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Image of Alan Winters6 May 2022

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

The concept is simple: cut tariffs levied on food imports so the products become cheaper in the UK, right? In this blog, we look at the trade data and discuss the reasons why changing tariffs would hardly affect prices.[1]

  • Only a small proportion of imports pay tariffs.

In 2021, the UK imported £38.6 billion of food products[2] (equivalent to 7.6% of the UK’s total imports that year and about 46% of UK food consumption). Approximately 66% come from the EU and are already exempt from tariffs under the EU-UK Trade and Cooperation Agreement (TCA).[3]


The other 34% of food imports are from non-EU countries and of these about 19% face no tariffs because the exporter has a Free Trade Agreement (FTA) with the UK. These FTAs offer tariff-free access to many UK imports, but with a few exceptions which vary by FTA and are sometimes subject to conditions that make it difficult to expand sales (e.g. health and safety regulations).

Of the remaining 15%, approximately 2.9% enter the UK tariff-free because the Most Favoured Nation (MFN) tariff rate (the rate charged on countries without FTAs or development-related preferences) is equal to zero, and another approximately 1.8% are entitled to do so as well through the UK’s Generalised Scheme of Preferences. Thus, we estimate that only about 10% of food imports faced tariffs in 2021. These rates average 17%, and range between 2% for some forms of dried fruits and vegetables and 30% for more processed foodstuffs like fruit juices.

Table 1: Source of UK Food Imports

  Value of Food Imports

(2021, £m)

Share of Total Food Imports

(2021, %)

Total 38,557 100
EU 25,294 65.6
Non-EU FTA 7,401 19.2
GSP tariff-free 700 1.8
MFN (i.e. Non-FTA) 5,162 13.4
(of which, facing non-zero tariff ) (3,697 ) (9.6 )
  • Not all of any tariff cut will be passed through to the UK – suppliers may increase their margins a bit.
  • Imports are the smaller part of domestic consumption.
  • The product itself is only a part of the consumer price. There are also processing costs, logistics, wholesale and retail margins. Hence, a 5% decrease in the cost of the product will generally translate into only a 2-3% decrease in the price to consumers.

On the other hand, partially offsetting these effects, but probably not by much,

  • If import prices are lowered by tariff cuts, domestic producers may feel the need to lower their prices to maintain market shares.
  • If non-EU goods become relatively cheaper, people will substitute them for EU and domestic goods, thus lowering the cost of consumption as a whole.

In the Appendix, we present up-to-date information about the pattern of UK imports and tariff rates (point 1 above) and more details of the numbers. However, we conducted a much more detailed study of this phenomenon in 2017, comparing EU membership with a zero-tariff Brexit which is a good approximation of the current situation on tariffs.[4] That study allowed for the points above except for the fourth and suggested that, if the tariffs on them were abolished, the average cost of meat for consumers might have fallen by 3.4%, oil and fats by 3.2% and fish by 2.7%. Other food products would have seen significantly smaller decreases. Cutting all tariffs to zero (including on manufactures) would have reduced the cost of living by 0.5%. Of this, we estimate that roughly 0.15% would have been due to food prices.

Other considerations

Abolishing tariffs also raises a number of other considerations. They do not all point in the same direction, but all serve to make the tariff question more complex and deserving of careful thought.

Tariffs increase the cost of goods to consumers and create economic inefficiency. However, they also redistribute income. In particular, if the UK abolished all tariffs on all food stuffs, this would hit UK  farm incomes hard and also the incomes of poor countries which currently export to the UK tariff-free but in markets where richer countries face tariffs — for example, bananas and cane sugar.[5]

The Treasury is said to object to the loss of revenue if food tariffs were abolished. Government revenue is a legitimate concern but the amount lost from this change would be very small. The Treasury says ‘the low hundreds of millions of pounds’ and we estimate no more than £500 million. A government concerned about the effect of food prices on poor UK consumers might even collect the revenue and use it towards an increase in benefits for the very poor. Distributing £500 million could give a one-off bonus of £85 to each Universal Benefit recipient.

The Department of International Trade is said to object to reducing tariffs on imports ‘for free’ when they might use such reductions to leverage the opening of other markets in FTA negotiations. But a small tariff-take implies small leverage and if the reduction were temporary, the leverage would not be entirely lost. On the other hand, a government that shows a propensity to suspend tariffs when politically convenient will clearly be able to extract a smaller ‘price’ for permanent reductions negotiated in an FTA than would a less uncertain one.

