Media  Global Economy  2021.02.25

Implications of the UK’s Joining the TPP

The article was originally posted on RONZA on February 7 ,2021

Trade Policy UK

The UK has formally applied for TPP11 membership.

I think there are many people who are wondering why the UK, a European country, would join the Trans-Pacific Partnership (TPP11; officially known as the “Comprehensive and Progressive Agreement for Trans-Pacific Partnership”). In this article, I would like to examine the implications of the UK’s participation in the TPP11.

Brexit and the Japan-UK FTA

First, what does TPP11 membership mean for the UK? The UK achieved Brexit in January 2020 and signed a free trade agreement (FTA) with the EU at the end of 2020 when the transition period ended. The cause for Brexit was to restore sovereignty. Negotiating trade deals with other countries and regions after being independent of the EU was seen as a major pillar of restoring sovereignty.

The signing of the FTA with Japan was the first step in that direction. After January 2021, the end of the Brexit transition period, it would become impossible for Japan to export Japanese cars to the UK market without tariffs (reduced tariff rates for a certain period) under the Japan-EU FTA, because the UK left the EU. For the UK, on the other hand, an FTA with Japan would make it difficult for the EU to export EU cars to the UK market, as Japanese cars would not be subject to tariffs in the UK market, while EU cars would be subject to a 10% tariff, which would enable the UK to put pressure on the EU to conclude an FTA with the UK.

As described above, in relation to the EU, the Japan-UK FTA was of great significance to both countries. While it usually takes several years to negotiate an FTA, the negotiations for the Japan-UK FTA which started in June 2020 were quickly concluded and the FTA was signed in October of the same year. Even taking into account that the UK was a member of the EU, which has an FTA with Japan, the agreement was reached in an exceptionally short period of time.

Application for TPP membership not a spur-of-the-moment decision

Next, the UK showed interest in the TPP.

In September 2016, before Trump’s victory in the November 2016 presidential election, I argued in a Webronza article, “The TPP Spoiled by Foolish America,” that we should conclude a new TPP agreement without the US and call on the UK leaving the EU to join it. That was because I thought that by expanding the TPP, we could regain interest in the TPP of the US, which was about to withdraw from it. The article was well read by those at the center of the Abe administration, and with some bumps and detours, it led to the start of TPP11 negotiations in May 2017 and the conclusion of the agreement in January 2018.

On March 28, 2017, the very day when then-Prime Minister May gave notice to the EU that the UK would leave the EU, I was invited to the British Ambassador’s residence in Japan and expressed similar views on the TPP. In retrospect, it seems that the Abe administration, which had opposed TPP11, changed its policy just before that time, and sensing the change, the UK took an interest in the TPP with an eye to the post-Brexit era. Later, when UK trade officials visited Japan several times, I exchanged opinions with them at the British Ambassador’s residence, by which I came to understand that the UK government was considering concluding an FTA with Japan first, and then participating in the TPP11. The UK’s recent application for TPP membership is not a spur-of-the-moment decision.

At that time, I was surprised to find that the leader of the UK negotiating team was the former New Zealand Ambassador to the WTO. In a strange twist, we renewed our friendship. Having dual UK and New Zealand citizenship, he had been appointed as the chief trade negotiating advisor to the British Department for International Trade. Some people doubt whether the UK can demonstrate good negotiating skills after leaving the EU because it has thus far left trade negotiations to the EU officials. However, also having served as the chairman of the WTO agricultural negotiations, he is expected to lead the UK negotiating team well.

Difficulties in negotiating the UK-US FTA

Although the cause for Brexit of restoring sovereignty has been served up to a point, a major obstacle remains in the way of trade between the UK and the EU, which accounts for 50% of the UK’s trade. Not only that, but negotiations for an FTA with the US, which accounts for 20% of the UK’s trade, are also expected to be tough going.

