The missing anchor: Why the EU should join the CPTPP

Since its inception in 1995, the World Trade Organisation (WTO) has largely failed to make substantial progress on twenty-first-century trade issues. In the context of stalled multilateralism,[4] multi-country regional Free Trade Agreements (FTAs) are viewed as increasingly important vehicles for driving trade integration between willing partners.[5] As geopolitical tensions in the Indo-Pacific have escalated since 2016, these mega-regional trade agreements have also taken on increased geoeconomic significance.

The Trans-Pacific Partnership (TPP), signed between 12 Pacific countries in 2016, was the centrepiece of the Obama administration’s strategic pivot to Asia. It was designed to counter the growing influence of China’s state-capitalist trade model in the region and its associated preferences concerning the role of the state in the economy.[6]

Modern trade relations offer countries greater prosperity by providing economies of scale and comparative advantage.

When President Donald Trump withdrew the US signature from the agreement in January 2017, one senior China analyst observed: “The TPP was the way to get China to address a lot of what we’re now trying to get them to address with tariffs…It may be the biggest strategic mistake the United States has ever made.”[7] While this may sound hyperbolic, it reflects the importance of high-quality, twenty-first-century trade agreements in an era of increased competition between economic systems and models of governance.

Modern trade relations offer countries greater prosperity by providing economies of scale and comparative advantage. They also foster greater economic interdependence through the convergence of rules and norms that regulate production and trade of goods and services, as well as a host of behind-the-border activities. Consequently, modern FTAs shape international standards of economic governance in a way that post-war agreements focused on cutting tariffs and quotas did not.

Following US withdrawal from the TPP, it was Japan’s leadership and status as the next largest economy in the grouping, alongside Australian support, that ensured the trade initiative was revived.[8] Despite the change in acronym to the CPTPP, the new agreement signed in March 2018 is nearly identical to the TPP, save for a small number of suspended provisions relating to intellectual property that the United States had sought, but of which other parties were not particularly supportive.[9]

Through harmonising and deepening trade ties between CPTPP member states, the agreement aims to provide a corrective to China’s ability to skew regional trade in favour of state capitalism by virtue of its growing market dominance. The CPTPP also provides a more meaningful model of regional trade integration than the Regional Comprehensive Economic Partnership (RCEP). The latter is a shallow, ASEAN-centric[10] trade agreement, which amongst other things lowers tariffs and reduces rules-of-origin barriers for members, but unlike the CPTPP has low or no commitments on labour, the environment, intellectual property and state-owned enterprises (SOEs). Thus, RCEP requires far less domestic reform commitment from China than entry to CPTPP accession would demand.

US domestic politics currently militate against the possibility of Washington’s return to the CPTPP. President Joe Biden’s razor-thin Democratic Party majorities in the US House and Senate, combined with Republican and Rust Belt opposition to the agreement and mid-term elections scheduled for November 2022, mean that re-joining the CPTPP is possible, but highly unlikely any time soon for the United States. In contrast, China has formally applied to join the CPTPP. The request, while not unexpected, says much about China’s desire to influence the regional trade architecture in the absence of US leadership, and raises fraught questions for the existing CPTPP membership on the best way forward, including in relation to China’s objection to Taiwan joining the trade pact.[11]

This creates an opportunity for Brussels to step up, and step into the CPTPP. The EU has the potential to become a regional trade policy counterweight to China, which the European Commission has designated as a “systemic rival” since 2019.[12] An EU accession to the CPTPP would not necessarily rule out China from joining the grouping, nor need to be presented as a geopolitically confrontational decision. To the contrary, it may make it easier for existing members to contemplate allowing Beijing to join the CPTPP on more exacting terms. Adding a trading bloc the size of the EU would significantly increase the coverage of the CPTPP, solidify its liberal and global character, and strengthen CPTPP members’ ability to maintain the agreement’s high standards and inclusive nature in possible accession talks with China.

The EU has the potential to become a regional trade policy counterweight to China, which the European Commission has designated as a “systemic rival” since 2019.

From an Australian perspective, the EU is a mostly like-minded and trusted partner, notwithstanding some evident trade policy divergences. The EU is already Australia’s second largest trading partner and second largest source of foreign investment,[13] but the relationship is underdone. Furthermore, bilateral relations were strained in September 2021 by Australia’s cancellation of its Attack Class Future Submarine Program led by the majority-state-owned French firm, Naval Group, in favour of a trilateral security pact between Australia, the United Kingdom and the United States. As a result, negotiations over an Australia–EU FTA, first launched in June 2018, appear to have stalled in October 2021 ahead of a twelfth round of discussions.[14]

An EU accession bid to the CPTPP should not only be welcomed, but actively supported in Australia’s capacity as a CPTPP founding member. This would help restore much needed confidence and momentum in Canberra’s relations with Brussels. As Canberra pushes to conclude a comprehensive FTA with Brussels, much of this work could also be ported into a European CPTPP accession bid.

This policy brief is based on two intersecting arguments. First, the paper outlines the geoeconomic goals of the original TPP and current CPTPP. We argue that the CPTPP’s strategic value aligns with both the EU’s Indo-Pacific strategy, and Australia’s interest in securing a liberal rules-based trade order. Second, we address the complementarities and hurdles to a potential EU accession. We conclude that the former outweighs the latter, and on that basis recommend that Australia supports an EU accession to the CPTPP.

