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13 January 2022

Image of Alan WintersL. Alan Winters is Professor of Economics and Founding Director of UK Trade Policy Observatory and Bernard Hoekman is Professor of Global Economics, European University Institute and Fellow of the UK Trade Policy Observatory

It is widely accepted that international economic relations depend upon a smoothly functioning multilateral trading system. That trading system, institutionally underpinned by the World Trade Organization (WTO), can both stimulate economic activity and help to promote international cooperation in spheres such as climate change and migration. However, the WTO is becoming less relevant to a world in which services account for a growing share of trade, interest in environmental regulation (notably on CO2 emissions) is growing, and digital technology is reshaping our lives.

These issues impinge directly on international trade and thus fall within the broad remit of international rulemaking in the WTO. However, decision making in the WTO typically requires consensus from all the Members, which is difficult to achieve when Members have different ideas about what the appropriate rules for dealing with such challenges are. Thus, not only has it become difficult for countries to agree on how to move forward, but these differences are creating new tensions in the global trading system.

One solution that would help to overcome the impasse is to facilitate those within the WTO who want to change particular rules to proceed among themselves by signing so-called ‘plurilateral’ agreements. The WTO foresees two types of plurilateral agreements, depending on whether what is agreed applies on a discriminatory or non-discriminatory basis. (more…)

January 13th, 2022

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10 December 2021

Image of Alan WintersMichael Gasiorek is Professor of Economics and Director of the UK Trade Policy Observatory at the University of Sussex and L. Alan Winters is Professor of Economics and Founding Director of UKTPO

China acceded to the World Trade Organisation twenty years ago. Yet despite being a member of the international trading club for two decades, China’s ‘role’ in the trading system continues to generate controversy  across a range of areas such as the alleged support to state-owned enterprises boosting their international competitiveness, restrictions on foreign direct investment in China and the ineffective intellectual property protection in China. In addition, and sometimes conflated with trade, there are technology-related security concerns and human rights abuses, notably with regard to the Uyghurs. The Covid-19 pandemic has also raised worries in some quarters about the vulnerability of supply chains, including over-reliance on particular suppliers such as China in critical sectors. (more…)

December 11th, 2021

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Image of Alan Winters 26 November 2021

Chloe Anthony is an ESRC-funded doctoral researcher in environmental law at the University of Sussex Law School. Minako Morita-Jaeger is a Policy Research Fellow of the UK Trade Policy Observatory and a Senior Research Fellow of the University of Sussex Business School. L. Alan Winters is Professor of Economics and Founding Director of UKTPO.

Trade deals primarily aim to facilitate trade between countries by lowering barriers to trade in both goods and services. Many of these barriers are increasingly concerned with different regulations across countries and also with so-called ‘non-trade policy areas’ such as labour or environmental standards. The UK’s most recent FTAs – for example, the UK-EU Trade and Cooperation Agreement, the UK-Japan Comprehensive Economic Partnership – aim for cooperation beyond trade.

The domestic impacts of trade deals – economic, social and environmental – can be significant, so it is important that UK trade deals are scrutinised domestically before they are signed. For example, trade agreements with larger partners, such as the EU or the US, may have significant domestic impacts. Even if aggregate impacts of a trade deal with one country are small, there still may be significant implications for certain sectors or groups within society. Also, the UK may sign an agreement with one country covering regulatory issues that may overlap or even conflict with a prospective agreement with another country – this requires debate and scrutiny. (more…)

November 26th, 2021

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Image of Alan Winters8 November 2021

L. Alan Winters is Professor of Economics and Founding Director of the UKTP0 and Guillermo Larbalestier is Research Assistant in International Trade at the University of Sussex and Fellow of the UKTPO.

Key Findings:

  • To date, the UK government has signed no new trade agreements relative to what it would have had as a continuing member of the EU.
  • The Government estimates that the two agreements in principle announced this year (Australia and New Zealand) will increase UK Gross Domestic Product by between £200 and £500 million annually – that is, 0.01% to 0.02% (one to two ten-thousandths) of GDP or between £3 and £7 per head of population – and that only after they have bedded down over 15 years or so .

We were asked to sum up the economic benefits of the UK’s new post-Brexit trade agreements. Our first observation is that if we take as a starting point the trade agreements that the UK would have been party to as a member of the EU, the government has, to date, signed no new trade agreements! (more…)

November 8th, 2021

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29 October 2021

Michael Gasiorek is Professor of Economics and Director of the UK Trade Policy Observatory at the University of Sussex.

