The Comprehensive and Progressive Agreement for Transpacific Partnership
The Comprehensive and Progressive Agreement for Transpacific Partnership (CPTPP) came into force in December 2018 and currently gathers 11 countries, namely Australia, Brunei Darussalam, Canada, Chile, Mexico, Malaysia, New Zealand, Peru, Singapore, Viet Nam, and Japan, in the Indo-Pacific region. After its formal application was submitted on 1 February 2021, an agreement was reached in March 2023 for the United Kingdom (UK) to join the CPTPP. The UK’s accession to the CPTPP is expected to be finalised at the upcoming CPTPP Ministerial Meeting in Auckland, New Zealand, in July 2023. Currently, the combined Gross Domestic Product (GDP) of the CPTPP’s Parties amounts to USD 13.5 trillion, already making the CPTPP one of the largest preferential trade agreements around the world, growing to more than USD 16.5 trillion with the addition of the UK.
Originally, the negotiated agreement was called the Trans-Pacific Partnership (TPP). Its negotiations were launched in March 2010 and were concluded on 5 October 2015. The US was an original Party to the TPP, but, on 23 January 2017, the US Administration decided to withdraw from the Agreement. The remaining 11 Parties agreed to go ahead with the Agreement without the US and slightly revised the Agreement’s text, calling it the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which was signed in March 2018. The CPTPP officially came into effect in December 2018 and, currently, five more countries have formally applied to join it, namely Costa Rica, China, Ecuador, Taiwan, and Uruguay.
The commitments included in the CPTPP can be divided into two main areas:
- Market access: This area focuses on the extent to which each CPTPP Party will reduce tariffs, open its services markets, relax visa requirements for business travelers, and similar matters. Each CPTPP Party has defined its own set of commitments specified in Schedules. Some commitments apply universally to all Parties, while others are limited to specific CPTPP Parties.
- Rules: These pertain to various aspects, such as the establishment of new food safety regulations or the permissibility of data transfers among CPTPP Parties. These rules apply to all CPTPP Parties, including any prospective new members that may join in the future.
The CPTPP aims for comprehensive tariff liberalisation among its Parties, with only a few highly sensitive sectors retaining tariffs. For example, Japan maintained tariffs on rice, while Canada negotiated safeguards for its dairy industry in the form of limited tariff-rate quotas. The agreement establishes a unified set of rules of origin, allowing content from any CPTPP Party to be combined or “cumulated”, which means that, if a product requires a minimum of 70% “CPTPP content” to qualify for preferential tariffs, that 70% can be sourced from any combination of CPTPP Parties.
The emerging opportunities from the expansion of the CPTPP to the UK
The UK’s accession to the CPTPP is a major milestone for international trade, presenting important trade opportunities for CPTPP Parties like Malaysia. Notably, investments by UK companies in Malaysia have the potential to strengthen bilateral trade relations and foster economic growth for both countries.[1] One of the key benefits for Malaysia of the UK joining the CPTPP will be the elimination of tariffs on palm oil imports, which currently amount to up to 12%, depending on the specific tariff line. This may provide an important boost to palm oil producers and exporters based in Malaysia. Malaysia is a major global player when it comes to sustainable palm oil production and exports, holding approximately 25% of the global market share, while Indonesia accounts for 60% of the global supply.
Palm oil is considered to be the most cost-effective and environmentally beneficial vegetable oil due to its high productivity per acre compared to other vegetable oils. With closer relations within the CPTPP, UK research institutions could collaborate with Malaysia’s producers to further enhance the industry’s sustainability and explore advancements in yield improvement, by-product generation, and other aspects. Malaysia has significant growth potential and increased palm oil production and efficiencies would further stimulate economic development in the country.
As the CPTPP provides for the removal of tariffs and other trade barriers among its Parties, being a Party to the CPTPP provides Malaysia with a significant competitive advantage in the markets of the other Parties, including in relation to Indonesia, which is not a CPTPP Party. By granting preferential treatment to each other’s goods and services, the CPTPP creates a more favourable trading environment, giving CPTPP Parties a competitive edge over countries outside of the CPTPP by making their exports more price-competitive in the markets of other CPTPP Parties.
This preferential access allows businesses from CPTPP Parties to reach new consumers, expand market share, and increase their competitiveness in the markets of the other Parties. The CPTPP also promotes a greater degree of supply chain integration among the Parties, which encourages businesses to establish regional value chains and production networks, benefitting from cost efficiencies, specialisation, and economies of scale. Generally, preferential trade agreements (PTAs) like the CPTPP also lead to “trade diversion”, which occurs when Parties to a trade agreement shift their imports from countries outside of the Agreement to fellow PTA parties. This trade diversion effect delivered by the CPTPP can result in increased market share and trade opportunities for Malaysia.
The 2022 Annual Progress Report for the UK Roundtable on Sourcing Sustainable Palm Oil published by Experts in Sustainable Forest & Agricultural Advice (EFECA) notes that, over the years, the UK has made significant progress in the sourcing of sustainable palm and palm kernel oil.[2] The Report indicates that the proportion of UK imports of these oils that can be classified as “certified sustainable” had increased from 16% in 2010 to 72% in 2021. The remaining imports are likely sourced through other forms of assurance, such as policies adhering to No Deforestation, no Peatland, and no Exploitation (NDPE) standards. There has also been notable advancement in transitioning to segregated supply chains, with approximately 80% of imports covered in the report certified under a segregated supply chain model of the Roundtable on Sustainable Palm Oil (RSPO).
