17 July 2023

CPTPP membership is worth much more to Britain than ‘0.08% of GDP’

By James Forder

The UK’s accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), signed this weekend by Trade Secretary Kemi Badenoch, ought to be a cause for celebration. It brings us into a trade area of 500 million people, covering 13% of global GDP.

Much of the reporting, however, emphasises that official estimates of the actual economic benefits are very small. The BBC’s anti-climactic write-up notes that, ‘gains for the UK from joining are expected to be modest’, and ‘the Government estimates it will add 0.08% to the size of the economy’ – and even that only over a number of years. The BBC report briefly mentions a ‘boost for the service sector’ under ‘benefits’ – though in such a cursory manner as to suggest this is barely worth consideration.

Yet that rather glum picture is misleading. The seemingly crucial ‘0.08% of GDP’ figure presumably comes from the Department for International Trade’s document, ‘UK Accession to CPTPP: The UK’s Strategic Approach’. That gave the figure of a £1.8bn increase in GDP (which is about 0.08%) but highlighted the point that this was the result of ‘static modelling’. (It is also based on a GTAP dataset from 2014, so the figures it is based on are almost a decade old.)

And even in the static modelling, there are considerably larger gains available. The DIT also applied their approach to a scenario in which Thailand and South Korea join the CPTPP. Adding these large countries resulted in slightly more than a trebling of the estimated benefits to Britain. Adding the United States as well (assuming no prior deal between the UK and US) multiplied the benefit by a further three and half. The benefit then is worth nearly £20bn.

More important than that, however, are the limitations of static modelling itself. What it does is presume that the effect of the trade deal is a reallocation of production from one sector to another, according to where that production is most efficiently undertaken. That is certainly a gain from trade, and one routinely taught in elementary economics.

The essence of the point is much like observing that it’s not usually best to grow tropical fruit in Scotland. So it will be that, to some extent, British accession to the CPTPP will move a little production from here to there, and there to here. But in the modern world, with a few special exceptions, the remaining opportunities for this kind of benefit are small. The large benefits have been acquired through the trade that already occurs.

So what else is there? The DIT noted that no account was taken of improved resilience of demand. The point here is that a wider range of markets for sales helps protect British business from cyclical fluctuations in its existing markets. Similarly, supply-chain resilience is improved as the range of feasible sources of materials grows. In addition to these things, joining a specific trade arrangement offers some security against rising protectionism in the world generally.

Then there is the apparent trend in the modern world for a growth of and lengthening of global value chains. As that continues, trade links facilitated by arrangements like the CPTPP will be of more value than they seem to be in the static modelling. The DIT also mentioned the point that it is very reasonable to expect the economies of the member countries to grow quickly in the foreseeable future. As that happens, access to their markets becomes more valuable.

Amongst all these omitted factors, though, surely the most important is the one the DIT described as ‘The full range of potential for the so-called “dynamic effects” resulting from increased trade on the long run growth rate of productivity of the economy’. In this context, the ‘growth’ of the economy means not the one-time increase in output resulting from the reallocation of production. It means the year-on-year small percentage increases in output arising from finding progressively better ways of producing things, and better things to produce.

Since they are concerned precisely with the finding out of things as yet unknown, the specific sources of benefit are numerous, but of their nature difficult to specify precisely. One simple point is that wider trade increases the intensity of competition, and that generates efficiencies and greater output.

Another might be that larger trading areas promote a fuller exploitation of economies of scale, and again improved efficiency and greater output. Anything that promotes the exchange of ideas might bring such a benefit – and ‘exchange’ might amount to no more than imitating the superior approaches of others.

One of the great successes of the market economy has always been its tendency to induce the deployment of ideas – new and copied – to produce superior economic outcomes. Once we are in this realm – the realm of ongoing, recurrent benefits – very small numbers can become very important indeed. Even a tiny increment to growth resulting from ‘dynamic’ factors will compound into large amounts in relatively brief periods.

The DIT’s calculations are what they are, and read fully, their account notes their limitations. But here is a very clear case where treating the number that happens to have been estimated as carrying the important information is a terrible approach to the assessment of public policy. A proper appreciation of the advantages of this landmark agreement require a much broader understanding of the sources of the gains from free trade.

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Dr James Forder is Academic and Research Director at the Institute of Economic Affairs.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.