'Week Ahead' and trade agenda, Latest news, UK trade politics, UK WTO & 3rd countries

UK trade policy 2023 preview: India, CPTPP accession, normalising EU ties

The United Kingdom can be expected to to prioritise sealing a preliminary trade agreement with India, joining CPTPP and stabilise its relationships with the European Union in 2023.

Two full years have now elapsed since the United Kingdom’s departure from the European Union’s single market and customs union.

Under such circumstances, it might be expected that Brexit would by now have been firmly displaced to the rear-view mirror, as the UK settled into its role as an autonomous trading nation.

But such has been the turmoil encountered over the past two years that little seems settled in terms of longer-term policy direction.

After a year in which the ruling Conservative party sacked two of its own prime ministers – first Boris Johnson and then Liz Truss – the party’s opinion poll ratings remain in the basement. This has prompted a growing expectation that the Labour party will be in power after the next election, which is likely to be held in the latter part of 2024.

Trying to work out how Labour would do things differently if and when it takes over in Westminster has become something of a parlour game among the UK’s political observers.

But for the next 12 months, the existing government of Rishi Sunak looks set to remain in power, and to continue on the course which he has pursued since October.

FTA focus shifts from political significance to economic content

The UK is certainly forging ahead with an ambitious programme of new free trade deals, as promised at the start of the UK’s post-Brexit journey by ebullient former prime minister Johnson.

But the political shine is starting to come off the FTA programme, as the country realises that FTAs do not only create winners.

The excoriating criticism of the UK-Australia deal by former environment secretary George Eustice last November has taken its toll on public perceptions of trade policy, and of the choices that they entail.

FTAs will from now on be scrutinised more for what they contain economically, rather than for what they represent politically.

This has already been seen in the strategic shift signalled by international trade secretary Kemi Badenoch in November.

Badenoch told MPs that the UK would take its time negotiating future trade deals, and would make sure that they delivered on UK priorities, rather than racing to meet arbitrary deadlines – as Eustice damagingly accused her predecessors of doing.

Notwithstanding these developments, the UK’s FTAs with Australia and New Zealand have now both been formally ratified by the UK parliament, and both should enter into force at some point in 2023.

The fact that MPs were not given a vote on either agreement bears witness to an ongoing discussion about the fitness for purpose of the UK’s current FTA ratification processes which will undoubtedly rumble on in the months and – probably – years ahead.

The battle to conclude a UK-India FTA

One of the highlights of 2023 is likely to be the conclusion of a new UK-India FTA.

Discussions are well advanced, with more than half of the 30 or so chapters already provisionally completed.

But completing the deal will involve politically sensitive concessions on both sides. At stake are demands for better access to the UK for Indian workers and students, and for improved access to the Indian market for UK services providers. Tariff reductions need to be negotiated on either side, and appropriate language found on labour and the environment.

Under Johnson or Truss, the UK might have offered India major concessions for the political prize of a speedy deal with the world’s largest democracy.

But Sunak’s government will keep negotiating until it is convinced it has the right deal in place.

Even so, the breakthrough is widely expected to come during the course of this year – although London is no longer offering hostages to fortune.

Market access challenge in CPTPP accession talks

The other big trade deal in the works this year is UK accession to the Comprehensive and Progressive Agreement on Trans-Pacific Partnership.

Like the UK-India deal, this is another complex negotiation on which an initial deadline – accession by end-2022 – was quietly dropped midway through last year.

The issues around UK accession to CPTPP are substantial and they pose major challenges for the UK as it targets what it sees as the centrepiece of its much-vaunted Asia-Pacific ‘pivot’.

London offered full agricultural market liberalisation to CPTPP members Australia and New Zealand in the bilateral deals which it struck in 2021 – and now member countries such as Canada are pressing the UK for something very similar as part of its CPTPP ‘admission fee’.

But the UK agricultural fraternity is already up in arms about the impact of the Australia and New Zealand deals on their markets for beef and sheepmeat, so replicating such agreements for the other nine members would be politically almost impossible.

The Asia-Pacific bloc is also very wary of the accession negotiations which it must soon conduct with another applicant country – China.

Beijing will be told that all CPTPP members must demonstrate full compliance with their existing international commitments. That message would lack credibility as long as the UK remained at odds with the EU over the implementation of the Northern Ireland protocol.

This is another reason why the UK is expected to find some form of resolution over the Northern Ireland issue this spring – see below.