Hikes in food (or fuel) prices indicate shortages, in which case people need to cut back to the extent that they can. Cutting prices reduces the incentives to do so. If the government feels people cannot afford to live appropriately at the new prices, they should supplement their incomes, (e.g. via benefits) not ‘subsidise’ the consumption of shortage goods. However, the government does need to be realistic – and honest. Increases in import prices reduce real incomes in the UK. On top of the general effects of Covid, the war in Ukraine and, most significantly, the disruption and increases in costs caused by Brexit, UK real income is falling and set to fall further.[6] The burden has to fall somewhere in the population, so not everyone can be maintained in the way to which they were accustomed. The choice of where is largely a political one.

Appendix: The UK’s Food Imports

The UK’s main non-EU non-FTA partners for food products are the USA (2.2% of the UK’s total food imports in 2021), Brazil (2.1%), China (2.0%) and Thailand (1.6%). The main imports of food from non-EU non-FTA countries are preparations of meat or fish (HS 16, 13.6% of the total non-EU non-FTA imports of foodstuffs), fruit and nuts (HS 08, 10.4%), and oil seeds (HS 12, 9%).

Note that many tariff rates for food products under the UK’s Global Tariff (UKGT) are specific (i.e., they levy a fixed amount per unit of quantity independent of price), so it is difficult to estimate their percentage effects on prices. In our calculations below, we consider the ‘ad-valorem equivalent’ (AVE) tariff rates expressing the fixed amounts as a percentage of an average price. As import prices rise relative to the period over which these averages were calculated, these percentages are overstated somewhat. The table below shows that of the £5.2 billion (i.e., 13% of the UK’s food imports) from non-EU countries non-FTA, 1/5th face no tariffs, and about 3/5ths face tariffs that are higher than 5%.

Table 2: AVE Tariff Bands for UK Imports of Food Products

Tariff Band Imports from non-EU non-FTA

(2021, £ million)

Share of Total UK Food Imports

(%)

Share of total non-EU non-FTA Food Imports

(%)

0% 1,119 2.9 21.7
0%-2.5% 503 1.3 9.7
2.5%-5% 122 0.3 2.4
5%-10% 942 2.4 18.3
10%-20% 932 2.4 18.1
>20% 1,198 3.1 23.2
Unallocated 345 0.9 6.7

Table 3: The UK’s Imports of Food Products, 2021

  (1) (2) (3) (4) (5)
HS2 Tariff average Imports from non-EU non-FTA (£ million) Share of product in imports of food from non-EU non-FTA (%) Share of non-EU non-FTA in total imports of product (%)
Simple

(%)

Weighted

(%)

01 Live animals 1.4 0.88 24.4 0.5 5.4
02 Meat and edible meat offal 46.69 43.41 447.6 8.7 12.0
03 Fish and crustaceans, molluscs […] 10.19 8.96 380.0 7.4 17.7
04 Dairy produce; birds’ eggs; natural honey; edible products of animal origin, n.e.s. 44.47 13.38 103.6 2.0 3.8
05 Products of animal origin, n.e.s. 0 0 99.2 1.9 47.3
07 Edible vegetables and certain root and tubers 9.32 9.72 256.5 5.0 8.2
08 Edible fruit and nuts; peel of citrus fruit or melons 4.95 3.88 535.5 10.4 11.5
09 Coffee, tea, maté and spices 1.96 0.6 166.8 3.2 13.9
10 Cereals 15.01 6.8 346.8 6.7 23.2
11 Products of the milling industry; malt; starches; inulin; […] 19.79 19.38 41.3 0.8 10.6
12 Oil seeds and oleaginous fruits; miscellaneous grains, seeds and fruit; […] 1.97 0.25 464.7 9.0 38.0
13 Lac; gums, resins and other vegetable saps and extracts 0 0 58.1 1.1 28.8
15 Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal or vegetable waxes 7.64 4.39 361.7 7.0 20.2
16 Preparations of meat, of fish or of crustaceans, […] 21.9 26.28 701.4 13.6 22.6
17 Sugars and sugar confectionery 25.58 33.32 207.2 4.0 19.2
18 Cocoa and cocoa preparations 9.68 5.44 75.2 1.5 3.5
19 Preparations of cereals, flour, starch or milk; […] 11.69 8.76 228.8 4.4 6.5
20 Preparations of vegetables, fruit, nuts […] 16.14 12.1 223.1 4.3 8.4
21 Miscellaneous edible preparations 6.5 7.95 439.8 8.5 16.3

