Hemita Bhatti, CBI – Written Evidence (CPT0026)

What are the potential benefits of joining the CPTPP that go beyond those of bilateral agreements with individual member countries of the CPTPP? Are there any disadvantages? What are the potential economic impacts on the UK? 

1. Membership of CPTPP has the potential to deliver new opportunities and help realise benefits for British business across many different sectors and regions. The growing middle class in the CPTPP markets provides a large consumer base for UK products and services. The generous rules of origin and increased market access will help UK businesses to expand into those markets. It also allows UK businesses to make products for all different markets without the need to change processes, parts, suppliers, or components, which makes investments more competitive.
2. The agreement is a wider strategic opportunity for the UK. Signing a deal with the CPTPP countries, which account for bilateral trade flows of £100bn (larger than UK trade with China) would diversify the UK’s trade with like-minded and fast-growing economies.[1] By joining the bloc, the UK could look to use its existing influence to align CPTPP members on future economic issues, such as scoping out new standards at plurilateral level that could be taken up for agreement at WTO. There is also interest from South Korea and Thailand to join the CPTPP, which could give the bloc more influence on the global stage. The convening power of this grouping is a tool that the UK should not underestimate as it looks to build out its voice as an independent trading nation.
3. The UK already has or are in the process of negotiating bilateral trade agreements with 9 out of 11 members of the CPTPP. However, the UK does not have bilateral agreements with Malaysia and Brunei – trade with Malaysia makes up £3.34bn of trade in 2017, so a 95% tariff reduction would be helpful in this case.[2] But the CPTPP could offer UK firms significant benefits that bilateral agreements in the region could not, specifically in the generous Rules of Origin chapter, which allows full cumulation for every signatory. This means that the manufacturing and production process can be spread out across territories of the CPTPP, lightening the tariff burdens when materials get moved around and increasing confidence and security in supply chains. CPTPP is also an opportunity to make trade work for a wider range of UK citizens: smaller and medium-sized businesses will be better positioned to access a rapidly growing consumer base demanding higher quality products and services from abroad.   CPTPP, together with other future trade agreements, could heighten the UK’s attractiveness for inward investment.
4. There is potential for the US re-joining the CPTPP, although unlikely in the immediate future, due to competing domestic priorities. But, if President Biden does decide on re-joining, the CPTPP could provide an alternative way to navigate the trading relationship with the US if the current bilateral negotiation proves challenging.  In a more optimistic scenario, it could helpfully compliment a UK-US trade deal.
5. There are no standout disadvantages of joining the CPTPP, which is internationally known as a high standard agreement, with low binding terms. But the UK must seek carveouts in sectors with defensive interests like the Agriculture, Automotive and IP where the agreement text poses a threat to existing trading terms. There is also a risk of CPTPP members ‘double dipping’ or accumulating the double benefits of CPTPP and bilateral trade agreements.  This could give agricultural competitors like New Zealand and Australia an advantage over the UK.

Is there any scope for the UK to renegotiate parts of the CPTPP agreement, or can it only seek derogations and exceptions?

6. The UK will be obliged to accept much of CPTPP in its current form as the UK was not an original signatory for the deal. For example, it will be challenging to move CPTPP in a more ambitious direction on intellectual property enforcement issues such as patent term extension or market exclusivity provisions in the life sciences sector without the United States, who shaped much of the original provisions in the precursor agreement but subsequently withdrew. As such, the UK will need to secure any offensive goals through side letters, where greater ambition may be possible with some of the more like-minded CPTPP members. Pursuing a “united front” with members like Australia, New Zealand, and Canada on sustainability or cybersecurity safeguards could be a good starting point.
7. The UK will also need to take care in what it gives up when securing a seat at the CPTPP table. Attempting to renegotiate the terms of an existing multilateral agreement with 11 nations is far different than attempting to negotiate a new deal with one partner. When Canada finally joined the TPP discussion in 2012, some nations worked hard (and were ultimately successful) in securing market access concessions in Canadian agriculture, as they knew the size of the TPP bloc gave them more leverage than in a bilateral setting.
8. The UK’s decision to accede to CPTPP, as it plans to negotiate bilateral deals with some of the bloc’s members also complicates their negotiating position in both settings. The longer it takes for the UK to negotiate bilateral deals with Australia, New Zealand, Canada, and Mexico, the more this could complicate the UK’s efforts to secure good carveout agreements in CPTPP, as bilateral terms would no doubt form the basis for any side letters with these partners. Additionally, negotiating 1-to-1 deals at the same time as CPTPP could encourage these countries to use CPTPP as arbitrage to squeeze the UK on two fronts in hopes of securing additional wins.