The EU currently has a large number of bilateral trade agreements already in force with seven out of eleven existing CPTPP signatories (Figure 1), and is in trade negotiations with two more, including Australia. Positive trade relations with all eight ratified CPTPP members makes the prospect of an EU accession to the agreement favourable.[27] The EU’s progressive trade and rule-making agenda on key issues such as subsidies and digital trade governance has the potential to add considerable value to the CPTPP’s proposition as a modern, open, and high-quality mega-regional trade agreement. EU membership could therefore solidify the liberal rules-based orientation of the CPTPP and increase its appeal to other states.

Furthermore, EU accession would raise the stakes for the United States to re-join the CPTPP, or risk losing an opportunity to continue shaping standards in the Indo-Pacific region. The theoretical possibility of a mega-regional trade agreement that included both the United States and the EU would be hugely beneficial to Australia and the other CPTPP members, particularly those that currently have no preferential access to those markets and would struggle with a large size imbalance during bilateral negotiations. However, it would require not only that the United States overcome its current free trade scepticism, but that a number of divergences between US–EU regulatory preferences be resolved. The challenges of cementing a powerful regulatory bloc that includes both the United States and the EU would be significant, but surmountable. While China is powerful, and set to grow stronger, for it to be outside such a combined regulatory group would be challenging. Although the prospect is clearly some way off, it is one nevertheless worth considering in greater detail by focusing on two examples, of complementarity and complication, in a prospective EU–CPTPP accession negotiation.

the EU is deeply concerned with the distorting effects of dumped imports by Chinese SOEs on the EU internal market.

Convergence: EU rules on foreign subsidies would strengthen the CPTPP

The CPTPP’s Chapter 17 lays out regulations on SOEs, which analysts have noted is “aimed at laying down twenty-first century rules for China”.[28] Some of the CPTPP’s key innovations for disciplining SOEs include extending and adapting existing WTO trade rules that require SOEs to act commercially and without discrimination towards the services sector. This makes the CPTPP more reflective of the significant role of services in modern economies. The agreement also elaborates on forms of non-commercial assistance with the goal of ensuring a level playing field. Given that the EU has a well-developed competition policy[29] covering antitrust, cartels, mergers, and state aid, CPTPP rules that advance disciplines on SOE activity in services beyond EU shores should be welcome by Brussels.

Furthermore, the EU is deeply concerned with the distorting effects of dumped imports by Chinese SOEs on the EU internal market.[30] In response to that issue, Brussels published an innovative white paper in 2019 seeking to address problems with foreign subsidies.[31] The paper refers to subsidies paid by non-EU states to entities operating in the EU that undermine fair competition in the internal European market. Like the CPTPP, the EU white paper argues for expanding a focus beyond subsidies in goods production to include ”trade in services, investment or other financial flows in relation to the establishment and operation of undertakings in the EU”.[32] This is a cross-sector approach aimed at ensuring and protecting market competition in the face of challenges arising specifically from SOEs and state capitalism, hence highly complementary to the progressive competition policy outlined in the CPTPP.

Divergence: EU rules on data privacy may impinge on future US accession

The United States was the driving force behind the original TPP, and as its largest economy secured many of its rules and regulatory preferences. The CPTPP carried these over mostly without change, including digital trade governance rules. There are long-running differences between the United States and the EU concerning data privacy protection,[33] which would pose perhaps the most significant hurdle for EU accession talks.

Federally, the United States takes a sectoral approach that regulates privacy for certain types of data, and focuses on ensuring ease of commercial use. The EU views data privacy and protection as a fundamental human right, and developed its General Data Protection Regulation (GDPR) to ensure high privacy protection and transparency standards, harmonisation of standards across the EU internal market, and extra-territorial application to non-EU entities’ trading into the EU. The CPTPP’s standards are far from the EU’s on personal data protection and harmonisation.^[34] In line with US preferences, the CPTPP prioritises ”use” over ”protection”, does not address data protection in terms of a human right, and the degree of harmonisation across parties concerning data protection ”is set at a level to barely justify digital trade”.[35]

The EU does not need to change CPTPP rules per se; rather some kind of equivalence regime could, theoretically, be worked out.

While these divergences with the EU on digital trade would be a significant hurdle if the United States were still a party to the CPTPP, without the United States it may in fact be easier for CPTPP parties to agree to meet the EU’s requirements for GDPR-standard data protection. There may also be scope to use accession talks to further enhance the level of harmonisation on data protection in the CPTPP, given that it is currently minimal and the agreement seeks to be a modern twenty-first-century trade agreement. As previously noted, the EU already has FTAs with seven CPTPP members, including Japan and Canada. The latter two economies are tightly linked with the United States; both have FTAs with the United States, and their regulatory approaches in the field of digital trade governance are arguably more reflective of US approaches, yet they have been able to agree digital rules with the EU, indicating that convergence is manageable.

Still, the concern that by admitting the EU into the CPTPP the rules on digital trade, for example, could be rewritten according to EU preferences, thus resulting in a diminished incentive for the United States to re-join, is real. For the foreseeable future, it is unlikely that the United States and the EU will be able to bridge their divergent regulatory approaches to enable smooth digital data flows between themselves.[36] Nonetheless, at least two counterpoints are relevant. First, the ground is shifting in the United States, particularly in relation to anti-trust investigations targeting the big technology companies, but also in relation to privacy concerns. Geopolitical contestation with China sharpens the latter, so current US preferences, as favoured by “big tech” and inscribed in CPTPP rules, cannot be taken as a given. Second, the EU does not need to change CPTPP rules per se; rather some kind of equivalence regime could, theoretically, be worked out. After all, as noted above, Japan and Canada, inter alia, have bilateral FTAs including digital chapters with both the EU and the United States.