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UK and the TPP: An intelligent move?

    Whilst the future of the UK’s trade relationship with the EU remains uncertain, Secretary of State Dr Liam Fox returned from a recent World Trade Organisation (WTO) meeting hopeful of new trade deals for a post-Brexit UK. Britain’s exit from the EU can unleash more comprehensive and beneficial trade agreements with other nations, particularly the emerging Asian markets. Interestingly, Dr Fox recently commented on the possibility of UK involvement in the Trans-Pacific Partnership (TPP) as a future trading platform during House of Commons oral questions last week.

    The objective of the TPP is to create a trade relationship between member nations with structures similar to those found in the EU single market. It was signed in February 2016 between 12 members of the Asia-Pacific region – however Donald Trump withdrew the US from the TPP in January 2017, in one of his first acts as President. A new agreement was signed by the 11 remaining member nations in November 2017. Among the participants are Australia, Canada, Chile, Japan, Mexico, New Zealand, and Singapore.

    All trade talks between member nations and the UK remain in their preliminary stages, and Britain would be unable to join until it leaves the EU in March 2019. But is UK involvement in the TPP an advisable move in the first place?

    On face value, the move seems an unusual one – with all of the participants of the TPP situated in the Pacific or South China Sea. There are numerous other trade deals which Liam Fox could pursue as the UK considers its future outside of the EU. These opportunities, it is argued, should be prioritised before TPP allegiance because of the “gravity model”, which asserts that the two most important factors to consider when predicting trade flows are an economy’s size and its proximity to trading partners.

    It can be argued however, that because services do not require the movement of physical commodities, they are not subject to the same “gravity” forces as goods. Furthermore, continual technological developments are enabling services to move rapidly across time zones in a way goods cannot.  Global consumer and supply networks are becoming ever more integrated, and the UK’s comparative advantage in many services enables the nation to be in a prime position to increase said exports once it leaves the EU.

    Given the gravity model impacts services less than goods – there are a number of benefits to the UK from TPP membership.

    Services account for 79% of the UK’s GDP, and just over two-fifths of its international trade. The IMF estimates the emerging TPP economies of Malaysia and Vietnam (members of the ASEAN group) to grow at around 4% to 2022, and as such there is an opportunity to reorient trade to areas which can benefit from UK expertise. Liam Fox also recently noted the UK’s strong interest in a free trade deal with Australia and New Zealand, and in August 2017 Theresa May signed an agreement with Japan, committing both nations to treat an economic partnership as an immediate priority post Brexit. Furthermore, there are grounds for Britain to strengthen Commonwealth trade relationships following Brexit. Conveniently, 6 of the 11 nations in the TPP are Commonwealth members.

    Whether or not the TPP is worth the UK’s attention despite these positives, however, is still up for debate.

    Negotiations on a trade deal have dragged on over many years – and still are experiencing headwind. After the withdrawal of the US, who accounted for 65% of total GDP of the original 12 members, a new agreement is still yet to be finalised. Furthermore, combined spending from the 11 TPP countries make up less than 8% of the UK’s export market – compared with Germany, who alone comprise 11% of UK exports.

    It may be more pertinent for the Department of International Trade to focus on bilateral trade deals with the larger economies of the US, China or India.

    The UK is India’s fifth largest export market and third largest source of FDI. According to the OECD, India is expected to continue sustained growth above 7% as they recover from the transitory impacts of rolling out the Goods and Services Tax (GST) and other measures, including demonetisation. This makes a lucrative trade deal between India and the UK particularly attractive for both parties. A UK-China trade deal also seems inevitable, although negotiations are unlikely to commence until well after the UK resolves trade relations with the EU post Brexit. Finally, both the US and UK have much to gain from a free trade deal. Britain is America’s largest source of FDI, and British companies employ over a million American workers. Moreover, 1.25 million British are employed by US affiliates in the UK.

    Although international supply networks continue to develop to allow for more accessible trade in services, and UK TPP membership presents an opportunity to expand Britain’s service exports into Asia, Liam Fox’s first priority should be pursing bilateral trade agreements elsewhere. Involvement in the TPP may be an alternative to signing bilateral trade agreements with individual nations, however the TPP itself is still not finalised after 11 years of negotiation, and member nations play a relatively insignificant role in the UK’s trade portfolio.

    The UK’s trade relationship with the single market remains up in the air post-Brexit, and policymaker’s immediate attention should be focused around securing a deal with the EU which can bring the most benefit to Britain. Following this however, officials have an opportunity to continue strong service export performance by strengthening ties with its major trading partners from outside the EU, namely India, China and the US. Markets such as these have the greatest capacity to generate economic prosperity within the UK, and as such should be prioritised higher than agreements such as the TPP.  

    DISCLAIMER: The views set out in this blog post are those of the individual authors only and should not be taken to represent a corporate view of the Centre for Policy Studies

    Josh Adamson is a CPS Economic Research Intern from Perth, Western Australia. He joins us through the Mannkal Economic Education Foundation, which offers international scholarships to students with a passion for free markets. Josh studies economics, and aims to work in the financial services sector.  

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