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The UK recently announced that it will join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), giving British businesses access to the 11 other members of the Indo-Pacific trade bloc and bringing its combined GDP to £11 trillion.
Some commentators have suggested the deal could make up for Brexit. It’s been called “a momentous economic and strategic moment” that “kills off any likelihood that it [the UK] will ever rejoin the EU customs union or single market”. Shanker Singham of think tank the Institute of Economic Affairs has even said: “it’s no exaggeration to say that CPTPP+UK is an equivalent economic power to the EU-28-UK”, comparing it to a trade deal between the UK and EU members.
UK business and trade secretary Kemi Badenoch echoed such sentiments, telling Times Radio:
We’ve left the EU so we need to look at what to do in order to grow the UK economy and not keep talking about a vote from seven years ago.
The problem with this fanfare is that the government’s own economic analysis of the benefits of joining this bloc is underwhelming. There is an estimated gain to the UK of 0.08% of GDP – this is just a 50th of the OBR’s estimate of what Brexit has cost the UK economy to date. Even for those that are sceptical about models and forecasts, that is an enormous difference in magnitude.
Of course, the CPTPP is expected to offer the UK some real gains. It certainly provides significant potential opportunities for some individual exporters. But the estimated gains for Britain overall are very small.
The main reason for this is that, apart from Japan, the major players of the global economy are not in the CPTPP. The US withdrew from the Trans Pacific Partnership (the CPTPP is what the remaining members formed without it). And China started negotiations to join in 2022, but current geopolitics now make its entry highly improbable. India was never involved.
In addition, the UK already has free trade agreements with nine out of the 11 members. The remaining two, Malaysia and Brunei, are controversial due to environmental threats from palm oil production to rainforests and orangutans.
Britain’s existing trade agreements with CPTPP members
And despite the widespread public perception of the Asia-Pacific area as a hub of future growth, the performance and prospects of the CPTPP members are a mixed bag. The largest member, Japan, is arguably in long-term decline, as is Brunei, while just three members (Vietnam, Singapore and New Zealand had average growth in the last decade above 3% annually.
Finally, distance really does matter in trade. All the CPTPP members are thousands of miles from the UK, which explains their relatively small shares in UK trade at present.
While all of these points pour cold water on the suggested gains, there are some potential benefits from the CPTPP agreement, which allows for mutual recognition of certain standards. This includes patents and some relaxation of sanitary and phytosanitary rules on food items.
However, agreements over standards will involve the UK submitting to international CPTPP courts on these issues. This sits uncomfortably with many of the “sovereignty” objections to the European Court of Justice in relation to Brexit (largely from many of those who have extolled the CPTPP). It’s also notable that out of the nine agreements with CPTPP members that existed before the UK signed this deal, all but two are rollovers of previous EU deals.
But a trade deal with the CPTPP is worth more to the UK than separate deals with each member due to requirements around “rules of origin”, which determine the national source of a product. When a product contains inputs from more than one country, a series of separate free trade agreements may not eliminate tariffs. But if all the relevant countries are members of a single free trade agreement, then rules of origin on inputs from other members cease to be a problem (although there might be some issues if some members do not police the requirements properly).
While these benefits should be recognised, we should also acknowledge that the CPTPP is not the ideal agreement for Britain. As stated above, distance really does matter in trade – this is overwhelmingly accepted by modern trade economists.
Research shows that the rate at which trade declines with distance has barely changed over more than a century. This might seem strange because transport costs have fallen over time. But, as transport and communications have improved, firms have outsourced much of their production to complex supply chains that often cross national borders many times, with “just-in-time” supply schedules to keep down the costs of holding large stocks.
This means that, while trade everywhere has grown, there is still a big premium for trading (many times) across borders between contiguous countries. It is exactly this type of trade which benefits most from big comprehensive trade agreements that simplify rules of origin and regulatory paperwork.
This suggests that, while some elements of the the CPTPP offer benefits to the UK, it is unlikely to boost its trade in the way it does between countries around the Pacific Rim. For this sort of boost, the UK really needs to look towards its own neighbours. Of course, this is just the sort of agreement that Badenoch seems reluctant to discuss.
The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.
The UK government has decided to go ahead with a rise in corporation tax in April 2023. The move is a clear reversal of the tax reduction which previous chancellors hoped would encourage output and innovation.
