The UK’s Accession to The Comprehensive and Progressive Trans Pacific Partnership
In a BfB article of November 22nd 2022 (Autumn Statement: A Growth Plan in Disguise?) I wrote the following:
“Rapid progress is being made in the UK’s application to join the giant Asian trading bloc CPTPP….Brexiteers who are alarmed about talk of the UK re-joining the EU single market…should relax. By end-2023 we are set to have made major global trade and security arrangements that will finally consign such talk to the dustbin of history.”
Since that writing the US, UK and Australia have further cemented the AUKUS military and security pact, Japan and the UK have agreed a new defence pact, and the US and UK have agreed an Energy and Security Partnership. Intensive trade negotiations with other countries continue, most notably with India. The UK and the EU have greatly eased tensions around the Northern Ireland Protocol through the Windsor Framework, which also appears to be unlocking improvements to cross-Channel ties on trade, energy and security as well as the illegal migrant issue. However, the most dramatic development is the recent announcement that the UK’s accession to the CPTPP has been agreed. It is difficult to exaggerate the momentous nature of this agreement, one with huge economic and geo-political implications. In the words of Professor Stephanie Rickard of the London School of Economics “The UK is trailblazing. This is changing the agreement from a regional one to a global one”, while world trade expert Professor David Collins says that this “raises the UK’s status enormously in the global economy”. In conjunction with the leading role that the UK has played in the West’s response to the Russian invasion of Ukraine there is a clear pattern of UK leadership on key global issues. Die-hard Remainers scoffed at the very idea of the UK attempting accession to the CPTPP and regarded the concept of Global Britain with derision. Brexit supposedly meant the UK “going it alone” and ending up “isolated in mid-Atlantic”. How wrong can you be?! While we are on that theme, Brexit was also supposed to lead to the break-up of the Union, but the recent collapse in support for the SNP and for independence reveals that as another canard. Brexit was always going to increase the economic risks of Scottish independence from very high to completely unconscionable.
In the long-term,
accession to CPTPP will raise UK economic growth, re-orient UK trade towards the dynamic Pacific region, counteract the global trend towards protectionism and increase world trade, and help the region resist Chinese hegemony. It may well prove to be the catalyst for the USA to renew its application for membership – withdrawn by President Trump in 2017 – thus powerfully accentuating these desirable forces. Competitive pressures on the EU single market will increase, possibly forcing the EU to adopt a less protective and more pro-innovation approach. Last but far from least, it finally destroys any possibility of Brexit being reversed! It would be madness for any future government to contemplate withdrawal from this highly favourable arrangement, much less attempt to re-join the EU. Unlike membership of the EU, there is no free movement of labour involved, no large annual payment to the bloc, no surrender of fishing rights*, no surrender of sovereignty to a foreign court, and no compulsory imposition of tariff barriers against other countries. The Labour party has already indicated its provisional support for accession.
What is the CPTPP?
The CPTPP is a trade agreement between 11 countries in the Pacific region – Japan, Australia, New Zealand, Singapore, Canada, Mexico, Chile, Vietnam, Malaysia, Peru, and Brunei. It was formed in 2018 and once the UK joins will produce about 16% of world GDP compared to 14.5% for the EU. A number of other countries have either applied to join, or are seriously considering doing so, including Taiwan, Korea, Thailand, Uruguay, Columbia, Ecuador, Costa Rica, The Philippines and Indonesia. Even China has applied to join, though there is no possibility of this happening in the foreseeable future. The region has been growing much faster than the EU for decades and is projected to continue doing so for many years – partly aided by very favourable demographics (again in contrast to the EU). According to the British Chambers of Commerce 90% of the growth in the global middle class will be in the Indo-Pacific in the next seven years – the ideal export market for the UK’s heavily services dominated economy. Only 8% of UK exports go to CPTPP members, but this figure will rise rapidly after the agreement comes into force. The CPTPP has made much more progress in liberalising trade in services than the EU. The trade pact requires that the UK has control over its own regulatory system, so the dynamic alignment with EU regulations that the Remain dominated UK establishment has been desperate to retain is not possible. In contrast to the EU, which forces its members and trading partners to have the same regulatory standards, the CPTPP relies on mutual recognition, equivalence and adequacy of standards. This is a much more advanced and liberalising approach than that of the EU, and one which is increasingly recognised as global best practice. This in turn is pressurising the World Trade Organisation (WTO) to up its game in the face of faltering progress in world trade.
