join the trade area since its creation. Members also include Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and Canada. The UK is joining an existing free trade agreement (FTA) rather than negotiating a new one, so here has been relatively narrow scope for changing parts of the agreement to suit  British interests. Nevertheless, the UK’s negotiators have been successful in  agreeing the terms of market access with all signatories. It represents a  significant development in the UK’s post-Brexit trade policy.

Prime Minister Rishi Sunak said: “this deal demonstrates the real economic benefits of our post-Brexit freedoms. As part of CPTPP, the UK is now in a prime position in the global economy to seize opportunities for new jobs, growth and innovation”.

We’ve been assessing what’s in the agreement and what it could mean for UK businesses.

What is CPTPP?

The CPTPP trade area is vast. Spanning the Pacific rim from Malaysia to Chile, CPTPP countries are home to 500 million people, 13% of global GDP (15% with the UK included) 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 65% by 2030.

The trade agreement has already resulted in 95% of goods being traded between members tariff-free. Each member has its own schedule of market access commitments offered to some or all of the other members. CPTPP members also cooperate on regulatory issues but, unlike the EU, this is conducted on an equivalence basis rather than through harmonisation – so each member state often retains their own rules and practices.

One of the biggest issues with providing cross border services can be a lack of long-term legal certainty over the terms of trade. CPTPP aims to provide that certainty to service providers by guaranteeing market access and  improved regulatory transparency. 

The UK government has said membership of CPTPP will “open up unparalleled opportunities for British businesses and consumers”. 

So what’s in the deal?

It will take some time to work through the fine print of the treaty text – but we do now know the principal terms of the UK’s accession.

Goods: CPTPP reduces tariffs on 95% of goods between its members and enables over 99% of UK exports to be eligible for tariff-free trade. The agreement also includes provisions on establishing efficient and transparent customs procedures and contains straightforward rules of origin that allow inputs from any CPTPP member country to qualify as “originating”.

This means that if a business’s supply chain intersects with multiple countries within the trade area, low or zero tariff treatment can be claimed on products sourced from any location across the bloc. So once the deal is in force, 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.

Product regulations: the agreement encourages members to use international  standards and promotes transparency of product regulations, requiring countries to publish draft regulations online prior to implementation. It also includes provisions on the mutual recognition of conformity assessment (including equal treatment of assessment bodies in other territories) and establishes dialogues with regulators across the region, providing a framework for further cooperation over the longer term.

Services: the agreement contains modern rules for trade in services which remove some common market access barriers such as labour market tests and establishment requirements. It also ensures that traders from one member state are treated no less favourably than domestic suppliers or those from other CPTPP countries. The agreement also encourages the recognition of professional qualifications, although it is not directly facilitated by the agreement itself.

CPTPP also contains dedicated annexes for financial services and professional services which help to lock-in legal certainty for firms in these UK priority sectors and establish working groups or committees in which regulatory barriers can be addressed and transparency improved.

Mobility: the agreement includes provisions on the temporary entry of businesspeople to undertake certain activities in-country, removing some of the common obstacles to mobility such as economic needs tests and work visas – and requires countries to put transparent and predictable procedures in place.

Digital & data: CPTPP contains among the most modern rules for digital trade. It prohibits customs duties on electronic transmissions, supports the free flow of cross-border data and prohibits unjustified data localisation measures (although financial services are exempted). It also provides a range of other protections, for instance against the forced disclosure of source codes.

Investment: the investment chapter of CPTPP guarantees protections for investors by providing legal certainty on the non-discriminatory treatment that they will receive relative to domestic investors. It also provides access to a  transparent investor-state dispute settlement mechanism (ISDS) which allows investors to bring claims against governments in the event of discriminatory treatment (however the UK has secured special arrangements in this area).  Outward investment flows from the UK to CPTPP countries totalled £117.3bn in 2021. Investment from CPTPP countries in the UK accounted for at least 9% of UK inward investment in the same year.

Government procurement: the agreement includes commitments that give UK firms the same treatment as domestic suppliers when responding to procurement opportunities in CPTPP countries.

Intellectual property: the agreement establishes regional standards for IP protection and enforcement. CPTPP establishes a different IP regime than is currently in force in the UK, including the extension of trademarks into new areas (but the UK has secured arrangements to effectively exclude itself from some provisions).

