A NEW COURSE
In the context of Global Britain’s lofty goals, Lawrence Dore (London) and Tamlin Vickers (Brussels) of DRD Partnership offer an informative update on the UK’s record on post-Brexit trade
Following its departure from the EU at the beginning of 2021, the UK has embarked upon an unprecedented programme of free trade agreement (FTA) negotiations, as it has sought to chart a new course post-Brexit. With its relations with the EU in the doldrums, the UK government is under growing pressure to secure FTAs beyond Europe in order to demonstrate the benefits of Brexit. This political context has meant that unlike most of the world pro-free trade arguments are winning the day in Britain. As a result in 2022 we could well see the UK securing a ground-breaking FTA with India and becoming a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
UK’s record to date
2021 was the first year in which the UK was able to negotiate its own bilateral FTAs as a non-EU member. The UK government hit the ground running and against expectations managed to conclude an FTA with Australia, an in-principle FTA with New Zealand, a digital trade agreement with Singapore, and an economic partnership agreement with Japan. The UK also agreed over 70 ‘continuity’ agreements (essentially replicating existing EU ones), and submitted its application to join the CPTPP. A pretty impressive start.
The UK-Australia FTA, signed in December 2021, was the first FTA that the UK has concluded post-Brexit. Welcomed by business leaders, the deal improved mutual access to public procurement contracts, extended mutual recognition of professional qualifications, and deepened mobility between the countries.
The agreement also reduced barriers in agricultural trade. The criticism this attracted from British cattle farmers concerned about unfair competition and from environmental groups for promoting long-distance transportation of beef for marginal consumer gains, was brushed aside by the UK government. Indeed for the UK the FTA was a statement of intent – International Trade Secretary, Anne Trevelyan, described it as a blueprint for other countries wishing to do trade deals with the UK, so they can ‘see just how expansive the UK wants to be’.
2022 and beyond
For all the success of the UK’s first year, the reality is that FTAs in themselves do not tend to bring about much economic benefit. Given that Brexit is forecast by the UK’s Office for Budget Responsibility to cost the UK 4 per cent of GDP over the long run, there is quite an economic gap to make up. The Australian and New Zealand FTAs are expected to boost UK GDP by just £500 million and £200 million annually – 0.02 per cent to 0.01 per cent – and that is only after 15 years. It is only FTAs with countries of the size of the US, China or India that would make a perceptible economic difference. With no progress expected with the US or China in the foreseeable future, the UK’s best hope for a major agreement is with India.
India is on course to become the third largest economy in the world by 2050, and the UK government hopes bilateral trade will double over the course of this decade. India is, however, a notoriously tricky trade negotiator, with powerful domestic vested interests making any moves to liberalise access into its market very challenging. Australia and the EU have both been negotiating for over a decade without success.
The stars may however be aligning for the UK. The Modi government is thought to be keen to make tangible progress with the UK and the two countries recently launched negotiations with an ambitious aim of reaching an agreement by the end of 2022. The areas in which India is likely to push hardest on – it wants Indian services providers and intra-corporate transferees to be allowed to work temporarily in the UK and Indian students to stay in the UK for two years after graduation – are likely to be met with an accommodating attitude from a UK government desperate to strike a deal. It is therefore not inconceivable that a meaningful agreement (possibly not a full-blown FTA) will be reached this year.
UK’s application to join the CPTPP
Another interesting trade development for the UK this year – and the government’s number one priority – is accession to the CPTPP, a trade agreement between 11 Asia-Pacific countries, with a combined population of 500 million people accounting for 13 per cent of global GDP.
A key reason for the UK prioritising its negotiations with Australia, New Zealand, Singapore and Japan last year, was that agreements with existing CPTPP members was seen as a strategically important first step to facilitate accession to the CPTPP. The UK is for the same reason soon to begin negotiations with Canada and Mexico to upgrade their existing agreements. (The only other FTA which the UK is focusing on this year is with the Gulf Cooperation Council, comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE).
The UK’s application has been broadly welcomed by the CPTPP’s founding members, particularly Japan, which sees UK accession as potentially strengthening the pact’s geostrategic aims. Existing members would also gain through improving their access to the UK market which, as well as being valuable in its own right, is seen as providing a good testing ground for the global market; the power of UK media means that success stories can be communicated to other markets worldwide. From the UK’s perspective, accession would improve market access for British services and digital companies, and enable firms to build more efficient supply chain networks, taking advantage of the varied economic structures of the member countries.
What of the UK’s most important trading partner?
CPTPP accession represents the best opportunity in the short-term for the UK government to demonstrate a tangible benefit of its post-Brexit trade policy autonomy. It would show that the UK was able to tap into new opportunities outside the EU, as well as cement geostrategic alliances in increasingly important region – a neat synergy between the UK’s trade policy and broader foreign policy goals.
The National Security and Investment Act portrays mixed messages for UK inward investment
by DRD Partner Jon McLeod and Associate Anna Cacciaguerra Ranghieri
In the wake of Brexit and the disruption of the pandemic, the UK government is keen to stress that Britain is open for business. But for some investors, uncertainty around new rules portrays a more complex picture.
The New Year heralded the UK’s National Security and Investment Act (NS&IA), subjecting 17 designated sectors to direct political intervention in the case of a perceived threat to national security. The Business Secretary has the additional power to review any qualifying transaction in any sector if they are concerned an investment may raise concerns.
The Act is broad, covering domestic, as well as foreign investment, and leaves considerable grey areas for dealmakers – not least in the definition of national security. Further, the legislation contains no provision to appeal, meaning businesses must get it right first time. Suddenly, some transactions are looking riskier, or at least less clear cut for prospective dealmakers. Our own poll found that 70 per cent of them believe the new rules will make it more difficult to do deals in the UK, while almost threequarters believe it will be harder to attract foreign capital.
This is not the only sea change in the post-Brexit regulatory environment to be examined by foreign investors, as the UK emerges from the pandemic. The second phase of the Future Regulatory Framework Review is underway, proposing that City regulators lead on developing regulatory requirements, subject to scrutiny by the Treasury and Parliament.
The Business Secretary has been quick to reassure dealmakers that the screening process of the NS&IA is “simple and quick, giving investors and firms the certainty they need to do business”. But some will inevitably sense mixed messages. Much will depend on the real-world application of the new Act, and the proof will be in the pudding for future transactions.
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