How Britain left Brexit behind with a new Pacific trade deal – The Telegraph

Credit: Original article can be found here

In her garden at the British embassy in Tokyo, Julia Longbottom poses for a photograph as cherry blossoms bloom in the background.

The UK’s ambassador has plenty to be smiling about, not least the current flowering of relations with Japan and other key allies in this part of the world.

It is just hours after Kemi Badenoch, the Business and Trade Secretary, concluded the negotiations for Britain to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a large new trade bloc which will soon rival the European Union in size. 

The move has been hailed by foreign policy experts as a genuine diplomatic win, firming up another pillar of the Government’s “tilt” towards the Indo-Pacific region. Brexiteers, meanwhile, see it as a first step towards the global Britain they have long dreamed of.

“The UK is the first country to accede after the original partnership was established,” notes Longbottom, “so it’s a trailblazing moment, really.”

Back home, however, the response has not been quite as warm. 

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

Illustratively, the first article published by the BBC about the deal was simply headlined: “UK-Asia trade deal to boost UK economy by 0.08pc”.

But experts say that to focus on this prediction alone – which is questionable anyway – somewhat misses the point.

The real gains for the UK will be geopolitical, says Longbottom, with CPTPP giving London a seat at the table in a region that is to become the world’s centre of gravity, both economically and diplomatically.

China’s rise – and how other countries should respond – is the issue dominating everything here, while Russia’s attack on Ukraine has upended assumptions about conflict elsewhere – including Taiwan. 

That has put Japan, Australia and others on high alert, spurring support for Britain’s growing role in the Indo-Pacific, not just in Westminster but also Tokyo and Canberra, where the UK is seen as an important ally. 

Japan, in particular, was a key advocate of Britain’s accession to the CPTPP, helping to smooth disagreements during negotiations. Tokyo has already struck a series of defence pacts with the UK as well.

“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, downbeat?,” says Longbottom.

“But it’s worth reflecting on how the UK is seen from outside. 

“The vision set out for the role of the UK post-Brexit – the way we will use our foreign policy, our trading agreements, our defence and security capabilities to be a force for good with like-minded partners – was music to our Japanese friends’ ears. 

“They see and expect us to be playing a proactive role on the international stage. We are a partner that is valued.”

Huge economic output

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

The region contains half the world’s population – including 1.7m British expats – as well as shipping lanes that carry 60pc of global trade.

Since 2000, it has accounted for 53pc of global GDP growth, according to data from the International Monetary Fund, and is expected to generate 54pc up to 2050 as countries there become wealthier.

As much as half of that expansion is expected to come from China, with India forecast to play an increasingly important role too.

In 2021, the 11 CPTPP countries boasted an economic output of $11.7 trillion, according to the World Bank.

With the UK included, the figure would have been $14.8 trillion, or about 15pc of global GDP. That compares to the EU 27’s output of $17.2 trillion, or 18pc of global GDP.

And experts say that there is also great promise in what the CPTPP is trying to achieve. 

Like other free trade blocs, countries within the CPTPP face no tariffs on 99pc of goods traded, covering everything from cars and machinery to dairy products and chocolate. 

But they are also committed to opening up their economies, through recognising each other’s regulations and not putting in place barriers that discriminate against foreign companies.

Shanker Singham, a trade expert and former adviser to Liz Truss when she was international trade secretary, believes this is better than the EU model – where the whole bloc passes shared laws – because it allows countries to experiment and find the best regulations to achieve their goals. 

“The CPTPP’s organising philosophy, if you will, is that countries can have their own regulations, provided they’re not distorting and damaging to trade,” he says. 

“You can achieve regulatory goals in a number of different ways and as long as those goals are the same, then we should be mutually recognising each other’s systems. 

“That’s a very, very different approach to the harmonisation model the UK has been in for 40-plus years. And I think it’s incredibly important, because it is more likely to craft a system that will liberate into the economy greater levels of GDP per capita.”

Kemi Badenoch, the Business and Trade Secretary, likened the UK’s CPTPP deal to an investment

Credit: Leon Neal/Getty Images

The CPTPP agreement also contains modern chapters on services, intellectual property and digital commerce, which are key strengths for the UK, says Paul Baker, an economics and trade consultant based in Mauritius. 