Under the Trump administration, little progress was made in negotiations with the US. Even with the Biden administration in power, it is unlikely that a new trade agreement will be reached as quickly as the Japan-UK FTA, as President Biden has stated that he will not sign a new trade agreement until domestic investment in workers and education is increased. In addition, while the US is an important trading partner for the UK, the reverse is not necessarily true.

There is an even more difficult issue. The US and the EU have long been at odds over whether to permit the import of chlorinated US poultry. In the negotiations for a UK-US FTA, the US will certainly demand that the British government resolve this issue. However, British consumers oppose the import of such poultry. There is also a problem with the relationship with the EU. The EU will be concerned about the influx of US poultry through the UK. If the EU tightens its quarantine regime on the UK, it could cause further logistical stagnation.

Many people may wonder why this small economic issue constitutes an obstacle to trade negotiations. However, a small economic issue could develop into a big political issue. Agriculture, which accounts for only about 1% of Japan’s GDP, has always been an issue in Japan’s trade negotiations. The biggest stumbling block in the negotiations for the post-Brexit FTA between the UK and the EU was the fishery issue in British waters. Also, in the negotiations for the Japan-UK FTA, the handling of British blue cheese was not finalized until the very last minute.

Negotiations with the US are unlikely to go smoothly. Under such circumstances, British government officials appear to believe that boosting trade with the countries in the growing Pacific region by participating in the TPP will provide a bright spot for the British people affected by Brexit and the spread of COVID-19, even though the UK’s trade volume with those countries is only half that with the US.

Accessing the US market through the TPP

The TPP was a mechanism the Obama administration of the US sought to use to win over China.

Since China joined the WTO, developing countries have become increasingly vocal in their opposition to the promotion of free trade, making it difficult for the WTO to create agreements that reflect new economic realities. There are some minor new agreements, but basically the WTO agreements reached in 1993, more than a quarter of a century ago, are still being applied.

Disappointed with the WTO and eager to create a trade agreement suitable for the 21st century, the US turned its attention to the TPP. The first step is to create high-level rules under the TPP without China. China was not a part of the talks, but luckily, Vietnam, a socialist country with a large number of state-owned enterprises, participated in the TPP. The US used Vietnam as a hypothetical China to negotiate disciplines for state-owned enterprises. The Trump administration demanded that China should protect intellectual property rights, discipline state-owned enterprises, and so on, and such US demands have already been stipulated in the TPP. In relation to e-commerce, the TPP prohibits requirements for the disclosure of source codes, software blueprints, whereas the RCEP, of which China is a member, was unable to do so.

In the case of a massive free trade area like the TPP, where the US would enter, the number of member countries would increase because they would be disadvantaged by being excluded if they did not join. If the TPP expands, China would be forced to join, and that is when those disciplines were intended to be imposed on China. For the Obama administration, the TPP was a mechanism designed not to exclude China, but to make the country follow the new trade rules.

Although having withdrawn from the TPP, the US is the country that led it. Given the growing importance of countervailing tactics in the US to manage its relations with China and China’s rising presence in the Asia-Pacific region, there is a good chance that President Biden, who served as Barack Obama’s vice president, will endeavor to return to the TPP after the 2022 midterm elections.

If that happens, the UK will be able to access the US market via the TPP without an UK-US FTA. If the UK joins the TPP before the US does, it can make demands on the US in course of the US accession negotiations to the TPP, and will not be required by the US to do something about its own rules such as animal and plant quarantine programs. It is easier and more advantageous for the UK to join the TPP than to conclude a UK-US FTA.

The political implications of the UK’s participation in the TPP vis-a-vis China

The UK has opposed China’s enactment of the Hong Kong National Security Law to suppress the democratic movement in Hong Kong, saying that it runs counter to the one-country, two-systems principle agreed between the two countries.

