This month’s trade tracker takes a deep dive into trade deals. It looks at what deals the UK has recently signed and is currently negotiating, as well as the economic impact they may have.
This will be part one of two, with next month’s tracker focused on the EU and its current trade talks, as well as how they differ from what the UK has been able to negotiate since leaving the single market.
Of the 71 free trade agreements or trade deals the UK has signed since leaving the EU, 68 are rollover deals identical to the deals the UK had with those 68 countries when it was in the single market. These rollovers are not insignificant; they have allowed the UK to continue relations as they were with key trade partners across the globe.
However, as conduits for trade growth, they will do little to expand the UK’s trade reach further than when it was in the EU. Hence, the government will tote this number often, but little media coverage has been given to any of the 68 deals. Instead, coverage has largely focused on the details of the new three new agreements the UK either has signed or is currently negotiating that will lead to new trade opportunities previously not afforded while a part of the single market, namely Japan, Australia, and New Zealand.
One such agreement was the UK-Japan Comprehensive Economic Partnership Agreement (CEPA). The deal was negotiated and signed in October 2020, before coming into effect on 31 December 2020, coinciding with the end of the transition period for UK withdrawal from the EU.
Initially, this deal was labelled by the government as a ‘historical deal’ that diverged from the agreement the EU has with Japan. However, the UK Trade Policy Observatory analysed trade data for the first twelve months after the deal was ratified and found that trade fell. In addition, it found there was little additional economic value to the UK and that the deal was nearly identical to the trade deal the UK had with Japan while part of the EU, with the exception of a chapter on digital trade.
Signed but not in force
The UK currently has six deals signed but not in force. Two are part of the 71 signed rollover deals. They are Madagascar and Comoros – part of the economic partnership with Eastern and Southern African countries (ESA) – and are awaiting ratification by the respective countries.
The remaining four are considered new agreements made outside of the EU. The UK signed a digital economy agreement with Singapore and a digital trade agreement with Ukraine. While not free trade agreements, they still strengthen ties with the two countries.
Australia and New Zealand are the two landmark post-Brexit free trade agreements. They were signed on December 2021 and February 2022, respectively. These deals were negotiated from scratch, in theory allowing the UK to tailor them as per its objectives.
However, many commentators, as examined below, have viewed the agreements as benefiting Australia and New Zealand more than the UK. Once in force, the deals will ensure zero tariffs on all UK exports to Australia and New Zealand and on 99.5% of exports from Australia and New Zealand to the UK. The small number of exceptions are for sensitive agricultural products like meat and dairy products from New Zealand and long-grain rice from Australia, sectors which the UK sees as vulnerable to international products crowding out local products.
Both deals have been signed but are not in force. They currently await the completion of domestic legal and parliamentary processes from the UK, with Australia having ratified the agreement in November 2022; once those are completed, the agreements will enter into force 30 days later. The best estimate is that this will occur in the first half of 2023. Before they are enacted, what benefits and concessions are expected and were made respectively?
Australia deal: benefits and concessions
The Australian think tank, the Lowy Institute, reports that the UK’s tariff elimination for Australia is ‘almost unprecedented’, particularly when compared to Australia’s free trade agreements with the likes of Japan, China, the US, Korea, CPTPP, or EU.
The UK, on the other hand, did not receive special treatment. Australia already has very low tariffs, so the request to eliminate them was unproblematic. As was noted by the Lowy Institute, ‘Sure, Australia has agreed to eliminate its own tariffs, but that is somewhat like landlocked Switzerland offering to eliminate its navy’.
As part of the agreement, Australia will loosen migration schemes for UK nationals by expanding the access to working holiday visas to include 35-year-olds, increasing the length of stay from two to three years, and removing specified work requirements including regional work in remote areas. Additionally, Australian employers are no longer required to show an economic necessity when hiring UK nationals.
Notwithstanding the opportunities for British citizens, the benefits for the UK seem to revolve around what this agreement represents rather than the opportunities it opens. The Australia free trade agreement was the first post-Brexit deal. The then Secretary of State for International Trade, Liz Truss, said this deal would pave the way for the UK to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), opening up trade with 11 large trade relation countries. It has been suggested by trade journalists following the story that the government was willing to concede more in this deal as both a long-term plan to open doors to bigger deals and a short-term PR win post-Brexit.
Following the announcement, UK farmers immediately pushed back on the agreement based on predictions that the UK market would be flooded with cheaper lower-quality meat from Australia. That is saying nothing about the environmental cost of shipping beef across the world.
The government has countered these claims, stating that the deal ensured rigorous import requirements and that Australian produce met UK food regulations. They also said that Australian imports would not hurt UK farmers; instead, they would replace EU imports of products such as beef. They further stated that 81% of beef sales are UK-grown beef, and retailers like Aldi, Morrisons, M&S, and Waitrose were committed to selling 100% British beef.