For example, all signatories must agree not to levy border taxes on digital services sold from one country to another. Forcing businesses to store country data locally is also banned.

“The Indo-Pacific is a very dynamic, fast growing region,” Baker adds. “And so it could go in any direction. Potentially, we can tap into that growth.

“We are quite far away, so the distance is a problem. But the other thing with these estimates is that a lot of it is in the trading goods part, which is easier to measure.

“It’s much harder to measure the benefits and services – and that’s where the UK could reap more benefits.”

For Britain, existing bilateral trade deals with nine of the member countries – Canada, Peru, Chile, New Zealand, Australia, Brunei, Singapore, Vietnam and Japan – mean the only immediate trading gains from accession will come from Mexico and Malaysia, which have a combined $1.6 trillion GDP. 

But other countries are sitting in the waiting room, Baker points out. Current applicants include Ecuador, Costa Rica, Uruguay, China and Taiwan, with South Korea, Thailand, the Philippines and – further down the road – the United States also seen as future candidates.

If all those countries, bar the US, China and Taiwan, were to join, CPTPP’s share of global output would rise to 18pc. 

And with the US, the figure would leap to 43pc – dwarfing the EU in size. At the stroke of a pen, it would also finally achieve tariff-tree trade between Britain and America, following years of fruitless bilateral talks. 

“These other countries, they’re all good opportunities,” Baker adds, “and that could obviously lead to a larger marketplace. If the US joined, that would be a true game-changer for the UK.”

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

“It shows that democracies are willing to stand up on commercial practices against China, where the United States shares a lot of the same concerns as the UK.”

The attractiveness of the CPTPP has even prompted some in Europe to call for the EU itself to join.

Cecilia Malmström, the Swedish former EU trade commissioner and now an economist at the Peterson Institute for International Economics, says the bloc should stop “navel-gazing” and join the Indo-Pacific club to “strengthen global trading rules”.

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

Joining CPTPP would add 0.3pc to the EU’s GDP over the “medium to long term” but represents “an opportunity matched by a real risk of marginalisation if Europeans do not seize it”, the council said. 

Fresh urgency

With tensions rising in the Indo-Pacific, however, foreign policy experts believe that the biggest motivations for Britain joining CPTPP are geopolitical. 

Concerns were already growing as China, under president Xi Jinping, became more assertive on the world stage. But they have gained fresh urgency following Russia’s invasion of Ukraine. 

Officials in Japan and Australia fear that failing to meet Russian aggression with a tough and united response will embolden China to seize Taiwan – the self-governing island that Beijing claims for itself – by force. 

Tokyo, which counts China, Russia and a divided Korea as its closest neighbours, has been particularly rattled, given its proximity. It has made prime minister Fumio Kishida’s administration keener than ever to hug allies such as Britain close.

Japan’s Prime Minster Fumio Kishida is keen to strengthen relations with the UK

Credit: Simon Dawson / No10 Downing Street

“The Ukraine crisis has been a very sobering moment,” says Longbottom, the UK ambassador.

“Everybody’s very conscious that what’s happening in Ukraine and what Russia’s doing is being watched carefully by everybody around the world.

“Japan feels very connected to Ukraine, and it’s had a galvanising effect… partly because public opinion has said, ‘If that can happen in Ukraine to ordinary people, what could happen to us or to other countries in this region?’”

Meanwhile, Beijing is attempting to extend its already powerful sphere of influence. 

A huge expansion of China’s military has been accompanied by vast territorial claims over most of the South China sea, contested by Brunei, Malaysia, the Philippines, Taiwan and Vietnam. China also has territorial disputes over islands with Japan.

President Xi has refused to criticise Russia’s invasion of Ukraine, instead declaring a new era of close relations “without limits” with the Kremlin, and helping to prop up Vladimir Putin’s regime by purchasing discounted oil and gas that is being shunned by the West.