Sustainability: there are commitments in the agreement which prohibit the undermining of the labour and environmental standards of each member state. 

There are also a range of other chapters covering diverse topics from sanitary and phytosanitary (SPS) regulations to commitments on competition, state-owned enterprises, transparency and anti-corruption.

The UK’s “side letters”: the UK will be able to derogate from the generic obligations of CPTPP in certain areas via separate agreements, including on intellectual property (where the parties have agreed that the UK is not required to implement certain provisions, for example on grace periods, until there is international harmonisation in this area of patent law). Furthermore, ISDS will be disapplied with Australia and New Zealand. There are also be bespoke goods arrangements with Malaysia, reflecting the fact that CPTPP provides preferential market access for the first time.

CPTPP v. existing trade agreements

Of course, not all of this is new. The UK already has bilateral trade agreements with 9 of the 11 member countries – so is there any extra benefit to the UK joining?

The UK’s membership of CPTPP will help to cement existing strong economic relationships in the region by providing certainty over the long term, locking in high standards with major trading economies and underpinning important investment relationships. In many areas, CPTPP’s provisions are generally comparable to the UK’s bilateral FTAs. However, in some cases CPTPP goes further.

The UK generally enjoys low or zero-tariff trade with most CPTPP members already, so for the majority of goods, there will be no tariff changes as a result of joining the trade area. However, the CPTPP tariff schedule does not necessarily align with the UK’s bilateral FTAs, so some goods will see further duty reductions. Under CPTPP, tariffs are also eliminated faster on some sensitive goods, such as cars, beverages and agricultural products – and the agreement has the effect of increasing quotas applied to certain products. Some wins for the UK in the agreement include enhanced market access for dairy products in Canada, Chile, Mexico and Japan; medicines and engines in Vietnam; and the removal of Malaysia’s tariffs on exported whisky and chocolate.

Traders can choose whether to use the rates of duty specified under the bilateral FTA or under CPTPP – whichever offers the most favourable terms to them. Of course this cuts both ways, so imports of specific goods may also become more competitive than is currently the case under bilateral FTAs, including imports of fruit juices from Chile and Peru and honey and  chocolate from Mexico.

The rules of origin in CPTPP also offer a distinct advantage in permitting regional cumulation compared to the bilateral agreements in isolation. Admittedly, the UK does not currently import large volumes of inputs from across CPTPP to re-export to CPTPP countries due to the physical distances, but the measures could prove beneficial for some firms in specific sectors (such as vehicle manufacturing and green tech) and over the course of time could result in diversified supply chains that may not be viable without CPTPP membership Moreover, businesses sometimes do not fully utilise the tariff-liberalising measures within traditional trade agreements 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’s straightforward and flexible rules could well tip the balance and we could see greater utilisation of preferential duty rates as a result. There are also rules of origin in the UK’s bilateral FTAs of course, so traders have optionality here.

Perhaps the most significant trade liberalising opportunity is with Malaysia -  the only country where CPTPP is in force and with which the UK does not currently have an existing free trade agreement. While Malaysia is only the UK’s 34th largest export destination, it is a growing market and businesses may see some product-specific tariff and non-tariff barriers reducing as a direct result of CPTPP accession. In particular, tariffs of around 80% will be eliminated on UK exports of whisky within 10 years and up to 30% on exports of cars within 7 years of entry into force. The agreement also sees specific rules of origin established for trade in vehicles.

Most trade barriers affecting services suppliers are of a regulatory nature, and CPTPP establishes dedicated fora through which parties can address regulatory issues over the longer term.  It also guarantees UK firms that they  will not be required to establish a local office to supply a service and will not be discriminated against in favour of local providers.

There is also a dedicated financial services chapter which guarantees non-discrimination of service suppliers across CPTPP territories. Financial services represented £10.9 billion of UK services exports to CPTPP countries in 2021, so the provisions of this chapter will be important in underpinning export growth in this area.

Services providers will also benefit from greater government procurement opportunities; for example, UK hospitality firms will be guaranteed non-discriminatory treatment in Canada under CPTPP where it is not provided under the bilateral FTA. The UK will also gain access to Malaysia’s government procurement market for the first time, representing potential opportunities in areas like construction and business services.