The idea of lowering corporation tax to boost growth (and ultimately tax revenue) failed spectacularly under Liz Truss’s short-lived premiership. And as the current chancellor Jeremy Hunt explained in his recent budget: “Even at 19%, our corporation tax regime did not incentivise investment as effectively as countries with higher headline rates.”
In raising corporation tax to 25%, the government has conceded that companies have not been investing productively. Despite corporation tax rates falling to 19% from 28% in 2010, and historically low borrowing costs (with interest rates close to zero to help businesses recover from the 2008 global financial crisis), business investment took until 2016 to recover to its pre-crisis share of GDP, which was already low in comparison to the EU.
Corporate Britain preferred to either save its profits, or pay out dividends to shareholders, revealing four deep rooted structural problems behind the UK’s growth problem.
Research shows that larger firms in the UK are more cautious about any boost in profits, compared to their counterparts in the EU. It takes an unusually large profit boost to give them an incentive to invest.
Investment may also be depressed by the increase in the number of firms whose profit relies on securing intellectual property rights, particularly in sectors like pharmaceuticals and software, where these are strongly protected. As these rights raise profits by restricting access to the market to new products, they can lessen the incentive for companies to invest in more production.
It is an extension of what’s known as the “innovators’ dilemma”, where market leaders hesitate over developing new products that could take away sales and profits from their current range.
Business strategists often advise that when capital costs are unusually low – as in the UK’s low interest rate phase from 2008 to 2020 – it’s best to lessen the focus on profit and instead go for growth. But with interest rates now rising, much of UK plc has left it too late.
In 2016, when UK business investment finally recovered to levels similar to those before the 2008 financial crisis (around 10% of GDP), growth didn’t pick up as conventional forecast models had expected.
Trends are worsening further as the recovery from the devastating impact of COVID stalls. One cause appears to be what’s referred to as “financialisation”: when non-financial firms chase profit through financial and real estate investment, instead of spending on more productive new equipment and innovation. But this is often risky when interest rates rise or asset prices fall.
Ministers and the Bank of England have urged employees to keep pay rises below inflation, to avoid a “wage push” that might keep inflation high. Though many protested in an ongoing strike wave, on the whole, wages have not matched inflation. In the year to January employees got an average wage rise of 7% in the private sector and just 4.8% in the public, compared to consumer price inflation of 10.1%.
In contrast, the speed with which companies raised prices to match (or even exceed) their rise in costs, suggests the “profit push” has been stronger than any wage push in driving inflation upwards.
UK firms have done better than their employees at protecting income against the rising cost of living. But because they won’t return the favour, and invest to improve productivity and let wages rise, the chancellor has chosen to tax those profits more and spend the proceeds himself.
Chancellors since 2014 have done well to avoid the mistake of letting public investment fall when private investment is still subdued after a crisis.
But current fiscal targets designed to stabilise UK public debt inevitably mean a squeeze on public projects (outside healthcare and defence where increases have been pledged). The latest OBR forecasts show general government fixed investment slowing from 12.3% growth this year to just 0.4% in 2024, followed by falls of 3.3%, 1.1% and 1.4% in the years that follow.
This squeeze is being worsened by the runaway costs of HS2, now more than twice its original £33 billion projection, and other over-budget mega-projects such as Hinckley Point C, which take funds from more prosaic outlays on crumbling transport, energy, education and healthcare infrastructure.
The government’s spring budget envisages central government co-investing in emerging technologies such as artificial intelligence, carbon capture and small nuclear reactors. But under its self-imposed investment restrictions, the state will struggle to fund its new entrepreneurial role. And the current government’s desire to be seen as “pro-business” cannot hide its profound irritation that the private sector didn’t step up its investment performance while the funds were still flowing freely.
Alan Shipman does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
Around 30 years ago, many developed countries started a process of absolute decoupling of their emissions of CO₂ and energy use from economic growth. This means keeping emissions stable, or better yet, shrinking them, while still growing the economy.
As a result, GDP is now much higher than it was in 1990 in the UK, France, Germany and the US, but CO2 emissions are lower. This is not just because of the deindustrialisation of the west: emissions decrease even if we include our imports from countries like China.
This trend may be too little too late to avoid the worst consequences of climate change and the destruction of wildlife. But it is a testimony of perhaps the biggest misunderstanding about economics: that growth is a measure of how much an economy produces, rather than an imperfect account of the value of this production.
