The UK’s membership of the Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP) trade group brings new supply chain opportunities. They should not be overstated: The UK already has trade deals of varying sorts with all CPTPP members except Malaysia and Brunei.

➤ Export opportunities could add 0.4% to annual UK growth in shipments to the CPTPP group, with the largest opportunities in autos and organic chemicals.

➤ Membership of the CPTPP may make access to Malaysia as a reshoring opportunity easier. Some of the biggest opportunities are in electronic components, consumer electronics, apparel and building materials. Malaysia offers lower operational risks and costs than mainland China.

➤ The UK will also be more deeply entangled with other regional deals including the Regional Comprehensive Economic Partnership (RCEP) and United States-Mexico-Canada Agreement (USMCA). Improved access to Mexico, already utilized extensively by automakers and capital goods firms, may be useful, given the lack of a trade deal between the US and UK.

New deal, old hurdles: UK signs up for CPTPP
The UK has announced it is joining the CPTPP, a Pacific-basin focused group covering 11 countries including Japan, Malaysia and Mexico, among others.

– Discussions were initially mooted in 2020, as discussed in our report “Brexit Watch: Ford, BMW have a stake in quick-and-dirty CPTPP deal.” The formal application process began in 2021.

The UK already has trade deals in force with eight of the 11 countries in place as of March 2023. Those largely result from continuity deals signed after the UK left the European Union in 2020.

– A trade deal with Japan, the largest economy in the CPTPP, was already signed in October 2020. Similarly, a trade agreement reached with Vietnam in 2021 has already resulted in a widening, deepening and accelerating of tariff cuts versus the prior EU-Vietnam deal.

– The UK has also signed, but not yet fully implemented, trade agreements with Australia and New Zealand. That leaves Malaysia and Brunei as the countries where the UK’s joining the CPTPP yields an incremental free trade area, as opposed to accelerating existing deals.

– The CPTPP group represented 7.0% of UK merchandise trade in 2022, according to S&P Global Market Intelligence data. In the case of exports, Singapore was the largest market with 1.5 percentage points of the 6.5% total share. For imports, Canada represented 2.1 percentage points and Japan 1.6 percentage points of the CPTPP group’s 7.4% share.

A formal signing of the deal is expected in 2023, though hurdles include formalization of legal texts, British parliamentary approval and domestic ratification by existing CPTPP members.

– Approval by parliamentary bodies can take an extended period as demonstrated by the rollout of the CPTPP itself, which was only approved by 10 states as of February 2023 — Brunei has yet to ratify — after being signed in March 2018 and initially ratified by six countries in December 2018.

The same, but quicker: export market opportunities
The UK government has identified benefits for the UK including £1.7 billion of additional exports over the next 15 years. The majority of benefits are expected to come from nontariff measures, rather than tariff removal.

– Participation in rules of origin — where a certain proportion of a product has to come from within the trade area in order for the finished product to transit the area tariff-free — may be a boon for UK component manufacturers, particularly in autos.

– The implementation of simplified customs and trade facilitation measures as well as standardized regulations and conformity assessments may cut the cost of trade with the UK for CPTPP members versus nonmembers.

UK exports to CPTPP members have underperformed total UK shipments since 2016, falling 0.8% annually between 2016 and 2022. Exports to the rest of the world increased 0.02% annually, according to Market Intelligence trade forecast data.

– The outlook may be slightly better, with exports to the CPTPP group expected to grow 2.5% annually through 2030, compared with 2.0% for all other destinations.

– Assuming the government’s £1.7 billion of extra trade comes to fruition over the next 15 years as predicted, growth could be enhanced by 0.4 percentage point annually.
– Given the UK already has free trade agreements with most CPTPP members, the room for extra growth may be limited, though the government has noted that CPTPP membership may accelerate tariff reductions versus existing agreements. Many of the deals are also under five years old and so may not have yielded all their benefits yet.

The opportunities for expanding exports can be seen via a trade gap analysis. This shows the share of exports to CPTPP countries versus those to non-CPTPP countries. We have excluded the EU from the analysis to avoid over-recognizing raw materials and supply chains that require geographically short connections.

– Among manufactured goods, the largest gap is in automotive vehicles, which represent 9.8% of exports to the CPTPP versus 10.9% to the world excluding the EU in 2022, according to Market Intelligence trade data.

– Additionally, exports of automotive engines were 1.1% of CPTPP-bound exports versus 1.7% for all others. Notably, the UK government has held autos as an example of where companies can take advantage of the CPTPP’s rules of origin.

– Organic chemicals including pesticides (HS 2933), hormones (HS 2937) and vaccines (HS 3002) accounted for 2.5% of CPTPP exports versus 4.3% of all others. All three are areas where the regulatory alignment embedded in the CPTPP may help increase the competitiveness of UK exporters.