The impounding of a UK fishing boat by the French authorities on Thursday is symptomatic of the tensions in the wider political relationship between the UK and France, which goes beyond the implementation of the fisheries part of the Trade and Cooperation Agreement (TCA) with the EU. It is also symptomatic of the political importance of the fisheries sector on both sides of the Channel. Brexit was about ‘taking back control’, and with regard to fishing, for the UK Government, that meant taking back control of UK waters. The actual agreement, however, fell far short of what the fisheries industry had hoped for. (more…)

October 29th, 2021

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7 October 2021

Minako Morita-Jaeger is a Policy Research Fellow of the UK Trade Policy Observatory and a Senior Research Fellow of the University of Sussex Business School. Guillermo Larbalestier is Research Assistant in International Trade at the University of Sussex and Fellow of the UKTPO.

Complex geopolitical landscape

Trade policy concerns, national security and defence are increasingly intertwined in the Indo-Pacific region. This is partly driven by geo-political strategic interests and Sino-US rivalry in the Asia-Pacific region, and partly by the shifting economic balance of power towards the region. China formally applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) on 16 September, one day after Australia, UK and the US announced the creation of the new security partnership: Australia-UK-US (AUKUS). This should also be seen in the context of the Biden administration’s China containment strategy and an absence of US leadership in trade policy since the Trump era due to a greater focus on domestic priorities. China is thus trying to use the CPTPP as a tool in the geo-political power game in the Asia-Pacific region. By joining the CPTPP, China aims to cement its lead in trade and economic cooperation following the successful conclusion of the Regional Comprehensive Economic Partnership (RCEP), signed last December though not yet in effect.[1]

CPTPP members are looking at China’s application with scepticism. With geopolitical tension intensifying between China and CPTPP members over China’s territorial expansionism and trade disputes, it is likely that China will find it difficult to get approval from CPTPP members to commence the accession process.[2] Taiwan’s formal submission of accession (22 September) further escalates the political complexity surrounding the CPTPP.

Growing influence of China in regional value chains

Economically, the CPTPP countries are important trade partners for China. In 2019, approximately 20% of Chinese exports were destined to CPTPP members, of which 50% were in intermediate products. On the other hand, 27% of China’s imports originated from CPTPP members, of which just over 75% were for intermediate products.[3] This significant share of intermediate trade between China and CPTPP members is indicative of China’s important role in Asia-Pacific regional value chains. Moreover, Chinese value-added embodied in each of the CPTPP country’s exports increased between 2010-2015 particularly for Vietnam, Malaysia, and Mexico increase (Figure 1).

Figure 1: Share of Chinese value added content of exports, Source: OECD, %

China’s role in regional supply chains has been changing over recent decades. China’s exports have experienced a shift from labour intensive or input assembly at the last stage, to capital and technology intensive products over the last two decades.[4] In 1999, China’s main exports to the world, and by extension to CPTPP countries, were in products like footwear, T-shirts, and other textile apparel. In 2019, we find that China’s most important export is mobile phones and other electrical machinery and equipment. Most notably, Japan imports just over 5% of China’s mobile phones, Vietnam 4.8%, Singapore 1.8%. Other products of importance exported to CPTPP countries include portable computers, electronic integrated circuits, petroleum oils, and vehicles (Source: UN Comtrade).

China’s role in services trade has also been increasing. China’s export of services to CPTPP countries has increased significantly between 2005 and 2015 (Figure 2). On aggregate, the increase in services exports to CPTPP countries has been driven mainly by an increase in exports of business sector services. During this period, total services exports have increased, on average, by 11% every year.

Figure 2: Value of China’s Services Exports to CPTPP countries, Source: OECD

A high level of market access offers from China is a condition for economic gains

China’s strong position in regional value chains was established through free trade agreements (FTAs) with most CPTPP members. Table 1 shows China’s preferential trade arrangements with CPTPP members. China already has five bilateral FTAs (with Singapore, Australia, New Zealand, Chile and Peru) and two plurilateral frameworks (the China-ASEAN FTA and the RCEP (not yet in force)) which include various CPTPP members. Canada and Mexico are the only CPTPP countries that have no preferential trade relation with China.

Table 1: China’s bilateral/plurilateral FTA relations with CPTPP members

Interestingly, China has a weak preferential trade policy framework with its top three major export destinations: Japan (35%, $172,717m), Canada (12%, $57,981m) and Mexico (16%, $79,890m) [5] – only RCEP with Japan and no FTA with Canada and Mexico. This indicates that there may be important economic gains to be made for China in joining the CPTPP. But, for the wider region, these gains depend on how far China can promote trade integration within the region. To achieve deeper integration to support regional value chains, it is important that China offers a higher level of market access commitments than what it has offered under its previous FTAs. For example, RCEP, China’s latest trade deal, is less ambitious as it is based on the ASEAN framework that applies special flexibilities for least developed members and long tariff reduction period of 20 years or more. Under RCEP, China made one tariff schedule for ASEAN members and separate tariff schedules for each non-ASEAN member. These separate commitments need to be levelled up when China offers market access for CPTPP accession. It should be noted that a high level of trade in goods commitment is not enough. Trade in services and investment liberalisation is the key to facilitate regional value chains.