In some specific cases, the agreement also gives UK nationals better rights to undertake business travel to other CPTPP countries, including as contractual or self-employed service suppliers or as intra-corporate transferees, extending permitted lengths of stay or allowing transferees to be accompanied by spouses (but these terms vary in each market). For instance, UK professionals will now be able to stay in Vietnam and Peru for up to 6 months, double the length of time permitted under the bilateral FTAs. Stays of up to 12 months will also be available in Malaysia.

Compared to other trade agreements, CPTPP also has among the most modern rules for digital trade across all sectors of the economy. Of the UK’s bilateral FTAs, only the recent agreement with Japan is comparable across the board. The digital chapter will also have the effect of increasing cooperation in key areas like cybersecurity and provide stronger support for paperless trading.

What's the economic impact?

Despite the various advantages CPTPP brings, most forecasts have suggested the macroeconomic gains from CPTPP membership will be small. The fine print of the UK government’s analysis shows the deal is only set to increase GDP by 0.08% over the next 15 years.

However, the benefit to niche market sectors could be significant, and the positive growth trend is expected to continue well into the future, given that the Asia-Pacific region is forecasted to comprise an ever-greater share of the global economy.

The economic benefit of CPTPP increases as the commitments within the agreement are developed further and the agreement itself grows to include new members. So far, China, Taiwan, Ecuador, Costa Rica and Uruguay have applied to join. More recently Ukraine has joined this list. South Korea, Thailand and the Philippines have all also expressed an interest (and are already signatories to RCEP, the other regional trade agreement in Asia).

More broadly, membership of CPTPP is an opportunity to work with likeminded partners to support the establishment of modern, precedent-setting trade rules - especially as the global economy shifts eastwards and at a time when the rules-based international order is coming under pressure. Being the first new country to join the trade area gives the UK a stronger hand in influencing the trading rules of the future as the agreement is developed. Indeed, the UK is joining in time to participate in CPTPP’s first general review, taking place this year. This should allow the UK an opportunity to contribute to the development of the agreement.

The agreement could also potentially act as an economic framework for engagement with China; however, China’s accession would need to be supported by the existing members (including the UK) unanimously. Some commentators have suggested that CPTPP could increasingly act as a counterbalance to China’s influential role in regional supply chains.

CPTPP also represents a prominent component of the UK’s strategy to enhance its influence in the Indo-Pacific, as was set out by the government in the Integrated Review in 2021 and the Integrated Review Refresh earlier this year.

What should I be doing now?

The impact of CPTPP on business will vary depending on market sector. Government modelling found that the economic gains of accession are broadly distributed, but the automotive, beverages and tobacco sectors saw the greatest potential gains. 

Traders may benefit from additional tariff reductions, new quota sizes and  more flexible rules of origin which underpin more competitive trade in goods. UK manufacturers may be able to use a more diverse range of inputs when exporting to CPTPP member states, while continuing to qualify for lower tariffs. Businesses in affected sectors should also be mindful of the  increased levels of competition they could encounter in the domestic market through potentially cheaper imports.

Businesses should be undertaking a tariff analysis to assess exactly how the exposure of their products could be affected. Business trading in goods with Malaysia potentially stand to benefit more significantly, and those with intensive import or export interests across multiple CPTPP territories may benefit from a more holistic assessment of operating models in light of the  new agreement.

All types of businesses could find that CPTPP membership helps to create a more secure and positive investment environment in the UK and for outward investment to other member countries. Over the longer term,  businesses could also benefit from the guarantees in CPTPP on digital trade and the free flow of data, as more protectionist measures are introduced in other parts of the world.

Now that the treaty text has been published, it will be examined by the UK Trade and Agriculture Commission before being laid before Parliament for scrutiny. Enabling  legislation will need to be passed and ratification will need to take place in the UK and in CPTPP member countries. However, not all parties need to ratify the agreement in order for it to enter into force; rather, after 15 months if the UK and six of the parties have ratified the agreement, it will enter into force with those parties. There may therefore be a staged implementation as all countries complete their respective ratification  processes.

The agreement is not anticipated to enter into force until late 2024 at the earliest, but businesses will need this time to implement change if they see a benefit in adjusting their structure, supply chains, sourcing, or sales strategy.

For help in understanding more about this agreement or in assessing your trade and investment priorities, Deloitte’s specialists are on hand.

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