At the same time, China is seeking to extend its influence through the “Belt and Road” initiative, lending money to developing countries for infrastructure projects, and by gathering Indo-Pacific countries into a trading bloc that it can dominate. Beijing orchestrated the creation of the Regional Comprehensive Economic Partnership (RCEP) in 2020, a group that accounts for 30pc of global GDP and includes several CPTPP members, among them Japan and Australia.

Unlike CPTPP, the RCEP agreement contains no 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 grow, many Western countries are seeking to diversify supply chains, particularly in markets such as rare earths and microchips. Being part of CPTPP will give Britain a seat at the table as standards are devised in the region and new supply chains built up, according to George Magnus, an economist and research associate at Oxford University’s China Centre.

“We are joining CPTPP at potentially quite a fortuitous moment from the point of view of geopolitics,” he says.

“We will be able to mix and match with 11 other significant countries and to guide British companies, with a front row seat, about where the opportunities to do business in the future might be.”

Britain will also have a say in another thorny issue: whether China and Taiwan should be granted CPTPP membership. 

Diplomats in some countries fear that Beijing will seek to bend the CPTPP to its own ends, watering down provisions on state aid. There are also concerns it would wield a veto to stop the US from joining – locking Washington out of the two major trade agreements covering the Indo-Pacific. 

Inside the CPTPP, the UK can join other countries that are sceptical of China – such as Japan, Canada, Australia and potentially Mexico – and help the US to eventually join instead, Magnus says. 

“The vote [to begin negotiations] has to be unanimous,” he adds. “So you cannot get past the first hurdle without that. As things stand… China’s application would never get heard.” 

Foreign policy blunder

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, branding it a “potential disaster” for Americans.

That is now seen by many in Washington as a foreign policy blunder, says the Cato Institute’s Packard.

“It did damage to US prestige, and hurt us economically and geopolitically,” he says.

“It was an American-led initiative and the idea was to create this trade bloc, to help divert trade away from China and strengthen supply chains with long standing allies. 

“Pulling out, I think, was symbolic of the United States walking away from its post-war leadership position.”

However, Trump’s decision to withdraw was based on very real opposition from American voters to trade deals, with many perceiving foreign countries as having taken advantage of the US in the past. 

Swathes of the public recall how, following China’s admission to the World Trade Organisation and the Nafta free trade deal with Mexico, jobs and manufacturing went abroad. 

Ironically, the Obama administration wanted to address these concerns through the high standards in CPTPP – but by the end even Hilary Clinton had come out against the pact as she campaigned to be president. 

It leaves a tricky situation for Joe Biden, who has instead prioritised improving trading ties with 12 Asian countries through his own “Indo-Pacific Economic Framework”, which falls short of a trade deal but aims to bring down barriers over time. 

Patrick Cronin, a former US government official and Asia-Pacific chair at the Washington-based Hudson Institute, hopes the IPEF will prove to be a precursor to American rejoining CPTPP – and believes Britain can play a key role in bringing Washington into the fold.

“The administration sees it [the UK joining] as extremely significant, the region generally welcomes it. And they also see it as a possible way to facilitate getting the United States back,” he says.

“That should be inevitable. But it’s not because trade is extremely complicated in US politics.

“Americans feel like they’ve been victimised by this global trading system that we helped create. The reality is that the World Trade Organisation was a very successful enterprise. It gave us great soft power and hard power attraction as an economic power trading partner.”

But with the WTO seen to be stagnating, and China seeking to fill the void, Washington is gearing up again for a battle of ideas.

“We were no longer talking broadly about how to convince others that our vision of free trade and fair trade was the right way to go,” Cronin adds. 

“But now China is sort of forcing the issue. What is it about China’s approach to trade that we do not accept? And what is the positive vision we want to project for everybody, China included if it’s willing to abide by those rules? 

“[Joining] CPTPP is the most tangible trade act that could allow for us to regain our optimistic vision of trade. And a win-win situation – not one that is ‘win-win’ on China’s terms, by which they mean they win twice.

“There’s no closer or more trusted partner to the United States than the UK, so if things go well it can show a path for how the United States might then join as well.”

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

This would allow member nations to avoid difficult confrontations over just one of them being admitted. 