What would be the impact of the US seeking to re-join the CPTPP? What provisions might it seek to reactivate or renegotiate, and under what circumstances might it be able to do so? 

9. Given that trade and foreign policy are not currently top-level priorities for President Biden, it is unlikely that his administration will re-join the CPTPP in his first term. Katherine Tai, Biden’s chief trade negotiator, has been hesitant to endorse the CPTPP, claiming that while it offers a potential overlap with US geostrategic interests, it also represents a bygone era of American trade policy that agreements, the US is instead likely to focus on the enforcement and implementation of existing agreements such as the Phase 1 deal with China and the US-Mexico-Canada Agreement.
10.         If the US were to re-join, they would almost certainly need CPTPP signatories to agree to reforms and adjustments so it could become politically feasible for sceptical Democrats in Congress (who are not united on trade policy). President Biden has promised that any new trade deal negotiated during his administration will need to include strong environmental and labour chapters, meaning that these issues would be targets of reform in the event the US returns to the table. The US would also look to reactivate provisions of the TPP that were removed in the CPTPP on copyright enforcement, patent protections, and safe harbour for internet service providers. However, like the Trump administration, Biden’s team has expressed scepticism of sweeping investor-state dispute settlement (ISDS) provisions, so it would be unlikely for them to prioritize a reform of this chapter.

Rules of origin

How might the rules of origin in the CPTPP benefit UK manufacturers, considering that the UK’s supply chains are more closely intertwined with EU member states than CPTPP signatories?

11.         The CPTPP is seen as generous with its rules of origin offer as it provides ‘full accumulation’ for members.  The full accumulation of rules of origin allows for greater diversification of the manufacturing process, which may be carried out among different territories within CPTPP. This lightens tariff burdens on movement of materials within CPTPP, helps strengthen supply chain resilience and increases procurement of materials and parts from the members and increases investment within CPTPP. This would be beneficial for UK manufacturers in theory, as it would enable them to import and export components to CPTPP markets more easily and help make investments more competitive.

12.         However, the right to import and export components to CPTPP markets freely, would not extend automatically to re-exporting those components as part of finished products tariff free to the EU.  UK business does far less trade with CPTPP than with the EU – UK does £100 billion worth of trade with CPTPP members, whereas it does £668 billion with the EU.[3]  Many UK manufacturers have their distribution hubs located in EU rather than the Asia Pacific, due to its geographic proximity. That is why, UK manufacturers are more concerned by the lack of ‘full accumulation’ with the EU than they are by securing full accumulation within CPTPP. They cannot reap the benefits of full accumulation until the EU also agrees to it with the UK. For example, battery exports come in from Japan via EU into the UK, and the UK exports engines to the EU, which are then sent on to Japan. UK supply chains are fully integrated with the EU and it may be difficult and costly to disconnect these supply chains with Europe and reconnect them to CPTPP markets- the incentive to do so is consequently low.