Agricultural exports were a major focus for the government’s documentation, given the political sensitivities of farming employment, as discussed by Market Intelligence’s Food & Agricultural Commodities team.

– Yet, in total, food products accounted for 1.8% of exports, in line with exports to non-EU countries, indicating little gap advantage. While that was well below the 5.0% of exports to the EU, most of the EU-bound shipments were perishable goods.

Malay-shoring: Improved supply chain flexibility

UK companies may find additional opportunities for reshoring from entry into the CPTPP. As noted already, the main new market accessed under the agreement is Malaysia.

– That may provide an alternative to sourcing from mainland China. India has also been a focus for many firms, as discussed in “Dial R for reshoring: Telecoms supply chain restructuring.” Notably, the UK also has a trade deal under discussion with the government of India but not with that of mainland China.

Opportunities for sourcing from Malaysia rather than mainland China may be most prominent among products where mainland China’s share of UK imports is high while Malaysia already has a presence.

– Electronics are the largest opportunity, particularly including semiconductors and electronic components. For the latter, mainland China represented 49.3% of UK imports in 2022 while Malaysia accounted for 2.6%.

– For consumer electronics, mainland China’s shipments of printers and vacuum cleaners accounted for 30.4% and 62.4%, respectively, while Malaysia’s were 6.6% and 11.4%, respectively.

– Outside electronics, there are also opportunities in apparel, including gloves and building materials such as laminated wood.

Simplified trade regulations and tariffs are only a small part of the sourcing decision process. The balance of costs and risks must be appropriate, too.

– Malaysia’s overall operational risk score — admittedly just one of those estimated by Market Intelligence — of 1.4 (0-10 logarithmic scale) is similar to Japan and Canada. But labor compensation rates are one-quarter those of Japan and Canada, according to Market Intelligence data.

– While Malaysia’s labor costs are 40% higher than India’s, Malaysia’s operational risks are significantly lower. When compared with mainland China, Malaysia offers lower operational risk and lower costs.

CPTPP and beyond — adjacent market access and expansion

The UK’s CPTPP membership brings with it an entanglement with other Pacific rim trade areas and strategies, including the RCEP — led by mainland China and the ASEAN group of countries — and the US-led USMCA and Indo-Pacific Economic Forum arrangements.

– The UK already has a trade deal with Mexico resulting from the continuation of the EU-Mexico deal. That deal was updated and signed in April 2018 after initial formulation in 2000. Notably, the USMCA was only updated in November 2018, raising the prospect of some incompatibility as well as development opportunities.

Access to North American supply chains via Mexico could prove to be particularly important for UK manufacturers. The Biden administration has so far shown minimal desire to engage with the UK in developing a fully fledged trade deal:

– No special deal has been offered to access the Inflation Reduction Act’s benefits, unlike the negotiations being held with the EU.
– There has been little sign of a willingness to develop trade relations after the resolution of the Northern Ireland protocol with the EU.

– In any event, the administration does not have “fast track” Trade Promotion Authority, so would struggle to complete a significant trade deal during the remainder of the Biden administration.

Some of the largest exporters from the UK to Mexico already include multinational manufacturers, including automakers BMW Group and Tata Motors Ltd. (Jaguar Land Rover), as well as capital equipment manufacturers Caterpillar Inc., Cummins Inc. and Sandvik AB (publ), according to Panjiva data.

– All five companies mostly ship components to Mexico, presumably for onward manufacturing as well as direct supplies into the rest of North America.

– Shipments linked to BMW AG and Cummins Inc. grew fastest in 2022. All five had significant volatility in 2020 and 2021 shipments due to the Mexican government’s treatment of autos and capital goods factories as nonstrategic during the pandemic, as discussed in “GM, Autoliv face higher trucking costs during COVID-19 recovery.”

As discussed already, the strategic risks associated with doing business in Mexico are somewhat higher than those in other CPTPP jurisdictions. There has also been a steady increase in Mexico’s strategic risk score since the last presidential elections in 2018.

– The increase in risk comes from legal risk issues, including state contract alteration as well as broader contract enforcement challenges. Operational risks have also increased, including an elevated regulatory burden as well as labor issues in the wake of the passage of the USMCA. The latter have dissipated somewhat recently.

It is also worth noting that other countries including Costa Rica, Ecuador and Uruguay have formally applied to join the CPTPP, while the Philippines, South Korea and Thailand are considering applications. The six combined accounted for 2.0% of UK exports in 2022, although the UK already has a free trade deal with South Korea, which accounted for 1.3 percentage points of the export share.

– While mainland China has previously considered joining, thus far no formal accession process has begun. Thus far, there appear to be no plans for a free trade agreement between the UK and mainland China. If the UK joined the RCEP, that would add mainland China as well as four other ASEAN states for 6.4% of trade.

Source: Platts