That didn’t stop the deal from being criticised, most significantly by the former Secretary of State for Environment, Food, and Rural Affairs, George Eustice, who claimed the deal was ‘not actually a very good deal for the UK’ because of the effect it might have on UK farmers.
The actual effect on the market won’t be known for some time after the agreement comes into effect as supply chains adapt and expand to the terms of the agreement. However, due to the distance and that before the agreement, Australian imports into the UK of beef, pork and lamb were only 0.6%, 0%, and 12% of total imports, respectively, the effect will most likely be minimal and not sudden, as supply chain coordination and procuring buyers would not be a quick process.
Indeed, while the Department of International Trade states that this deal will increase bilateral trade with Australia by £2.3 billion (53%) it will only increase UK GDP by 0.08% by 2035. The small economic effect is not surprising due to the size of trade with Australia, which currently stands at 1.6% of all exports and 0.7% of all imports.
The UK’s Agriculture and Horticulture Development Board (AHDB) has published some of the most extensive reports on the effect these trade deals will have on UK agriculture. Their economic modelling showed that the UK could expect to see an increase in Australian imports for all agriculture commodities. However, the volume of this increase will be modest compared to total UK imports. The chart below highlights four sectors and the anticipated growth in imports from Australia and UK exports to there. It illustrates that while imports, percentage-wise, will increase significantly with the deal, the effect on domestic production will be minimal.
|Sector||Domestic production||Domestic price||Imports from Australia||Exports to Australia|
|Lamb||-0.1% (-200 t)||-0.1%||+80.9% (+10,000 t)||N/A|
|Beef||No change||No change||+260.7% (+12,000 t)||N/A|
|Dairy (cheese)||-0.3% (-1,500 t)||-0.5%||+254% (+1,100 t)||+199% (+2,600 t)|
|Oilseeds||-0.1% (-1,500 t)||-2%||28,000 t||N/A|
|Source: AHDB and Harper Adams University|
New Zealand: benefits and concessions
From the UK’s perspective, the rationale behind the New Zealand free trade agreement was similar to that of the Australia deal, providing a PR win and, since Australia and New Zealand are both members of CPTPP, paving the way for accession into the CPTPP.
Similarly, the economic impact will be small, GDP will only be 0.03% higher in 2035 as a result of the agreement. The UK’s manufacturing sector (motor vehicles, machinery, transport equipment, and textiles) is expected to benefit the most. In contrast, agriculture, forestry and fishing, and semi-processed foods are expected to experience negative impacts.
Trade between the UK and New Zealand is expected to grow by 41%. For New Zealand, the deal is expected to boost GDP by 0.12%, with increased imports of goods such as vehicles, machinery, and pharmaceuticals from the UK. The deal will remove the high tariffs on New Zealand exports of meat and dairy, wine, honey, seafood, and vegetables and fruit.
As reported in our divergence tracker, trade bodies, including the British Chambers of Commerce and Federation of Small Businesses, have welcomed the opportunities the deal provides to increase trade in both goods and services. Some of the most prominent criticism has come from the National Farmers Union, which says sensitive sectors like beef and lamb, dairy, and horticulture will be exposed to unfair competition from New Zealand farmers who face lower costs to production and are already highly export-oriented in their practices. The Welsh government and Scottish Farmers have also expressed concern about the impacts of the FTA on Welsh meat producers.
The AHDB’s research found that under the agreement, UK supermarket shelves are unlikely to be flooded with New Zealand red meat. While the headline results for the percentage change look substantial, such large percentage shifts are due to the extremely low amount of product coming in before the deal was signed.
|Change in NZ exports to UK (tonnes)||Change in NZ exports to UK (%)|
|Source: The Agriculture and Horticulture Development Board Horizon New Zealand trade deal report|
Building on the rollover agreements signed after Brexit, the UK is currently renegotiating terms with Canada, Mexico, Israel, and Ukraine, with the ambition of securing agreements that are more aligned with the UK’s priorities.
The UK is also currently negotiating several trade deals from scratch, including with India and the Gulf Cooperation Council (GCC), made up of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, while also looking to join the CPTPP.
Negotiations are underway to join the CPTPP, which would allow the UK to enter a free trade area of 11 countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.
Joining CPTPP would give the UK tariff-free trade relations with some of the fastest-growing markets. The UK is in the final stage of the process to join the CPTPP. It would be the first country to join since its initiation in 2018. China, Taiwan, Ecuador, and South Korea have also applied and are currently in negotiation.
While it was expected that the UK would join by the end of 2022, it was decided to push accession back and aim for finalising joining in 2023 to ensure the deal was not rushed. This pressure came particularly from the farm sector, which is acutely aware of the impacts trade deals can have on the sector. Currently, accession has stalled as Canada demands the UK open up its beef market to CPTPP members, something the UK is not keen to do.