13.         The UK must be cautious about manufacturers from other CPTPP members benefitting more from the rules than UK manufacturers. There should be carveouts in industries like automotive, where agreeing to liberalise all trade in finished vehicles upon entry would give Japanese manufacturers access to the UK market much earlier than the access set by UK-Japan trade agreement and would risk saturation of the UK market. It is a difficult carveout to negotiate, given that the UK would still want to maintain liberal tariffs with other CPTPP members, which Japan would be unlikely to concede.  UK could benefit from an accelerated tariff phase out with CPTPP markets like Vietnam (where it has currently agreed a 15-year tariff phase out) and Malaysia, where there is currently no bilateral trade deal.

Regulations and standards

Would accession to the CPTPP require any divergence from the regulatory standards that the UK and EU currently still share? What would be the implications of this?

14.         The CPTPP does not pose a threat to any regulatory alignment measures shared by the UK and EU. The agreement clearly upholds the right of signatories to regulate their own markets and, most importantly, does not look to impose specific regulatory outcomes on the signatories. Nor does the CPTPP seek out mandatory regulatory harmonisation – there are no rules saying the UK would need to adopt or recognise Australian machinery regulation or Vietnamese provisions on Personal Protective Equipment, for example.
15.         Rather, it seeks to establish a common understanding of what mechanisms should be used to determine international standards while upholding each state’s regulatory provisions and frameworks - such as individual signatory provisions on wine, medical devices, organic products, etc. It is worth acknowledging that the standards provisions in CPTPP, located in the Technical Barriers to Trade (TBT) chapter, are rather basic, building only slightly upon the WTO’s TBT Agreement.

What scope is there for the UK to promote international standards through the CPTPP and how might it do that?

16.         The UK will not be able to change or renegotiate the text of the TBT chapter in the CPTPP on standards. But accession to the deal could provide UK firms and regulatory bodies new opportunities to influence the discussion on international standards - both bilaterally and within multilateral groups like the International Standards Organisation (ISO). This is particularly true for industries and sectors where few current international standards exist, such as machine learning for medical devices.
17.         CPTPP could provide an effective platform for the UK to build the necessary commercial and diplomatic relationships in the region that help identify shared interests and raise them together on the world stage. In many ways, the text of the deal on standards is secondary to the power that CPTPP offers as a framework for future cooperation on new standards fit for the future. A good example is the Digital Economy Partnership Agreement (DEPA), an ambitious agreement that seeks to standardise areas like paperless trade, safe cross border data flows, and an ethical approach to AI regulation. Given that it has been created by three CPTPP members (New Zealand, Singapore, and Chile), the UK’s accession could make it easier to join the DEPA and lobby for the adopting of its provisions at the multilateral level.

Climate change and sustainability

Does CPTPP have adequate provisions to allow accession countries to maintain environmental protections?

18.         The CPTPP is a step towards closing the link between environmental protection and trade. It has an enforceable chapter on the environment, and it is more ambitious compared to existing trade agreements when it comes to environmental provisions. It pursues high levels of environmental protection and enforces environmental laws effectively, and actively ensures members do not derogate from these laws to encourage trade and investment.
19.         Joining the CPTPP allows the UK to influence and support forward leaning action on climate change through initiatives led by individual CPTPP members, like the Agreement on Climate Change, Trade and Sustainability (ACCTS), which is currently being led by New Zealand and negotiated with Fiji, Iceland, Norway, Costa Rica, and Switzerland. UK as a member of the CPTPP can work with members to adopt more ambitious climate provisions and garner support for the agreement at the WTO. 
20.         However, 4 out of 7 multilateral environmental agreements (MEAs) have been left out of the CPTPP.[4] This includes the Inter-American Tropical Tuna Convention, the Ramsar Convention on Wetlands, the International Whaling Convention, and the Convention on Conservation of Antarctic Marine Living Resources. This means the agreement does not cover air and water pollution other than from ships; climate change and possible carbon taxes; desertification; environmental justice; fossil fuel subsidies; genetically modified organisms; hazardous wastes and toxic chemicals; indigenous environmental rights; nuclear waste; oil and gas development; persistent organic pollutants; and wetlands preservation. So, although the agreement is forward leaning on environmental protections, it could go further and include a broader range of issues with environmental impacts. The UK should therefore seek to go further bilaterally with individual CPTPP members and see if others could join.
21.         It is concerning that there is no mention of climate in the deal. In fact, CPTPP contains provisions that may undermine UK climate targets. The ISDS mechanism allows foreign businesses to challenge climate policies in courts. It has previously been used by energy companies to challenge governments from introducing legislation due to concerns about the high cost of defending cases. This is another reason why there needs to be carveouts on the ISDS mechanism, as it risks discouraging governments from being ambitious with their climate policies.