Is China willing to change and abide by the CPTPP rules?

A key challenge for the possible accession of China to the CPTPP is whether China can abide by its rules. One of the original aims of the TPP (the precursor to the CPTPP) led by the Obama administration was as a counterweight to China’s growing economic presence in the Asia Pacific region. The CPTPP aims to promote a market-driven open economy. Hence, China’s state economy model itself does not easily align with some of these principles. Its scope is wider, and its rules are more stringent in comparison with the RCEP. One example is labour rights. CPTPP includes the labour chapter which requires members to comply with internationally recognised labour rights whereas China has never included labour issues in its previous FTAs. Problematic areas are likely to be state-owned enterprises and subsidies, digital trade, labour rights, intellectual property, and competition policy. These are areas where exceptions via side-letters are likely to be hard for China to achieve.

For example, the CPTPP has strong rules to level the playing field between state-owned enterprises and imports or investment from a partner country. Substantial industrial subsidies to state-owned enterprises in its strategic industries (e.g. defence, energy, telecom, aviation and railway systems),[6] are hard to reconcile with CPTPP rules.

Another critical obstacle may be digital trade policy. The CPTPP strongly promotes free cross-border data flow by strictly prohibiting the data localisation requirement and the disclosure of source code; as well as setting a relatively high threshold for government interventions to meet public policy objectives by applying the WTO type general exception clauses.[7] The CPTPP approach is completely different to China’s state-led digital governance, which has a strong notion of data sovereignty with China strengthening its authoritarian power in laws on data over the last several years.[8]

Possible implication for the UK’s accession to the CPTPP

The accession application of China (and then Taiwan) have changed the CPTPP political landscape. The CPTPP is in danger of becoming a geopolitical battleground in the Indo-Pacific. For the UK, there are two possible implications. First, China’s move may incentivise CPTPP members to accept the UK’s application to join the CPTPP as early as possible as a strong Indo-Pacific ally. At the same time, CPTPP members may more strongly insist on the full compliance of the UK to its requirements/rules (and thus be less flexible with regard to side-letters). This would demonstrate to China that there is a high threshold for joining the CPTPP in order to protect the original aim of promoting rules-based open economy.

Footnotes

[1] With RCEP Complete, China Eyes CPTPP – The Diplomat

[2] The challenges for China’s CPTPP membership bid, Financial Times, 20 September 2021.

[3] Source: UN Comtrade & BEC Classification, shares calculated using trade values.

[4] See for example, As China Moves Up The Value Chain, Some Manufacturing Companies Are On The Move |Interact Analysis

[5] Calculated from the OECD Trade in Value Added (TiVA), for 2015 (latest year available).

[6] Among 109 Chinese corporations listed on the Fortune Global 500, privately owned companies accounts for only 15%. See Explained, the role of China’s state-owned companies | World Economic Forum (weforum.org)

[7] Morita-Jaeger, M. (2020). Accessing CPTPP without a national digital regulatory strategy? Hard policy challenges for the UK. UKTPO Briefing Paper 61: Accessing CPTPP without a national digital regulatory strategy? Hard policy challenges for the UK « UK Trade Policy Observatory (sussex.ac.uk)

[8] For example, China Personal Information Protection Law, which will enter into force in November, Data Security Law, and daft regulations on algorithms.

Disclaimer:
The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

Republishing guidelines:
The UK Trade Policy Observatory believes in the free flow of information and encourages readers to cite our materials, providing due acknowledgement. For online use, this should be a link to the original resource on our website. We do not publish under a Creative Commons license. This means you CANNOT republish our articles online or in print for free.

October 7th, 2021

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29 July 2021

Yohannes Ayele is Research Fellow in the Economics of Brexit at the University of Sussex and Fellow of the UKTPO.

Since 1 January 2021, the UK’s trading relationship with its biggest and closest trading partner—the EU—has been governed by the Trade and Cooperation Agreement (TCA). Although the TCA is a zero-tariff and quota-free trade deal, several reports indicate that it is having a negative impact on the UK’s trade with the EU (see, 1, 2, and 3). While looking at the aggregate effect of the TCA on the UK trade is important, such analysis also misses the substantial differential impact of the TCA across the UK’s devolved administrations and regions.