UK exports to current CPTPP countries are already set to increase trade by £37 billion by 2030. CPTPP members’ economies accounted for £110 billion worth of UK trade in 2019 and the 2016- 2019 annual growth in UK trade with CPTPP members were, on average, 8% a year. Joining CPTPP is expected to boost this growth even further, models suggest that there could be an increase in UK GDP of £1.8 billion in the long run, with an estimated £800m boost to take-home pay for UK workers, which means supporting more UK jobs.
However, the UK already has bilateral free trade agreements with seven of the 11 members, signifying that entry would not guarantee a massive swing in trade relations. Benefits would include inputs from any CPTPP member counting as originating for rules of origin. It could also open doors for services and potential foreign investment into the UK.
The Department of Trade estimates show trade with all 11 members increasing on average by 65%, ranging from 29% to 149%. The UK sectors estimated to experience the largest increases are motor vehicles, beverages, and tobacco. The West Midlands, Scotland, and Northern Ireland are estimated to have the greatest relative increase in output.
|Country||Overall import demand by CPTPP members in 2019 ($bn)||Estimated level of import demand by CPTPP members in 2030 ($bn)||Estimated increase in import demand for CPTPP members by 2030 (%)|
|Source: IMF WEO, National Statistical Offices, World Bank, DIT calculations. Country totals may not sum to CPTPP total due to rounding.|
Trade with CPTPP countries varies by region of the UK, but most region’s exports level destined for CPTPP countries fall between 7 and 9%. However, certain regions like Northern Ireland (11%) and the East Midlands (13%) export at higher rates to CPTPP countries. Therefore, a trade deal that eliminated tariffs with these countries would have a significant effect on pre-existing trade relations and could lead to increases in exports to those countries.
Since 2016, India has on average been the UK’s 16th largest trade partner. India recently surpassed the UK as the world’s fifth-largest economy. The trade relation potential between two of the world’s largest economies, with such strong historic links, to date has not been met. The Enhanced Trade Partnership (ETP) aims to realise that potential by strengthening ties with India and reducing the high tariff barriers that currently exist between the countries.
One sector the government touts as a major benefactor of tariff-free trade with India will be the Scotch whisky industry, which currently faces a 150% tariff. Another ambition of the UK is to liberalise the restrictive rules regarding foreign direct investment (FDI) India currently has. The OECD did an assessment and found that on a scale of 0 to 1 with 0 being open to FDI and 1 being closed, India had a score of 0.21, the UK had a score of 0.04 with the OECD average at 0.06. Changes to reduce those rules, via an FTA, would be significant for both the UK and India.
Within the agri-food sector, there is relatively little trade to speak of between countries. While the current tariff rates make it difficult, non-tariff barriers remain some of the more difficult barriers to trade. This is due to India having more thorough sanitary and phytosanitary conditions, quantitative restrictions, and safeguards for agri-food goods than the UK or EU. The deal would create more clear and mutually agreed safeguards, allowing UK exporters to adequately plan for such non-tariff barriers.
For India, this deal would increase exports of textiles, food and beverages, pharmaceuticals, tobacco, leather and footwear, and rice, with digital services and IT sectors also benefiting. The deal is also expected to expand UK exports in multiple sectors including the automotive, agri-food, machinery, and pharmaceuticals sectors.
It would also ease cross-border friction and encourage regulatory alignment between the two countries, benefiting the UK’s financial and professional services businesses. Currently, UK exports face an average 18.7% tariff on goods into India, which is much higher than most other major trading partners. Eliminating those tariffs and increasing trade are projected to increase UK GDP by 0.12-0.22% by 2035, reflecting a 40-79% increase in trade.
The deal was originally slated to be signed by Diwali in October 2022. However, following the backlash against the Australia and New Zealand deals, the Secretary of State for International Trade, Kemi Badenoch, stated the UK wanted to focus on the quality over speed of the deal.
Additional issues arose after the Home Secretary, Suella Braverman, criticised Indian migrants by claiming they make up the largest number of visa overstayers. This statement was misleading, as Indian migrants make up the largest share of migrants in general but do not make up the highest proportion of overstayers. The statement was met with a sharp rebuke from India. Many thought it might put the trade talks in jeopardy. According to both sides, granting more free movement visas was never on the table for the agreement. Both India and the UK have indicated that they want to sign the deal in 2023.
The agreement is seen as a major step for the UK in its attempts to establish unique post-Brexit trade relationships. A trade deal with the most populous economy is crucial for the UK to realise growth outside the single market.
All this being taken into consideration, the UK still benefits from trade deals. This is so even in the case of Australia, where UK tariffs were higher and therefore Australian exports will benefit more from tariff-free trade. Imports/exports are not a simple loss/gain.
The UK gains from increased imports as consumers have more options and more competitive pricing, and regulations in trade deals can be put in place to safeguard domestic production without stemming competition.
A trade deal is a win-win and not simply a concession for the UK. Trade deals, such as this, not only eliminate tariff barriers but also entail regulatory convergence and harmonisation, allowing for trade to flow more smoothly than before, bringing with it more potential for growth.
By Stephen Hunsaker and Tom Howe, researchers, UK in a Changing Europe.