Emissions versus GDP
Fighting climate change requires a radical transformation of the economy to use less energy and resources. This means it could cause economic growth by making us consume “better”, not more. Putting a monetary value on protecting the Earth means people will pay the true cost of their consumption.
The things we buy typically become more valuable if the perceived quality of a product increases. And research shows that consumers are willing to pay more if they believe a brand is more valuable, for example, because it is more ethical or environmentally friendly. This is the case for low-carbon energy sources, fairtrade chocolate, organic and local products – and it’s even more the case for people that care about how others see them. So if this means replacing a £1.89 pack of beef burgers with £12 bean and mushroom patties, economic growth will certainly be good for the planet.
The same can be said for the services people spend money on. In fact, as the economy becomes more dependent on services than products, this part of our consumption is even more important to “green”.
This is because much of today’s economic growth is not about measuring the value of the objects we buy. Two-thirds of the world’s GDP is constituted of services, and those are increasingly provided from our own homes as we work remotely. The environmental cost is then almost entirely composed of the energy needed to make the internet work – and there is a way to make that greener.
Sci-fi authors and futurists of the 1960s correctly predicted that we would live in a world of wireless communications, flat-screen TVs and sophisticated kitchen appliances, while fewer foresaw that younger generations would celebrate the return of sleeper trains in Europe. They would probably also be surprised at how many people find love via their phone, using online dating services. The fact that Match.com is worth more than car companies Mitsubishi and Mazda combined shows how our economy is changing towards consumption of services rather than traditional goods.
This does not mean that free markets and technology alone can save the world from climate change. Government intervention is also needed. In fact, one of the oldest and most accepted ideas in economics is the principle that consumers should not only pay for the cost of producing what they buy, but also for its cost to society. This means taxing pollution, the destruction of wildlife, unhealthy food, traffic congestion and the depletion of natural resources, rather than raising the same amount by taxing income.
This could also be a source of economic growth. Research shows taxing pollution generates a “double dividend”: it restores fair competition between polluting and non-polluting products, and it generates tax revenue to invest for everyone’s benefit. If the prohibitive cost of pollution and limited natural resources forces us to innovate, we can actually create value instead of destroying it.
In this kind of world, sustained growth for the next century would mean the phasing out of fossil fuels and increased energy efficiency, and largely replacing meat production with plant and lab-based alternatives. But also more value created by services, addressing wellbeing, and creating cleaner air and water, healthier food and safer cities.
Indeed, 15-minute cities are more of an economist’s dream than a socialist utopia. Charging for the true cost of car use by heavily taxing noise and air pollution is textbook introductory economics. Reallocating public land towards humans and public transport saves time for everyone. On the other hand, adding roads simply creates more congestion, while public transport gets more efficient as more people use it. Less time spent in a car means more time for work and leisure.
And when it comes to artificial intelligence, just like machines and robots in the past, it will not kill jobs but give us more time and money to spend on leisure. This is economic growth.
The real challenge for growth is not defying the laws of physics with technology that magically allows us to produce more with the same or fewer resources. It is the ability of our societies to tax polluting activities and regulate the use of land and natural resources, while still being able to redistribute wealth. This is the ability to do better with less.
We also need to work out how to correctly account for everything we value. What is counted under GDP figures has already started to change over time to include things not directly measured by traditional markets.
Making the case for the preservation of nature means being able to put a number on it: taxing social costs but also recording the value of the use of our parks, forests and mountains. If those who care about protecting the environment do not fight to put the highest possible number on nature because they find the idea of valuing it in monetary terms repugnant, someone who does not care will do it.
Renaud Foucart does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
UK prime minister Rishi Sunak has said Northern Ireland will be “the world’s most exciting economic zone” due to its access to the EU single market under the latest post-Brexit trading deal between the EU and UK.
The details of the Windsor framework are still being pored over by politicians and business leaders across the UK, and particularly those in Northern Ireland.
But the agreement in principle aims to address some of the weaknesses of the Northern Ireland protocol. This came into effect in January 2021 as a way to check goods travelling from Northern Ireland into the Republic of Ireland (an EU member) without creating a hard border between the two.
According to the government, it has been a “source of acute political, economic and societal difficulties in the two years since it has been operating”. The main economically significant issues addressed by the new deal relate to goods movement, retail of agriculture and food products, and medicines.