The Pessimists on the UK Economy are Being Proved Wrong Again
The “Autumn Statement: A Growth Plan in Disguise?” article concluded with the following:
“A plausible scenario can be constructed in which the UK suffers only a mild downturn, as interest rates soon reach their peak, the inflation rate falls sharply, and confidence is boosted by major global trade and security agreements and improved relations with the EU. A recovery begins towards the end of 2023 and into 2024, further assisted by strong public sector investment and well targeted regulation. UK public finances are highly geared to economic growth so the OBR will be obliged to radically modify their pessimistic fiscal outlook. The government will then be able to cancel much of the planned post-2024 tax burden…”
Four and a half months later this description of future events still looks to be on track. GDP growth in Q4 is now estimated to have been slightly positive rather than the expected fall of 0.5%. GDP growth in January is initially estimated at 0.3% and data released since then suggests continued moderate growth. This is backed up by anecdotal evidence and company statements. UK car production in January was 8% higher than a year ago. This contrasts with widespread expectations of a recession at the time of the Autumn Statement, including notably pessimistic forecast for 2023 from the OBR and especially the Bank of England (BoE).
The BoE increased the Bank Rate again in March to 4.25%, but market expectations are now that Bank Rate has probably peaked, reflecting fears of a banking crisis and greater confidence that inflation is set to fall sharply. In my view there is not and is unlikely to be a general banking crisis, rather than a crisis in some banks that were badly positioned for rapid increases in interest rates. Moving from an extended period of low or zero interest rates – a seriously misguided policy framework – to an historically normal level of rates was always going to result in casualties. Too many zombie companies and unduly speculative positions were created and eliminating these excesses is a necessary condition for a return to stable economic conditions. This process is clearly underway and there will be more “accidents” along the way. In the UK there has been a very sharp rise in insolvencies, which in these circumstances is a healthy rather than unhealthy development. The continued extraordinary strength of the labour market suggests there is little danger of this process causing an overall recession.
The UK inflation rate disappointingly rose from 10.1% to 10.4% in March, but a more stable pound, lower commodity prices, dramatically lower natural gas prices, a major easing in supply chain pressures, sustained low money supply growth and the lagged restrictive impact of higher interest rates all suggest much lower inflation by year-end. This expectation is backed up by the recent fall in UK Bond market yields to well below 4%.
We have already discussed confidence boosting global agreements and better relations with the EU, while the Spring Budget did see the OBR markedly less pessimistic about the fiscal outlook. It was unfortunate that the Chancellor saw fit to go ahead with the planned increase in the company tax rate, but this was heavily mitigated by allowing full expensing of investment expenditure for the next three years. No cuts were made to the expansionary capital spending budget, and the Chancellor is pressing ahead with financial deregulation (the so called Edinburgh Reforms, which are more far reaching than critics allow). It seems probable that the government will be in a position to cut some taxes before the next election. This may not be enough to win that election but will promote recovery and inhibit any new government from subsequently raising taxes.
Robert Lee March 31st 2023
*The gradual transfer of EU fishing quotas to UK fishermen agreed as part of the UK/EU trade deal continues. This will raise revenues for UK fishermen by another £100m this year making £260m of extra fish in the first three years of Brexit. A drop in the ocean in terms of the overall economy (forgive the pun) but welcome relief for deprived coastal communities. From 2026 the EU loses its automatic right to fish in UK waters.