Services trade

What are the opportunities for the UK financial services and professional business services industries? In particular, what opportunities are there for the facilitation of movement of businesspeople between the UK and CPTPP member countries, and the mutual recognition of professional qualifications?

22.         UK businesses are leaders and trend setters in services sectors like education, cybersecurity, surveillance technology, and financial education, and would see ample opportunity to offer expertise in CPTPP markets as local income levels rise. And as more residents in the region gain access to credit and finance, UK financial services firms also have an opportunity to fill demand.
23.         Given that many CPTPP countries are looking to use large infrastructure projects as a bedrock of growth, another area of opportunity for services firms is infrastructure services such as architecture and engineering. CBI members would be eager to see a liberalised regime for the mutual recognition of professional qualifications in these sectors but understand that this will probably need to be achieved via side letters or separate bilateral agreements. The agreement is also light on liberalising the mobility of persons through Mode 4 services provisions or extended stay visas, something the UK will need to prioritize in bilateral negotiations as well.
24.         However, in other services sectors such as insurance, CBI members are primarily concerned with protecting market access and regulatory alignment terms that they have already achieved at the bilateral level with CPTPP members (like Canada) than they are in carving out new terms in a multilateral forum. It can be challenging to outline the clear and demonstrable benefits that multilateral agreements offer to services firms, given that the data on changes to cross-border services trends is not as current or reliable as with merchandise trade flows.
25.         Based on survey responses, CBI members are much more likely to expect CPTPP to bring benefits to merchandise trade than a radical change to services regimes. And while CBI services firms see opportunities in the wider Pacific Rim, these opportunities are viewed as the result of a burgeoning middle class in CPTPP markets than any terms of the text itself. So, the benefits of CPTPP for services may come from closer political relationships and greater business attention rather than better market access.

Digital trade

How should the UK balance the opportunities in digital trade with any concerns about data protection? Should the UK press to improve CPTPP data protection standards?

26.         CPTPP’s language on digital trade matches much of the UK government’s ambition in its other trade negotiations. For issues such as the prevention of forced data localisation and forced source code disclosure, CPTPP includes similar language to the UK-Japan FTA and the US-Mexico-Canada Agreement (the basis for US-UK FTA talks) but falls slightly short due to a larger list of exceptions and carveouts. CBI members welcome this. However, given these more stringent “strings attached” in CPTPP, the UK has a better opportunity to revolutionise digital trading flows through plurilateral agreements with individual CPTPP members like the Digital Economy Partnership Agreement (DEPA) with New Zealand, Chile, and Singapore or the Australia-Singapore Digital Economy Agreement (DEA). The UK needs to start a dialogue with business to review the DEPA and DEA – checking to see what works and does not work for them, and how they can replicate or join such agreements to spur the UK digital economy forward.
27.         However, CPTPP does present potential challenges to the ability of UK firms to transfer EU data to a third country in the CPTPP agreement. Under the terms of its adequacy deal with the EU, it is the UK government’s responsibility to safeguard EU data transfers from the UK into third countries that do not have their own adequacy deals with the EU. The UK should not risk a challenge to its own data adequacy deal with the EU if it cannot properly commit resources to overseeing the increased flow of data to 11 new countries.

Investment

How should the UK approach the investor-state dispute settlement (ISDS) provision in CPTPP? Should the UK seek exemption from ISDS by signing side letters with CPTPP member countries? Should the UK push for a multilateral investment court system, if there is scope to do so?