On the FTA agenda: Canada, Mexico, Israel, GCC, Greenland and Switzerland

In parallel with the CPTPP accession negotiations and associated market access talks, the UK is also conducting bilateral FTA discussions with both Canada and Mexico.

Britain currently has free trade agreements with both parties which were ‘inherited’ from the respective EU deals at the point of Brexit – but will hope to make progress in 2023 towards modernising and upgrading these deals, if the question of UK market access does not become too much of a barrier.

Also on the UK’s FTA negotiations radar are Israel, the Gulf Cooperation Council and Greenland – all up and running – while talks on a new trade deal with Switzerland are also set to launch soon.

Rules of origin challenges ahead

The intensifying global focus on supply chain resilience will also affect the UK negotiating activities in the coming year, with three separate deadlines on rules of origin set to expire at the end of 2023.

The UK’s existing ‘rollover’ agreements with both Switzerland and South Korea included a pledge to revisit the rules of origin provisions in each deal within three years of entry into force. At stake, in both cases, is a continuation of the agreements to allow EU-sourced content to count as ‘local’ for purposes of eligibility of tariff concessions.

Another looming deadline for the UK auto industry relates to the rules of origin deal struck with the EU in late 2020 on batteries for electric vehicles.

The UK-EU trade and cooperation agreement stated that until the end of 2023, cars with electric batteries may contain up to 60% non-originating material, instead of the standard threshold of 45%.

But this figure is set to fall to 55% for the period 2024-26 – before reverting to 45% from 2027.

These changes could pose problems for auto exporters as from next year, unless UK supply chains for car batteries have been able to adapt in the meantime – or unless the EU could be persuaded to extend the 60% rules of origin threshold a little longer.

Finding a settlement on the Northern Ireland protocol

And the question of post-Brexit grace periods will also take centre stage in the early months of this year, as the UK negotiates with the EU over the vexed question of how to implement the Northern Ireland protocol.

There is now a general expectation that some sort of deal will be reached by April, when the 25th anniversary of the signing of the Good Friday agreement will be commemorated.

The latter agreement brought an end to decades to inter-community violence in Northern Ireland,  but it also included a solemn pledge to do away with border infrastructure between Ireland and Northern Ireland – a commitment which has proven to be an intractable headache in the context of Brexit.

The UK and the European Commission both want the Northern Ireland issue to be resolved.

For prime minister Sunak, the prize will be the elimination of the threat of a trade war with the EU, and the removal of a major UK-US irritant just ahead of a planned state visit to London by US president Joe Biden.

But in order to achieve that, Sunak will somehow have to persuade the commission that his plans for quasi-unfettered movements of goods between Great Britain and Northern Ireland pose no material threat to the integrity of the EU single market – while simultaneously reassuring the right wing of his own party, and Unionists within Northern Ireland, that the integrity of the United Kingdom itself is not being compromised.

The question of how to square that particular circle has been the subject in in-depth official-level negotiations in Brussels for several months now, and these talks will undoubtedly continue right up until the April deadline.

UK-EU rapprochement?

There is a theoretical possibility that an agreement on Northern Ireland could have wider longer-term implications for EU-UK trade more generally.

Agri-food traders in particular are continuing to clamour for some kind of veterinary agreement between the EU and the UK, of a kind which could remove or reduce the need for SPS checks not only at Northern Irish ports, but at all other EU points of entry as well.

But agreement on the kind of regulatory alignment, or regulatory equivalence deal, that would unlock that kind of trade facilitation may be a step too far for the UK and EU at present.

And the Commission will be incentivised to play the long game in its ongoing dealings with the UK.

The TCA itself is up for revision in mid-2026, which is still some way off.

But officials in Brussels will be as conscious as anyone else of the UK opinion polls which now point to the probability of a Labour government within the next 24 months.

Labour has already ruled out the possibility of re-joining the EU single market and customs union – although no-one can be quite sure to what extent this simply represents the pragmatic removal of a stick which the party’s political opponents could otherwise use to beat it.

But closer political rapprochement with the EU, and the conclusion of a UK-EU veterinary agreement, are both now established features of Labour policy.

And it remains possible that, devoid of the political and ideological baggage which the Conservatives have borne since 2010, Labour may gradually move the UK back towards the EU’s sphere of influence.

This makes it all the more likely that, other than a deal on Northern Ireland, the EU-UK relationship  will remain fundamentally unchanged for the time being – and certainly for the rest of 2023.

Leave a Comment

Your email address will not be published. Required fields are marked *

*

This site uses Akismet to reduce spam. Learn how your comment data is processed.