FTI Consulting International Trade Bulletin – 24th September

FTI’s Key Headlines

‘That’s not a submarine. This is a submarine!’ –  French fume over AUSUK agreement

In a showdown that appears to be a cross between a Tom Clancy movie and Crocodile Dundee, with the résistance fervour of Les Misérables chucked in, France has continued to cry foul over the ‘AUKUS’ agreement announced last week. Last Friday the French Government took the dramatic diplomatic step of withdrawing its ambassadors from Washington and Canberra. The UK was also in its periscope’s sights with the French Europe minister dismissing Britain as the “junior partner” in the new submarine alliance and accusing the country of acting “opportunistically” to prove its place in the world post-Brexit; nul points there for the post-Brexit entente cordiale.

Having been blindsided by the alliance, France has hit back by trying to delay EU-Australia trade talks, due to start in October. Yet this is not the blow Paris would have the world believe. Negotiations between the EU and Australia were first launched in 2018 by former President Jean-Claude Juncker. Cynical observers may have noted that the EU’s agreement to engage in long sought after trade talks with the antipodes was announced just before the UK could initiate its own negotiations. The refusal of France and other EU nations to permit their domestic agricultural sectors to face meaningful competition from farmers down under meant that Brussels and Canberra were very unlikely to find common ground. That was before the submarine deal torpedoed the Franco-Aussie loveboat and leaving EU-Aussie negotiations up the proverbial creek without a paddle.

Uncle Xi’s PRC CCP courts CPTPP?  We’ll see… 

Just when you thought the shifting political winds of the Comprehensive and Progressive Trans Pacific Partnership couldn’t get any more comprehensively complicated,  in comes the People’s Republic of China with a bold application to become a member of the Pacific’s free trade club.

The CPTPP currently accounts for around 13% of global trade and is already considering an application to join from the UK, submitted earlier this year. Zhao Lijian, China’s foreign ministry spokesman, claimed that the application to join CPTPP was “completely unrelated” to the openly Indo-Pacific focus of AUKUS. Yet the timing can hardly be seen as a co-incidence, likely accelerating a long-considered move from Beijing. China’s application is the culmination of an extraordinary five-year journey for the trade bloc. Originally conceived as the economic limb of Barack Obama’s ‘Pivot to the Pacific’, the TPP (as it was then called) was drafted by US officials with the clear intent of constraining China’s growing economic influence across the Indo-Pacific.

Since 2016 when TPP was signed in Auckland, it has been killed by Donald Trump, resurrected by Shinzo Abe, given a hip rebrand by Justin Trudeau/Jacinda Ardern and coveted by Boris Johnson. Now the 11 remaining members find themselves in the surreal situation where China’s leadership seek to join an economic grouping intended to isolate them while Joe Biden – supposedly Obama’s spiritual successor – continues to snub an agreement written to increase American influence. Five years is a very long time in trade politics.

There is speculation that China’s membership bid is largely symbolic, knowing how unlikely it is that Beijing will be deemed to meet the CPTPP’s demanding entry standards. Membership would require root and branch economic reform of Chinese State Owned Enterprises and a new approach to intellectual property. Both reforms would appear to go against the current political tide which has Communist Party apparachiks asserting more control over the economy.

China would also need to placate several CPTPP members who have an effective veto on new membership applications. As AUKUS demonstrates, Canberra does not view Beijing as a reliable or rule-abiding partner. Arguments over human rights and Covid-19 led to Beijing imposing trade barriers costing Australia $5.4billion in export receipts; that in spite of the bi-lateral trade agreement already in place between the two countries. Beijing will also have to improve relations with Canada, which have become very fraught since Chinese authorities began detaining Canadian citizens in relatiation for Ottawa’s execution of a US arrest warrant on a Huawei executive.  An infuriated Canadian government has condemned this “hostage diplomacy” and will not be well disposed to closer economic ties while the issue remains unresolved.

Contest to join the hottest club in town

Amid a two-week period in which the world of international trade has given more dramatic plot twists and shock announcements than Love Island, the UK’s ongoing quest for CPTPP membership looks comparatively uncontroversial. That will come as a relief in Downing Street. With the hopes of a US/UK free trade deal thoroughly dismembered by Washington this week, the CPTPP is now the hottest club in town for the advocates of Global Britain. Although the drawn-out membership process might be less exciting than the cancelled contracts, shock alliances and hurt feelings of the submarine controversy, the decision on who gets let into the CPTPP club has profound long-term impacts.

UK membership would expand CPTPP into another wealthy western economy which, while shifting the club beyond the Pacific Ocean, will not fundamentally change the nature of the agreement. Certainly, the UK will need to implement some reforms and remove various protectionist barriers, but the CPTPP’s focus on the free flow of data, cross border financial services and free enterprise will sit comfortably with the UK’s economic model.

Opening the deal to China is a different story. Despite claims to the contrary, China’s robust economic responses to foreign critics and the harsh crack down on the property rights of suddenly unfashionable domestic figures, demonstrate that it is not a true market economy. Access to the vast Chinese market is a tempting goal for CPTPP members. Deals with Beijing have provided incredible growth opportunities for exporters from its existing free trade partners such as Singapore, Chile and New Zealand. But the Australian experience demonstrates the cost of doing business with the CCP – to criticise Chinese policy is to risk having market access cut overnight, regardless of what is written in any agreement. The long term impact of dependence on trade with China has been demonstrated by the current New Zealand Government which, despite its liberal credentials, is forced to bend over backwards and alienate western allies to avoid offending its largest and most domineering trading partner.

Throw in a last minute request to join from Taiwan, who submitted a formal application on Wednesday afternoon, and it becomes clear that there is quite a queue forming for entry to club CPTPP.

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