FTI Consulting International Trade Bulletin – 3rd February 2021
This Week in Trade
This week, we cover a hectic few days for UK trade as the road to membership of the Trans-Pacific Partnership begins in earnest, exactly a year after the UK’s formal departure from the EU. We consider the merits and pitfalls of membership. In her downtime this week, International Trade Secretary Liz Truss made her views heard at the World Economic Forum . We take a dive into her comments on China and the WTO. Elsewhere, with the parliamentary battle over last week’s “genocide amendment” still raging, we look at the Government’s new plans to appease Conservative rebels. Finally, we consider the steel industry, which this week became the latest sector to call for the UK to return to the EU negotiating table.
FTI’s Key Headlines
UK Officially Applies To Be The New Kids On The Bloc
The Government turned intention into action on Monday as it kicked off the formal application process to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). Secretary for International Trade, Liz Truss met with her opposite numbers from Japan and New Zealand at the start of the week to set the process in motion. Formal negotiations are expected to begin in the Spring. As of yet, no expected date for these talks to conclude has been given, but neither envisage any major impediments to the UK’s accession, following the Government’s informal lobbying efforts over recent months. The UK is therefore likely to become the first non-founding member of the group and its second largest economy, behind Japan.
Even by the most optimistic estimates, the economic benefits of the deal won’t come close to replacing the value derived from membership of the EU Single Market. For this reason, the Department for International Trade is preferring to focus on the ancillary benefits, highlighting for instance the pioneering approach the CPTPP takes to digital trade and the expected growth of member state economies. Of course, while the Government may not be so crass as to state it, the political advantages of joining also hold a lot of appeal. That the application was made on the first anniversary of the UK’s exit from the EU was unlikely to be a coincidence. The Government has stressed what they see as the comparative advantages of a trading bloc that preserves the right to regulatory independence (provided certain minimum expectations are met) and allows members to strike independent trade deals elsewhere. Both were core components of the Brexit philosophy as well as political redlines in the UK’s protracted, but ultimately fruitful trade negotiations with the EU.
The UK’s geographic isolation from the 11 members leaves many questions to be answered as to whether membership will have much practical benefit for the majority of British businesses. Those familiar with a world map will note that, while the UK is quite close to the EU, it is a rather long way from the Pacific Ocean. Currently exports to CPTPP member states account for less than 10% of all UK exports. The future success of membership will rely on greater numbers of British businesses taking the leap into cross-continental trade, with unfamiliar markets.
For her part, Liz Truss expects “Asia-Pacific countries in particular” to grow into major export markets for UK businesses. But the potential bonus prize from CPTPP membership is the possibility that a Biden administration will finally take the United States into the bloc as originally envisaged under President Obama. While this would offer the opportunity for the UK to secure a ‘backdoor’ free trade relationship with the US, at the moment this is no more a priority for the new administration in Washington than negotiating with the UK directly.
Government Offer Olive Branch Over “Genocide Amendment” Debate
According to reports this week, the Foreign Affairs Select Committee could soon find itself with new powers as the Government seeks to end debate surrounding the so-called “genocide amendment” to the Trade Bill. Following the amendment’s defeat, which we covered here a fortnight ago, pressure on the Government to take a tougher stance on trade deals with countries with poor human rights records has continued. While the initial amendment was defeated (albeit by a slim margin) the debate has not dissipated and figures on both benches remain keen to stymie a potential trade deal with China.
As a result, the Government is now reported to be considering introducing new powers for the Foreign Affairs Committee that will see them tasked with examining the human rights record of any country that the UK seeks to negotiate a preferential trade agreement with. More than simply an advisory role, should committee recommendations be disregarded by the Government, their implementation could be put to a vote in the House of Commons. The introduction of such powers would be interpreted as a significant bind on Government autonomy as well as a precedent for extending the powers of Parliament to affect Government policy more generally. As a result the proposal has not been without criticism. Chris Bryant, a Labour MP on the committee, described the proposal publicly as “an attempt to buy off a rebellion” on Monday.