The British government has shifted its stance toward China from cooperative to confrontational. Prohibiting equipment manufactured by Chinese telecoms giant Huawei from being newly introduced into its fifth-generation (5G) communications network from September 2021, it plans to eliminate all Huawei products from its 5G network by 2027. It also plans to dispatch the aircraft carrier Queen Elizabeth to waters in the western Pacific, including Okinawa Prefecture and other southwestern islands. The UK is stepping up its countermeasures against China.

The majority of the TPP11 members are former Commonwealth countries. In addition, some countries such as Australia and Vietnam are under threat from China. The UK’s joining the TPP may also be aimed at working together with these countries to counter China.

Significance for the promotion of global free trade

The UK is the first country to apply for TPP membership since the TPP11 came into effect.

The UK’s decision to join the TPP will be finalized after negotiations with the existing members of the TPP11. Considering that the UK was a member of the EU, with which Japan, a member of the TPP11, has signed an FTA; it has already signed an FTA with Japan; and it is a developed country, there appears to be no major obstacles to its participation in the TPP, including acceptance of advanced rules although the issue of tariff elimination on agricultural products may pose a problem to the UK since there are Australia and New Zealand in the TPP which have a competitive edge in agriculture.

This would set a precedent for other countries to apply for membership going forward, such as Korea and Thailand. If the UK accepts the strict regulations for joining the TPP, we can make the same demands on other applicant countries.

An increase in the number of members does not only mean a wider free trade area. In the rules of origin of the TPP, a system allowing for an accumulation of value-added ratios when determining the origin of a product was adopted, meaning that the value-added ratios throughout the entire TPP region, not just the value-added ratio of the home country, can be added together. In a bilateral FTA, even if accumulation is allowed, only the value-added ratios of the home country and the partner country can be added up, as in the case of the UK-EU FTA. The larger the number of countries joining the TPP, the more value-added ratios they can add up. Even if the value-added ratio of the home country is small, a good can be considered as originating in the TPP and exported within the TPP region without a tariff. Moreover, the free trade area within the TPP region will expand. The wider membership of the TPP will further facilitate tariff-free trade. Joining the TPP will make more and more sense. The TPP will continue expanding its membership with a domino effect.

I do not know how serious it is, but China has also announced its intention to join the TPP. However, in a bid to join now, China is likely to demand significant exemptions from the rules on investment, state-owned enterprises, etc. If China is entitled to such exemptions, few advanced TPP rules would apply to the country. In the WTO, China has explicitly refused to impose regulations on state-owned enterprises.

Furthermore, China has not fully complied with the requirements prescribed in the WTO Agreement and the Protocol of Accession. China has come under criticism for heavily subsidizing its steel industry, thereby causing a global steel glut, yet it has not fulfilled its obligation to report its subsidies to the WTO. If we do not know what is going on, we cannot demand correction. If such a situation were to occur in the TPP as well, the member countries would not know what they had allowed China to enter the group for. While other member countries will faithfully comply with the TPP regulations, China will not and just cherry-pick from the TPP.

In the accession negotiations, the existing members are the parties to the negotiations that require the applicant country to do what is necessary to promote free trade and comply with the TPP agreement. The negotiations will not end until all existing members are satisfied. They not only determine whether China’s systems and institutions are consistent with the TPP agreement; if they find that there are problems with China’s activities, then they should also be able to demand something that is more than just the TPP agreement from China. In the talks on China’s entry into the WTO, the Protocol of Accession provides that the country’s subsidies for agricultural production shall be limited to 8.5%, compared with the 10% set forth in the WTO Agreement on Agriculture. (However, unless China reports its subsidies, we cannot tell if it is complying with the provisions.)

We must not repeat the failure of the negotiations for China’s WTO accession. If China is allowed to join the TPP on easy terms, it will have a negative impact on the country’s domestic reforms as well. We will negotiate with China not on behalf of the US, but for ourselves and furthermore in order to promote global free trade and develop the rules and principles of the TPP into those of global trade. I hope that the negotiations for the UK’s participation in the TPP will set a good precedent to that end.