More on the UK’s food industry:

  • United Kingdom Food Security Report 2021: Theme 2: UK Food Supply Sources

https://www.gov.uk/government/statistics/united-kingdom-food-security-report-2021/united-kingdom-food-security-report-2021-theme-2-uk-food-supply-sources

  • DEFRA Report:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1056618/AUK2020_22feb22.pdf


Footnotes

[1] The work in this blog underpinned Ben Chapman’s article in The Independent, 1st May 2022

[2] For the purposes of this analysis we define food imports as those categorised under Sections I-IV of the Harmonised System (HS), but exclude chapters that are not strictly ‘food’ (HS 06, 14, 22, 23, and 24).

[3] This is subject to products meeting rules of origin, so technically not all of them avoid the tariffs. Proving origin for agricultural and other food products, however, is generally quite straightforward because production processes are simple. Based on the EU’s data on Preference Utilization Rates (PURs), we estimate that UK imports will get zero-tariff treatment around 90% of the time.

[4] In terms of zero-tariff commitments in trade agreements, 2016 and 2021 are basically the same; UK tariffs are a little lower in 2021 and trade with the non-EU sources is slightly more important.

[5] Removing tariffs on bananas and cane sugar means that imports could be diverted to countries like Brazil, China or the USA who currently import to the UK on MFN terms and away from poorer countries in Central America (Dominican Rep, Nicaragua, Belize) and Africa (Cameroon, Ivory Coast, Mozambique).

[6] The Bank of England said yesterday that UK real incomes are down 1.75% in 2022; for discussion of the Brexit and Covid hits, see, for example, Chris Giles in the Financial Times 23 December 2021.

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.

May 6th, 2022

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4 May 2022

Minako Morita-Jaeger is Policy Research Fellow at the UK Trade Policy Observatory and
Senior Research Fellow in International Trade in the Department of Economics, University of Sussex

The UK Government is aiming to secure the UK’s status as “a global hub” of digital trade, using Free Trade Agreements (FTAs) as well as digital economy agreements. Driven by the UK’s Indo-Pacific tilt strategy, the UK has been signing FTAs that include specific chapters/agreements on digital trade (such as with Australia, New Zealand, and Japan) and a digital economy agreement with Singapore.

While these agreements are expected to create economic opportunities, with a strong focus on free data flow and technological developments and innovation, they pose wider policy challenges such as the interoperability of data privacy law, cooperation in competition policy and security.


Since the UK is also in the process of joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), it is important to improve our understanding of the level of digital economy and digital governance in the Asia-Pacific. There is a digital divide and divergence of digital governance in the region, hence it would be sensible for the UK to take a comprehensive approach beyond FTAs/digital-only agreements to promote regulatory cooperation with Asia-Pacific countries.

Digital divide and divergence in digital governance in the Asia- Pacific

FTAs and digital trade agreements increasingly play a major role in shaping global digital trade governance especially as progress on digital trade at the World Trade Organization (WTO) is slow. Some Asia-Pacific countries, such as Singapore, Australia, and New Zealand, are pro-actively engaging in creating digital agreements, such as the Digital Economy Partnership Agreement (DEPA) between Singapore, New Zealand, and Chile and the Australia-Singapore bilateral Digital Economy Agreements.

If we consider the levels of digital competitiveness and digital governance in the Asia-Pacific region there are three characteristics that emerge when comparing across CPTPP members, CPTPP acceding countries (Taiwan, China and South Korea), other ASEAN countries (Indonesia, Thailand and Philippines), India and the US.

First, competitiveness in the digital economy varies across the Asia-Pacific. According to IMD World Digital Competitiveness Ranking (2021)[1], the USA is the most competitive data-driven country among selected 64 countries. Among CPTPP members, only Singapore, Canada) and Australia are ranked within the top 20 in the world. The three CPTPP acceding countries, Taiwan, Korea and China are also ranked within the top 20.  CPTPP members that place in the middle of the board are: New Zealand, Malaysia and Japan. Low-performing includes Chile, Mexico and Peru (CPTPP countries); Thailand, Indonesia and the Philippines (non-CPTPP ASEAN countries); and India (Figure 1-1).

