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A Brexit Trade Deal With Asia Isn’t so Outlandish

Brexiters have long claimed countries are queuing up to sign trade deals with Britain once it leaves the European Union. It’s one reason they so oppose any Brexit deal that leaves the U.K. tied to Europe’s customs union, even temporarily.

Right on cue, Japanese Prime Minister Shinzo Abe told the Financial Times this week that the U.K. would be welcomed with “open arms” into the 11-member trans-Pacific trade bloc, or TPP-11. Just as the Brexit talks reach their endgame, here at last is proof of the bright economic future that awaits Britain once outside the EU, right?

Not so fast. There are reasons to cheer Abe’s offer; but they aren’t the ones most often cited.

The idea of the U.K. joining the bloc after Brexit isn’t so outlandish. The world economy has been reorienting toward the Indo-Pacific growth markets; it makes sense for Britain, a very open economy where trade makes up 62 percent of GDP, to expand its ties with the region.

Six of the TPP-11 – or Comprehensive and Progressive Agreement for Trans-Pacific Partnership, to give it its full name – are also Commonwealth members with which the U.K. has historic links. The Asian initiative was always intended to be open to new members, too.

Even so, Britain needs to be realistic about what it would get out of membership.

For one, it’s pretty hard to discount geography. According to the gravity model of trade relationships, the two main determinants of trade flows are an economy’s size and its proximity to its partners. Members of the TPP-11 are concentrated around the Pacific Ocean or the South China Sea; the U.K., obviously, isn’t. That – and four decades of close ties – explains why 43 percent of U.K. trade, about 241 billion pounds ($317 billion), is with EU members, and only about 7 percent with TPP-11 countries.

Of course, things change. Britain’s economy is predominantly services-driven, so perhaps proximity matters less. Even so, the EU already has agreements with most of the TPP-11. Britain is seeking simply to have those converted into bilateral deals to keep its existing benefits, in which case it would be unlikely to see any major boost in trade. Preserving the status quo may not be that simple, though. As Bloomberg reported on Thursday, the U.S. is threatening to block the U.K. from a global public procurement agreement unless it overhauls its application.

The TPP-11 isn’t the EU by a long-shot, but joining would come with obligations and impose limitations. For one thing, any agreement would require Britain to leave the EU customs union. But Brussels’ demand that Britain maintains a frictionless border in Ireland means the U.K. could be locked into that arrangement for some time.

Britain’s future trading relationship with the rest of the EU could also complicate any trade deal because European rules in areas like food and product testing differ from the TPP, according to David Henig, director of the U.K. Trade Policy Project and a former senior government trade official. The EU objects, for example, to hormone-treated beef U.S. authorities are happy to approve. Those differences would greatly complicate Britain’s plans to smooth the flow of goods and food with Europe under a common rule book.

Even if it had a free hand to join the TPP-11, the U.K. might not like everything it finds there. Requirements on the setting of drug prices gives pharmaceutical companies more room to challenge pricing decisions – something that could prove costly for the National Health Service. Britain might also be asked to accept higher migration numbers from TPP-11 countries as the price of admission.

Abe wasn’t being altruistic when he made his invitation: at a time when U.S. President Donald Trump is upending the global trade order, attacking the World Trade Organization and slapping tariffs to protect American exporters, the Japanese prime minister understands that strength lies in numbers and rules-based authorities. Post-Brexit, it would be better to have the U.K. in the TPP-11 system than a trade maverick.

The Brexiters who so vocally fought to take back control will have to cede some of it to deliver the trade benefits they promised. The rhetoric that pits trade with Europe against trade with Asia is unhelpful and misleading; for Britain, it clearly has to be both. From that perspective, Abe’s invitation should be welcome. The principle benefits of joining the Asian-based club aren’t so much an immediate trade boost as being part of a rule-making body. Never mind geography; no nation can afford to be an island.
Source: Bloomberg

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