The Windsor framework aims to cut trading costs by simplifying customs checks for goods entering Northern Ireland. It will do this by reducing paperwork and shortening customs processes by relaxing some rules for internal UK trade. Many of these improvements will result from improved IT systems, data sharing and market surveillance enforcement between the EU and the UK.
Research we published in 2021 on the impact of Brexit and the protocol showed it would cause Northern Ireland’s economy to contract over the long run by up to 2.6%. And the same research suggests the new deal could mean a much smaller contraction.
We found that industries that primarily trade in goods – agriculture forestry and fishing, or food and drink – would be most affected by the protocol. Industries that mostly trade in services, such as the financial sector, would be less exposed but still negatively affected.
But with 80% of this contraction coming from trade barriers between Great Britain and Northern Ireland, any efforts to ease trade within the UK will help the region’s economy.
Our economic model used data for 2017 (pre-Brexit) to simulate how the economy might change over time after Brexit. This was based on differences in the trade costs of what Northern Irish firms buy from Great Britain (inputs), as well as sales of Northern Irish goods and services to the rest of the world including the EU (outputs).
It’s important to note that our simulation considers Northern Ireland in isolation. This means it assumes that the cost of inputs made outside the region are fixed, except for tariffs and non-tariff barriers, and that the same pre-Brexit trade agreements with non-EU countries are in place. But our results still provide some insight into how the new Windsor framework compares to the previous deal.
Great Britain is Northern Ireland’s main trade partner, providing about 65% of its imports of goods. These are not just goods directly consumed by households, but also include intermediate goods used in production by Northern Ireland’s industries. This makes the region particularly exposed to trade shocks with the rest of the UK.
Unsurprisingly, any non-tariff barrier (something other than charges or quotas) affecting inputs will increase the costs of production, which may cause increased prices for consumers.
Households in Northern Ireland also purchase products from industries that are dependent on trade with Great Britain. For example, 29% of spending on domestically produced goods occurs in the wholesale and retail industry, which is a major importer from Great Britain.
A key area of focus of the Windsor framework is on the effort to reduce the paperwork need to transport and sell agricultural produce. According to the European Commission, movement of goods is simplified under the new deal by the need for “only a single general certificate” for lorries, reduced checks and “simplified procedures for plants and agricultural machinery”.
Our research shows the agriculture, forestry and fishing, and food and drinks industries had both the greatest contractions in output and the largest non-tariff barriers under the Northern Ireland protocol. So, we expect any simplifications in this area to reduce the costs of trading with Great Britain, particularly in these sectors.
The special provisions made for these sectors should also reduce some of the non-tariff barriers faced, such as the bans on particular goods and higher rates of customs checks versus other products. More generally, we expect newly streamlined customs checks and processes to help other industries face lower non-tariff barriers than under the previous arrangement.
Agricultural food and retail will likely benefit the most from the new arrangements. Northern Ireland’s GDP will still fall as a result of Brexit but if we were to repeat our simulation today, GDP would likely decrease by less than what we had predicted under the protocol.
The actual size of the economic gains from the framework versus the protocol are hard to measure at this stage. The framework does not entirely remove non-tariff barriers because goods at risk of being sold to the EU will still be checked by customs when they enter Northern Ireland.
Reductions in non-tariff barriers will also require firms to declare where goods are to be sold. And Northern Ireland will still face friction for services trade with the EU. We estimated this would account for 20% of the GDP cost of Brexit under the protocol.
So, even in the most optimistic case, where non-tariff barriers to trade between the two parts of the UK are significantly reduced, the Windsor agreement will not completely neutralise the economic impact of Brexit in Northern Ireland. But the new deal between the EU and the UK is still likely to do better for the Northern Irish economy than the protocol.
Geoffroy Duparc-Portier receives funding from the ESRC "Centre For Inclusive Trade Policy" (ES/W002434/1) and from the Scottish Graduate School of Social Science (project reference number 2277374).
Gioele Figus receives funding from the ESRC "Centre For Inclusive Trade Policy" (ES/W002434/1), and "Trade in Northern Ireland: Characteristics of businesses and workers" ES/X013502/1.
The UK government recently announced the results of the second round of successful bids for for its £4.8 billion Levelling Up Fund. This money is provided to local governments with the ambitious (but pretty unspecific) aim of “creating opportunities for everyone” by addressing economic and social imbalances across the UK.