However, the Report explains that there are still areas of improvement with respect to the UK market. Challenges related to traceability in complex derivative and by-product supply chains persist in the home and personal care, as well as in the animal feed, sectors. The Report indicates that, in order to address these gaps, partnerships with initiatives in palm oil-producing countries should be pursued. The UK represents a fraction of around 0.5% of global palm oil consumption and the Report concludes that the UK’s most significant impact lies in fostering a collective effort to raise the overall production standards across global supply chains. Importantly, with respect to the Malaysian Sustainable Palm Oil (MSPO) Certification Scheme, the Report notes that it “covers almost all of Malaysia’s production base, with the total MSPO-certified area in Malaysia increasing considerably between July 2020 and July 2021 from 5.9 million ha to 6.66 million ha, representing 97% of its production area”, while noting that the Indonesia Sustainable Palm Oil (ISPO)certification was “further behind in terms of this proportion”.
With respect to the expected impacts of the UK’s tariff removal for Malaysian palm oil, the UK’s Agriculture and Horticulture Development Board (AHDB), the levy board that represents UK farmers, growers, and others in the supply chain, noted that economic data for the period from 2015 to 2022 showed that the UK’s imports of palm oil from Malaysia have been relatively constant. On average, Malaysia accounted for 15% of palm oil imports’ origin into the UK, given that the UK also sources palm oil from Indonesia and Papua New Guinea. Notably, according to the AHDB, given the overall cost-effectiveness of palm oil vis-à-vis other vegetable oils and given that the demand for palm oil is not solely price-driven, the removal of tariffs would not necessarily be translated into increased demand by UK’s consumers.[3] Still, the tariff liberalisation for palm oil certainly creates an important competitive advantage for Malaysian palm oil vis-à-vis its competitors in Indonesia, Papua New Guinea, and Latin American palm oil-producing countries.
The bigger picture
Negotiations and dialogue, as opposed to trade wars, tit-for-tat actions, and unilateral decisions, serve as the more promising means to achieve commercially relevant outcomes through the exchange of ideas, interests, and concerns among multiple parties that aim to achieve win-win outcomes where all sides benefit. Negotiated outcomes also deliver much greater stability and predictability in the global business environment through the establishment of clear rules and obligations, allowing businesses to plan investments and make strategic decisions in the long term.
As the example of the CPTPP shows, Malaysia would significantly benefit from such an approach and from the further negotiation of PTAs with key trading partners, such as the EU. This would contribute to a level playing field, competitive commercial advantages, and potential for important negotiated solutions regarding certain EU non-tariff measures and barriers. A dedicated PTA would provide Malaysia not only with improved market access to the EU, but the negotiation of preferential terms of market access could reduce the impact of non-tariff barriers established by the plethora of the EU’s recent regulatory initiatives impacting global supply chains, including palm oil when it comes to sustainability, forced labour, and deforestation. For instance, a preferential trade agreement could involve the harmonisation or mutual recognition of certain regulatory standards and technical requirements, such as those related to sustainability, which would help reduce trade barriers arising from divergent regulatory frameworks, ensuring smoother trade flows and facilitating market entry for Malaysia’s businesses. Commitments to enhanced regulatory cooperation would also allow Malaysia to play a more active role in the EU’s legislative debate.
Sanitary and phytosanitary measures, technical barriers to trade, and intellectual property rights can have a significant impact on trade relations, and a PTA with the EU could provide a platform for both Malaysia and the EU to engage in discussions to seek greater transparency, regulatory cooperation, and the removal of unnecessary and costly trade barriers. The alignment of regulations and streamlined procedures between the EU and Malaysia would lead to increased export opportunities, improved productivity, and overall economic growth for Malaysia.
Being a Party to the CPTPP helps Malaysia to integrate into both regional and global value chains and the UK’s accession further manifests this benefit. By aligning regulations and standards with CPTPP partners, Malaysia enhances its position as a preferred investment and manufacturing hub. This sort of integration with other trading partners, notably the EU, whose regulatory approach often inspires other jurisdictions, would also facilitate greater economic cooperation, technology transfer, and knowledge sharing, contributing to Malaysia’s overall development and competitiveness. In simple terms, engaging in dialogue and negotiations with its key trading partners and ultimately agreeing to a PTA such as the EU-Malaysia FTA would allow Malaysia to address both tariff and non-tariff issues, leading to increased trade, economic growth, and prosperity, including Malaysia’s palm oil industry.
The example of the commercial opportunities achieved by Malaysia with the UK through the latter’s CPTPP accession negotiations is a testament to the fact that, even with the EU, the solution to the current problems rests in well-executed negotiations based on a sound strategy.
Prepared by Uthaya Kumar
MPOC Brussels
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[1] See https://www.aseanbriefing.com/news/uk-joins-the-cptpp-opportunities-for-british-investors-in-malaysia/ (accessed 11 May 2023)
[2] See https://www.efeca.com/wp-content/uploads/2022/11/UK-RTSSPO-2022-Annual-Progress-Report-FINAL.pdf (accessed 12 May 2023)
[3] See https://ahdb.org.uk/news/the-uk-will-not-be-over-supplied-with-malaysian-palm-oil-grain-market-daily (accessed 11 May 2023)