Regions in the same country can be affected differently by new trade barriers because of the difference in industrial production structure and, second, the differential exposure of industries to trade policy changes. In this blog, we provide a brief report on how the UK’s regional trade with the EU fared in the first quarter since the introduction of the TCA. (more…)

July 29th, 2021

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29 July 2021

Yohannes Ayele is Research Fellow in the Economics of Brexit at the University of Sussex and Fellow of the UKTPO.

Since 1 January 2021, the UK’s trading relationship with its biggest and closest trading partner—the EU—has been governed by the Trade and Cooperation Agreement (TCA). Under the TCA, UK exports to the EU face zero-tariff and zero-quota. However, to claim zero tariffs, exporters must meet the rules of origin requirements and be able to provide proof of origin. Where exporters do not meet the requirements they end up paying the tariff. Even those exporters that can meet the rules of origin requirement, because of the cost of the paperwork and requirements for proof of origin needed to claim the zero tariff, they may instead choose to pay the tariff. The latter is more likely where the tariff preference margin (i.e., the difference between MFN non-zero tariff and the zero-tariff under TCA) is very low. These problems— the rules of origin requirements and costs associated to claim zero-tariff—could be particularly challenging for smaller companies. Therefore, in practice, firms may end up paying tariffs despite the zero-tariff and zero-quota deal under the TCA. (more…)

July 29th, 2021

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23 July 2021

Nicolo Tamberi is Research Officer in Economics at the University of Sussex and a fellow of the UKTPO.

We have updated our estimates of the effects of the introduction of the Trade and Cooperation Agreement (TCA) on UK-EU trade in 2021 through to April. The methodology used was described in the UKTPO briefing paper 57 (see the appendix for details). We find that over the period January-April 2021, the TCA reduced UK exports to the EU by 18.7% and imports from the EU by 25.8% compared to the scenario in which the UK did not leave the EU.

For the analysis, we used HMRC for UK trade and Eurostat data for EU trade excluding gold from both exports and imports (HS code 7108). Over the last few months, analysts and commentators have noted a big gap between UK exports to the EU as reported by the UK and the corresponding flows reported by the EU (that is, UK exports to the EU reported by the UK and EU imports from the UK reported by Eurostat). We have investigated the issue in detail in our latest working paper and concluded that we agreed with the ONS  that UK reported data should be used instead of the EU reported mirror flows. While both the UK and the EU changed the data collection method for UK-EU trade in 2021, the changes undertaken by the EU in its reported imports are larger than those of UK reported exports.

As always, these data are provisional and could be revised in the future, so our results should not be interpreted as definitive. Our preferred estimation, which uses the synthetic control method, shows that UK exports to the EU have been dramatically affected in January 2021 (-42%) and we find some milder evidence that they were negatively affected also in April 2021 (-14.3%). Adding up the period January-April 2021, UK exports to the EU were down by 18.7%. On the other hand, UK imports from the EU saw a smaller drop in January 2021, but they remained consistently below expectations for all months of 2021 to date. Over the entire period January-April 2021, UK imports have been 25.8% less than what they would have been otherwise. This can be seen in the figures below where the blue line depicts what actually happened, the orange lines give our counterfactual synthetic control estimates for what would have happened in the absence of Brexit.

Figure 1: UK-EU trade excluding gold (HS 7108) and synthetic counterfactual

UK exports to the EU

A) UK exports to the EU

UK imports from the EU

B) UK imports from the EU

The figures show actual UK exports to and imports from the EU excluding gold (HS 7108) and the synthetic series. We estimated the model for UK trade with each EU country and then aggregated the figure to EU total.

It is clear that over the period there has been a decline in exports and imports. The decline in imports appears to have been more consistent than the impact on exports and at this stage that is still somewhat puzzling. These are also still ‘early’ impacts as they only for the first four months.

 

Disclaimer:
The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

Republishing guidelines:
The UK Trade Policy Observatory believes in the free flow of information and encourages readers to cite our materials, providing due acknowledgement. For online use, this should be a link to the original resource on our website. We do not publish under a Creative Commons license. This means you CANNOT republish our articles online or in print for free.

July 23rd, 2021

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Image of Alan Winters22 July 2021

Michael Gasiorek is Professor of Economics and Director of the UK Trade Policy Observatory (UKTPO) at the University of Sussex. L. Alan Winters is Professor of Economics and Founding Director of the UKTPO.

The UK Government’s command paper on Northern Ireland published yesterday (21 July 2021) is significant in four regards.

First, because it explicitly recognises – at length – that the Protocol is not working (at least not for the UK) and needs to be modified in form or in implementation. This is almost certainly correct. (more…)

July 22nd, 2021

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