Winning projects have received as much as £50 million. In this round, the money will be used for ventures including building Eden Project North on Morecambe’s seafront and improving railway infrastructure across the UK. Smaller grants will go to projects involving electric buses, theatre and castle renovations, and new leisure centres and affordable housing.
All of the applicants – whether they won funding or not – have one thing in common: they all participated in a competitive bidding process. And while most bids for funding were not selected (out of 529 applications, only 111 will receive levelling up money in this round), they all represent hundreds of hours of work by in-house specialists in local government, and sometimes paid external consultants as well.
Which is why it’s all the more disappointing for the losing bids. The almost 80% of local councils who were rejected not only lost a project in which they believed, but also the time, money and energy spent preparing the bid.
Now there will be no multifunctional square in Wigan, and Bradford can forget about its advanced robotics centre. Well, for now anyway. Local councils will get another chance to invest their time and money all over again, when they prepare bids for the next round of levelling up funding (at an as-yet unspecified date).
But research shows that there are ways to make the process more efficient and effective the next time around.
So-called “beauty contests” – as the process for winning such funding is often described – are ubiquitous in UK local government funding. Around a third of the more than 450 grant schemes identified by the Local Government Association involve competitive bidding.
The cost of preparing a typical application is estimated to be between £20,000 and £30,000. This is a lot of money at any time, but particularly as many local councils are experiencing unprecedented budget cuts.
According to the 52 pages of official guidance for the Levelling Up Fund, bidders had to explain how they would divide the requested amount into the three investment themes of the fund and their sub-categories. They had to provide explanations of why their project aligns with existing central government strategies and the various missions of the Levelling Up white paper. They also had to answer dozens of specific questions about the project, and complete a cost-benefit analysis over the lifetime of the investment.
But that’s not all. The bids then have to be read and evaluated by civil servants before going through several more rounds of ranking and tweaking by senior politicians, (who may well have their own objectives).
Asking for detailed business cases helps rationalise decision-making during these kinds of processes. Beyond the basic financial evaluation, a cost-benefit analysis aims to measure the broader economic value of each project.
Winning project Eden North in Morecambe claims, for instance, that it will indirectly lead to more than 1,000 new jobs in a deprived region by attracting 740,000 visitors a year.
Indirect benefits are often non-monetary. Public transport projects typically have to put a value on estimated decreases in transportation times, air pollution, and road injuries, for example.
But comparing different cost-benefit analyses can mean ranking the value of a human life versus that of a rare bird, for example, or even present costs versus future benefits.
So while useful, such assessments are often not very precise when comparing things as different as a railway upgrade in Cornwall with a city centre regeneration project in Yorkshire. Research also shows these tools often select the kinds of projects most likely to see cost overruns. And drawing conclusions about small differences between generally “good” projects in this way can be pretty meaningless.
Unfortunately, creating precise but meaningless rankings often happens when resources are scarce. Prospective students craft their best personal statements to get into their dream schools, and researchers submit lengthy proposals to access increasingly competitive grant money. But research shows these review processes are often no better than random, and unable to consistently rank good projects.
So why do we keep on ranking the unrankable? Streamlining bidding processes could save time and money by eliminating the bad projects, financing the outstanding ideas, and allocating the rest of the money randomly among the good ones.
However, experimental evidence shows this would be difficult in practice: bureaucrats and politicians like to be in control, even if the outcome is as good as random. Humans also like to interpret success as the result of hard work and not some sort of lottery.
In a recent large-scale experiment, I worked with Elias Bouacida, an assistant professor at Paris 8 University, on research which found that when given the choice, most individuals prefer to see their fate decided by a procedure that looks reasonable than by a lottery – even if they are aware that both are equally unpredictable.
A simple alternative – one that would be much more beneficial in terms of money and time saved on the bidding process – would be to replace competitive bidding with an allocation formula that assigns pots of money to local governments, letting them choose their own projects.
We could also offer fewer types of grant and allow applications to be re-used. Reducing application forms to a short cost-benefit analysis would help with this. And then applicants would simply need to trust in the imperfect outcome of a short but independent assessment by civil servants.
This would embrace the randomness of the outcomes, the current governmental preference for centralisation, and the human preference for the appearance of a reasonable process.
Renaud Foucart works for Lancaster University, a partner of Eden Project North in Morecambe.
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