MPs received confirmation last night that regardless of the Government’s proposal, they will be given a second opportunity to amend the Trade Bill on this issue. The House of Lords voted emphatically in favour of giving the courts new powers to adjudge genocide abroad, for the second time in a matter of months. Attention will now focus solely on the Commons, who will decide whether it should be the courts or the committee that holds the Government to account on their chosen trading partners.
The affair is a frustrating one for the Government as starting free trade negotiations with China is already extremely unlikely in the current political climate. Not only would it be politically toxic in the UK, but Beijing remains furious with the London over the Hong-Kong visa programme, the blocking of Huawei and the regular criticisms of Xi Jinping’s regime. Every democratic nation with an independent trade policy has to weigh the potential economic benefits of deals with authoritarian states against questions of political consequences and moral compromise. While it is probably the right call to avoid trade negotiations with China in the current climate, giving away part of the Government’s power to weigh these costs and benefits to courts or committees will have long-term consequences for Global Britain well beyond Parliament thumbing its nose at Beijing.
Steel Sector Calls For A Return To Negotiations
The UK’s steel industry has issued a plea to the Government to return to the negotiating table with the EU or stump up state aid to protect the sector amid fears for its future. Industry body UK Steel has revealed that export quotas to the EU are likely to run out in the first quarter of 2021 for a range of products, leaving many exporters facing 25% tariffs.
Approximately 30% of UK-produced steel is currently exported to the EU and therefore the imposition of tariffs would impose a heavy burden on an industry already struggling to export to other markets. As a result the industry is imploring Boris Johnson to start renegotiating the existing deal. However, there appears very little imperative from the European side to make any concessions.
At the heart of the issue is the inclusion of exports to Northern Ireland in quota calculations. This means that exports of UK produced steel arriving in Belfast contribute to the fulfilment of the quota in the same way as exports to Paris or Berlin do. With trade between the UK and Northern Ireland prevalent in all sectors including steel, the UK’s quota will be filled up very quickly.
The debate also refocuses attention on President Trump’s imposition of 25% tariffs on UK steel and whether the inauguration of Joe Biden offers an opportunity for the Government to reengage. The Department for International Trade had been working with the Trump administration right until its last days to try and secure the removal these tariffs, but were unsuccessful. At the time of their introduction in May 2018, close to 10% of all UK steel was exported to the US, the removal of barriers to this trade would be a welcome counterbalance to new EU tariffs.
Truss Promotes The Role Of The UK In 2021 At Davos
Speaking at the virtual meeting of the World Economic Forum on Friday, Liz Truss outlined her proposed plans for a reformed World Trade Organisation (WTO), attacking China for its current approach to global trade. As reported in last week’s edition, Truss was expected to use her appearance to establish closer ties with a working group comprising of Japan, the EU, and the US, that scrutinises the Chinese trade regime more closely. Speaking at an event titled “Fixing the International Trade system”, Truss launched an attack on China for “undermining” global trade and people’s trust in globalisation through its use of state-owned subsidies. The International Trade Secretary went on to state that the UK Government was committed to working with likeminded allies, listing Japan and the US as key examples.
Truss also spoke extensively on WTO reform. Noting her belief that the UK could be the most influential in driving change in the organisation as the president of the G7 and host of COP26, Truss asserted that the WTO desperately needed to create new rules for digital trade. In addition to this Truss stated that she would be pushing for issues to be resolved within the WTO’s dispute resolution mechanism when she attends the meeting of Ministers later this year. The meeting is likely to be key to the future of the WTO as it sees the return of an active United States and the appointment of a new Director-General.
If the outcome of the meeting proves unsatisfactory, leading nations including the UK may no longer look to the organisation as a useful platform to shape international trade. Countries may instead choose to rely further on trading blocs as a means of building pressure on certain actors to reform, something Truss did not shy away from on Friday as she indicated the potential of the CPTPP to fulfil that role.
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