28.         The investment chapter of the CPTPP contains the investor-state dispute settlement (ISDS) mechanism. This is a controversial mechanism as it allows investors to sue countries for perceived discriminatory practices, making nation-states vulnerable to private companies.
29.         The provision enables companies to sue governments over decisions that impact their corporate profits even if those decisions are made in the public interest. Arbitrators are paid on a case-by-case basis, and so benefit from an increase in claims. Because governments may not use the ISDS system to sue investors, if arbitrators have bias toward companies or investors, they might encourage further investor claims in order to benefit from them commercially. 
30.         The Code of Conduct for ISDS Proceedings was established in CPTPP, to address perceived legitimacy concerns that arise when a system permits adjudicators to act as arbitrator in one case and legal counsel in another (double hatting). This provides for some objectivity in to the ISDS process, which other agreements like NAFTA lack.
31.         Although the ISDS mechanism is more transparent and objective in CPTPP compared to other agreements, there is still risk of the UK government becoming disproportionately targeted through ISDS, as Canada and US had been in NAFTA with 15 and 21 cases made against them, respectively. That is why it is important to establish some carveouts to protect UK against opportunistic litigation.
32.         New Zealand signed side letters with five members of CPTPP – Brunei, Malaysia, Peru, Vietnam, and Australia – to exclude compulsory ISDS. This was done using two approaches: first, by fully excluding an investor's right to ISDS and second by a more complex route for dispute resolution on a staged basis. However, investors may be able to draw on the general consent to arbitration in a prior treaty such as AANZFTA to pursue ISDS against one of the states, even without the respondent state's specific consent to arbitrate that dispute. So, although NZ has carveouts, it is not 100% protected against ISDS. When UK begins pursuing carveouts on ISDS it must keep in mind that signatories with existing bilateral trade deals with UK could use the terms of them to any carveouts.

Intellectual property

What implications do the intellectual property provisions in the CPTPP agreement have for the UK? Should the UK seek an exclusion for the audio-visual sector?

33.         Intellectual Property (IP) plays a huge role in contributing towards UK’s innovation and creative industries, which are world leading and a key asset to the UK economy.
34.         Firms in the UK market sector invested £134bn in knowledge assets in 2016, 50% of which were protected by IP rights. The UK is one of the top 10 countries as a base for global R&D performing companies with UK R&D valued at £25 billion in 2018.
35.         One of the key concerns for business in joining the CPTPP, is the significant risk that exists to patent grace periods, patent term adjustment and UK’s membership of the non-EU Patent Convention (EPC). Both the proposed UK bilateral Australia and New Zealand Trade deals include approaches to protect existing UK IP standards and consistency with the UK’s existing inter­national obligations, including the EPC. This needs to be replicated in the negotiations on CPTPP.
36.         The grace period and patent term adjust­ment provisions in the CPTPP are not present in UK patent law (or in the EPC), and clear carveouts from them in the CPTPP agreement are essential. Business would support a provision like the one agreed in the UK-Japan CEPA, which reads, “The Parties shall continue to cooperate to enhance international substantive patent law harmonisation, inter alia on grace period, prior user rights and publication of pending patent applications.”
37.         The patent term adjustment is currently suspended in all CPTPP members, which suggests carveouts would be possible. However, for the UK such suspension (or other opt-out) should be permanent. 
38.         On the audio-visual (AV) sector specifically, the UK should seek a complete carveout of AV services from the IP, services, subsidies, and digital trade chapters of the CPTPP agreement. It is important the current high standards of UK IP protection and enforcement are maintained. Producers’ most valuable asset (their IP) needs to be protected from any potential theft or infringement, which can cost very significant amounts in legal fees. The carveout of AV in the UK-Japan deal is sub-optimal as there is reference to a committee which will look at matters in relation to services. For the CPTPP, the UK would want to see a full exclusion of AV to protect the UK industry.

12 March 2021