Source: Figure 1-1:“IMD World Digital Competitiveness Ranking 2021”, IMD World Competitiveness Center, p28. Figure 1-2 selected major Asia-Pacific countries from Figure 1-1. Figure 2-1: Global Data Governance Map

Second, countries with a high degree of digital competitiveness do not necessarily score highly on data governance. According to the Global Data Governance Map, which provides the metric that captures comprehensive data governance,[2] OECD countries show a high performance (Figure 2). Especially, European countries occupy the top performance group (UK, Germany, Netherlands, France, Ireland, Finland, and Sweden). In the Asia-Pacific, Australia, New Zealand, Korea, Japan and Canada belong to the high-performance group (Figure 1-2). As highlighted in yellow in Figure 2, these countries are good performers both in terms of digital competitiveness and digital governance.

The UK is one of the highest-ranked countries. Interestingly, the US and Singapore, the countries that show strong digital competitiveness, show relatively weak scores with regard to data governance. In the case of the US (18th), attributes of “Regulatory” (a legal regime around data’s types and/or uses), “Responsible” (the ethical, trust and human rights implications of data use and re-use) and “Participatory” (constituents’ participation to data governance) have a low score.[3] One example of a lack of regulatory attributes is that the US does not have a data privacy law at the federal level. As for Singapore (20th), the scores with regard to “Regulatory”, “Responsible” and “International” (international efforts to establish data governance rules and norms) are low. Although Singapore is active in creating digital agreements, its weakness lies in promoting ethical and trust frameworks such as providing a public sector data ethics framework and a trust framework for digital identity management.

Source: Digital governance: Global Data Governance Map. Digital competitiveness ranking :“IMD World Digital Competitiveness Ranking 2021”, IMD World Competitiveness Center.

Note: Since IMD World Digital Competitiveness Ranking does not provide scores, we use rankings. Thus, the scatter plot shows that countries in the higher left column are the best performers (high digital governance score with higher digital competitiveness) and that the lower right column are low-performing countries.

Third, countries with a low level of digital competitiveness are also low on digital governance. Among CPTPP members, Mexico, Chile, Malaysia and Vietnam belong to this group. ASEAN countries, (the Philippines, Indonesia, Thailand) and India also show low performance (Figure 2). For example, Vietnam scored zero on “Responsible” performance since there are no legal frameworks that support ethical, trust and human rights aspects of data use and re-use. The performance of Chile, which is one of the signatories of the Digital Economy Partnership Agreement, shows high performance on the international attribute.  However, it scored zero on “Responsible” and “Strategic” attributes. Like Vietnam, it lacks ethical, trust and human right related governance. Also, it lacks a long-term strategy or plan for how data should be used for society, such as a national data strategy, public administration data strategy, and AI strategy.

What does it mean for the UK? 

It is worth noting that the UK is the best performer of data governance by attributes. The UK had high scores on every aspect of six attributes (“Structural”, “Regulatory”, “Participatory”, “International”, “Strategic”, and “Responsible”). It achieved a full score in “Strategic”, “Responsible” and “International attributes”.[4]

How, then, should the UK – surveyed as the world’s top performer of data governance – promote regulatory cooperation in digital trade with Asia-Pacific countries? There are two things to be noted. First, it would be in the UK’s interest to advocate that Asia-Pacific countries promote a regulatory regime that can enhance trust. Like Singapore, many Asia-pacific countries are relatively weak in promoting legal frameworks in recognising and mitigating risks and potential harms of a data-driven economy[5] and in considering the implications of data-driven changes on trust, equity and human rights into policy.[6] The UK could encourage its trade partners to strengthen these policy areas.

Second, especially for developing countries – that are left behind both in terms of digital governance and digital competitiveness – the UK could assist to level up digital governance. Although the e-commerce chapter in the CPTPP promotes free cross-border data flow, a digital divide and divergence of digital governance exist among CPTPP members. Also, non-CPTPP members, such as ASEAN countries and India, with which the UK is seeking to extend economic relations, are behind in digital governance. Technical cooperation and capacity building to enhance legal frameworks and institution building could be a way to improve digital governance in the Asia-Pacific and the UK could play a role in these areas.