“If you close the door on China, do you have to do that to Taiwan as well?,” says Magnus.

“There’s very complicated politics involved about how all of these joint applications are going to be managed. 

“The safest thing to do for countries is to kick the whole thing into the long grass and hope that it would be like Turkey’s accession to the EU – nobody’s ever said no, but it’s never going to happen.”

Potential for growth

So how much will Britain ultimately benefit from CPTPP? The answer is complicated.

Kemi Badenoch, the Business and Trade Secretary, has likened accession to an investment.

“What we are doing is looking at what the future is going to be like,” she told BBC Radio 4’s Today programme.

“You have lots of people talking about, ‘This is only 0.08 per cent’. Think of it like us buying a start-up. 

“It’s not about what it’s doing today, but about the potential for growth tomorrow.

“The CPTPP countries [have] over 500 million people at the moment and we’re starting a trading relationship with them that’s going to go into the future and deliver a lot of growth to the UK.”

She has rubbished the “scoping exercise” by the Civil Service that predicted 0.08pc growth as essentially out of date, saying it was based on data from 2014.

Trade expert Singham agrees, arguing that modelling of this kind is “a very inexact science at best” that cannot fully account for scenarios where countries lower trade barriers over time.

A free trade deal between New Zealand and China is a prime example of this, he says, having increased trade fivefold within 11 months rather than the projected 11 years.

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

“Now, it’s all about behind the border barriers, and distortion measures” – such as onerous licensing requirements, lax IP protection or biassed government procurement – “and that’s very difficult to measure.”

Another less-discussed but important factor, an one equally difficult to model, is how much British companies will actually take advantage of their new trade freedoms.

Less than 10pc of UK businesses currently export goods and services abroad, a figure the Government has been trying to push higher for decades.

Among those to have recently gone east is Octopus Energy, which has set up a fast-growing retail business in Japan and a new regional HQ for its investment division in Singapore.

Octopus’ joint venture is with Tokyo Gas, a 138-year-old company that is hoping to tap into its British partner’s cutting-edge software and expertise in electricity markets to expand its market share. 

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

Elsewhere, British businesses including BP are hoping to cash in on Japan’s imminent rollout of offshore wind power, while defence companies including BAE and Rolls-Royce are expected to be part of a joint project with the UK to develop a new fighter jet. 

Greg Jackson, chief executive of Octopus Energy Group, says expanding into Asia can be daunting but that more British firms should take the plunge.

“If you’re really ambitious as a company, the UK is only a mid-sized nation,” he says, so if you want to make a difference on a global stage, you have to expand internationally.

“The secret to good growth is great partnerships around the world. Particularly in sectors like energy, which has huge government involvement, government relations really matter.

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

“Just like those partnerships, these are win-win situations that create good employment and export industries. We can look forward to a new set of opportunities across the Pacific region – I would love to see more British companies doing this.”

He cautions, however, that firms should go in with eyes open: Those looking to get rich quick will flounder in more cautious cultures such as Japan, which can seem startlingly different at first.

To establish his joint venture, Jackson and his colleagues engaged in almost weekly meetings over Zoom with colleagues at Tokyo Gas for about a year, building up trust.

“You really have got to make sure it’s not just transactional, but a deep relationship,” he adds.

Some issues with CPTPP could still rear their heads. 

A disagreement with Canada about hormone-treated beef that came up in negotiations has been put off for another day, while green campaigners have expressed outrage that through the deal, tariffs on Malaysian palm oils – linked to deforestation – will be relaxed. 

But from a broader perspective, Britain’s accession to the CPTPP looks like a canny strategic move, at a time when France, Germany and other EU countries are struggling to formulate a coherent strategy towards China and the Indo-Pacific. 

It should be seen in the context of the Government’s “tilt” towards the Indo-Pacific, alongside the 2021 Asian tour of the aircraft carrier HMS Queen Elizabeth – Britain’s most powerful warship – and the signing of the Aukus submarines pact with the US and Australia, says UK ambassador Longbottom.

“It’s a really significant step,” she adds. “We’re not tilting any longer, we are now committed. So the tilt is done.”