A comprehensive multi-stakeholder approach beyond FTAs/digital-only agreements could be seen as a way to enhance digital trust in the region for long-term social and economic prosperity. The UK could make use of its experience and knowledge to widely improve digital governance and promote regulatory cooperation in the Asia-Pacific. 


Footnotes

[1] IMD World Digital Competitiveness Ranking (2021) surveyed 64 countries. Among CPTPP members, Vietnam and Brunei are not included. The Ranking defines digital competitiveness into three factors and each factor is further divided into 3-sub-factors: “Knowledge” (sub-factors: talent, training and education, scientific concentration), “Technology” (subfactors: Regulatory framework, capital, technological framework), and “Future readiness” (sub-factors: adaptive attitudes, business agility and IT integration). See methodology in detail: World Digital Competitiveness Rankings – IMD. IMF World Digital Competitiveness Ranking does not provide scores.

[2] The Global Data Governance Map surveyed data governance of 51 countries plus the EU both at the national and international levels using six attributes: “Structural”, “Regulatory”, “Participatory”, “International”, “Strategic”, and “Responsible” and subdivided 26 indicators. Among CPTP members, Peru and Brunei are not included. See the methodology in detail in Aaronson, S. et all (2020). DataGovHub Paradigm for a Comprehensive Approach to Data Governance Year 1 Report.

[3] Sub-categories (26 indicators) of six attributes are as follows: “Strategic”: national data strategy, public administration data strategy, national guidelines for private sector data sharing, and AI strategy. “Regulatory”: law for the protection of personal data, open data law for the proactive release of government information by default, freedom of information act ensuring citizens can access government documents, right to be protected from automated decision-making, and right to data portability. “Responsible”: digital charter, public sector data ethics framework or guidance, AI ethics framework, and trust framework for digital identity management. “Structural”: data protection body, open data portal, open data body, public sector data governance body, and international data affairs body. “Participatory”: public consultation on personal data protection, public consultation on public data, expert advisory body on ethics and expert advisory body on data-driven technical change and its impact on society. “International”: Convention 108, open government Partnership, OECD AI Principles, and trade agreements with binding provisions on cross-border data flows. See the explanation in detail at Global Data Governance Map.

[4] “Participatory” is relatively weak among the six attributes. For example, the UK is not well performing with regard to expert advisory body on data-driven technical change and its impact on society (DataGovHub – The United Kingdom (letsnod.com)).

[5] For example, protection of personal data, freedom of information act to ensure citizens’ access to government documents, and right to be protected from decision-making.

[6] For example, digital charter, AI ethics framework, and trust framework for digital identity management.

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.

May 4th, 2022

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11 March 2022

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

President Biden announced today that the US, the EU, and the G7 countries (which includes the UK) will be suspending Russia’s Most Favoured Nation (MFN) status at the World Trade Organization (WTO). In this blog we look at what this actually means for the UK and what the potential trade implications are for the UK.

What does MFN suspension mean? A key principle of the WTO is that countries do not discriminate between each other – this is known as MFN treatment. This means, for example, that a WTO member country will levy the same tariff on the imports of a given good no matter who is exporting the good. There are some exceptions to the application of MFN treatment – notably if a subset of countries sign a free trade agreement amongst themselves. A second key principle of the WTO is that in joining the WTO countries agree to set the maximum MFN tariffs they would levy on each of their goods. In other words, countries agree to cap their maximum tariffs. These are known as the bound rates.

While there is no coordinated formal WTO response, the UK is not alone in suspending Russia’s MFN status. In so doing, together with the other countries the UK is giving itself the option (a) to treat Russia differently from other countries (b) the UK is no longer capped to levy its bound rates on Russia. Effectively this means that the UK can choose to levy tariffs and/or to restrict trade with Russia as much as it likes. Russia too has recently responded with banning exports on a range of goods inter alia to the UK, the US and the EU. There is also the issue, which we do not discuss here, as to whether it is envisaged that MFN suspension will also apply to services trade.

Suppose trade in goods between the UK and Russia completely stopped, how big might the implications be? For the UK and looking at trade in goods, Russia accounted for just over 2% of UK imports and 0.7% of UK exports in 2019 (we take 2019 so as to avoid any impacts of Covid on trade flows).[1] Similarly for Russia the UK accounts for around both 2% of imports and exports. Of UK imports from Russia around 40% are petroleum products and around 40% gold and precious metals and stones. UK exports are more mixed, though with over 15% constituting vehicles.

Overall, given the low levels of trade with Russia, the trade restrictions are unlikely to have much of an impact on the UK economy. While the overall impact may not be great it is possible that individual sectors may be affected because potentially a high share of their trade is with Russia, and prices for certain commodities may rise due to the concerted efforts by countries to isolate Russia economically – oil and gas are the key examples.

To think about those sectors that have a high share of trade with Russia, consider the table below. For each 6-digit product (of which there are more than 5000), we have calculated the share of UK imports coming from Russia. We then count for how many products is the dependence on Russia between 0 to 25% of imports, 25% to 50%, 50% to 75% or greater than 75%. What we see is that there are only 5 products in total for which Russia accounts for more than 50% of imports in those products: isobutene-isoprene rubber (85%); fertilisers containing nitrates and phosphates (77%); furskins (60%); Bromides (60%) and Beet-pulp (56%). There are 13 products where Russia accounts for between 25%-50% of imports.

2019 % Share

 

Ranges

No of 6-digit

 

items

Imports

 

Value ($ 1000)

Imports

 

Share

Imports 0-0.25 5105 13,155,451.93 94%
0.25-0.5 13 784,601.39 6%
0.5-0.75 3 32,365.28 0%
0.75-1 2 12,154.24 0%

The following table undertakes the same sort of analysis but now looks at the importance of Russia for UK’s exports. Hence for each product we have calculated the share of UK exports going to Russia. Once again, we see that for the vast majority of UK exports (5108 products) the share of exports going to Russia is less than 25%, and there are only 13 products where the share is higher than this. The five highest shares are for: a category of man-made staple fibres (100%), Amino-napthols (73%), coarse animal hair (56%), a particular category of paper/paperboard (42%); conveyor belts reinforced with textile materials (38%).

2019 % share

 

Ranges

No of 6-dig

 

items

Exports

 

Value

Exports

 

Share

Exports 0-0.25 5108 3,121,610.14 98%
0.25-0.5 12 79,448.27 2%
0.5-0.75 2 204.86 0%
0.75-1 1 3.59 0%

While the UK as an individual country is not an important trading partner for Russia, this does not mean that the UK should not introduce trade sanctions or they have little point. As discussed in our blog of the 27th January, NATO as a whole is an important trading partner for Russia (44% of Russian exports go to NATO and NATO accounts for 38% of Russian imports). A key, striking and important feature of the responses to Russia’s war on Ukraine has been the extent and depth of coordinated economic responses by NATO and EU countries and others. As part of that overall response, the UK actions do matter.

Footnotes

[1] The source of all the trade data in this blog is the UN Comtrade database.

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.

March 11th, 2022

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4 March 2022

Minako Morita-Jaeger is Policy Research Fellow at the UK Trade Policy Observatory
Senior Research Fellow in International Trade in the Department of Economics, University of Sussex

The UK signed a bilateral FTA with Australia on 17th December 2021. The Agreement is currently under UK parliamentary scrutiny for a three-month period until the middle of March. This is the first FTA the UK has negotiated with a trade partner ‘from scratch’. The Agreement is potentially an important benchmark for future trade negotiations, notably the ongoing application by the UK for accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). (more…)

March 4th, 2022

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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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Share this article: FacebooktwitterredditpinterestlinkedinmailImage 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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Share this article: Facebooktwitterredditpinterestlinkedinmail7 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.

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October 7th, 2021

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Share this article: Facebooktwitterredditpinterestlinkedinmail8 July 2021Image of Alan Winters

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

On 1st June 2021, as part of its post-Brexit trade architecture, the UK Government launched the Trade Remedies Authority (TRA). On 11th June the TRA recommended the extension of only some of the quotas and tariffs on steel imports that the UK had inherited from the EU. On 30th June, one day before these measures were due to expire, the Government rejected the TRA’s recommendation and extended the policies on several categories of steel for which the TRA had recommended the revocation. It also announced a review to check whether the TRA was ‘fit for purpose’. What was going on? And does it matter?

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July 8th, 2021

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