Predicted 0.08% boost from UK-Asia trade deal could be overestimate

Trade department used different approach to estimating economic boost which ‘generates larger estimated GDP impacts’

Trade secretary Kemi Badenoch (PA)

The government’s prediction that its Brexit trade deal with Asia-Pacific countries will grow the economy by 0.08 per cent may be an overestimate, it has emerged.

Officials working on the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP) deal changed their usual approach to calculating the GDP figure and instead used a new model that “generates larger estimated GDP impacts”, according to the government’s own documentation.

Trade secretary Kemi Badenoch last week responded to mockery of the low figure, which amounts to a £1.8bn economic boost, by saying her department's estimate was probably too low and ignored some benefits.

But her department’s own small print suggests the number might have been even smaller had the previous model for calculations been used.

Brexiteer government ministers have been keen to talk up the benefits of doing trade deals outside the EU – but have been left frustrated by their own forecasts which show limited economic upsides from the new free trade agreements.

Speaking last week, Ms Badenoch argued that CPTPP would bring “significant economic growth if we use it properly”. However, she admitted she did not have hard numbers to back this up.

“I can’t stand this estimate, even though it came from my department,” she said of the 0.08 per cent figure.

A technical document, published by the Department for International Trade, states that officials could not employ their usual approach to calculating the GDP benefits of a deal, known as a “Melitz-style model”, because there were too many unknown variables.

Instead, the department used a so-called “Armington-style” model to get the number for CPTPP, which the document notes tend to produce higher GDP figures “for a given free trade agreement”.

The model also produces results that are “not directly comparable” to the previous estimates for deals with the US, Australia, Japan and New Zealand, the document states.

The Armington model is itself not unusual, and is “routinely used by trade modellers and academics”. However, the change in methodology has raised eyebrows given the political focus on the small benefits of such trade deals.

Sam Lowe, a trade expert and senior visiting fellow at the King's Policy Institute, told The Independent: "While the approach the government has taken is perfectly credible, the change in methodology does seem to have been made with the intention of making the GDP figure sound more impressive."

Nick Thomas-Symonds, the shadow international trade secretary, described the government record on trade as “lamentable”.

“No wonder they feel the need to present figures in the most favourable way they can find. The OBR predict a 6.6 per cent fall in exports in 2023, a hit of over £51bn to the UK economy. That hammers UK growth and will make the cost of living crisis even worse.”

Sarah Green, the Liberal Democrat spokesperson for trade, said: “No matter which way you look at it, the official forecast says that the economic benefit from this deal will be small.

“Instead of trying to discredit the official figures, the government should be working to grow our economy by cutting the red tape stopping British businesses from exporting their goods and services abroad.”

After failing to secure its original objective of a Brexit trade deal with the United States, the government has presented joining the CPTPP as its flagship trade deal and a major benefit of leaving the EU.

Ministers say there are wider benefits to their agreements not captured by the government's modelling, and The Independent understands officials have been asked to look at ways to capture these.

"This use of the Armington model specification rather than the Melitz-style model specification affects the estimated scale of impacts. Specifically, it generates larger estimated GDP impacts for a given FTA," the department's document states.

"The use of this Armington model specification, along with updates to the databases and estimations of trade barrier reductions, means that the scale of impacts in this scoping assessment are not directly comparable to those presented in the published scoping assessments for the US, Australia, and New Zealand."

In an analysis published by the UK Trade Policy Observatory, Minako Morita-Jaeger said that while accession to CPTPP was “a geopolitical strategic gain”, “the economic value for the UK is likely to be small”.

The policy researchers noted that the UK “already has bilateral free trade agreements with nine CPTPP members out of eleven", including comprehensive deals with Japan, Canada, Singapore and Australia.

Polls suggest the public has high hopes for the agreement. A new Savanta survey for the Independent shows that 59 per cent of those asked believe joining the Indo-Pacific trade pact is important, while 17 per cent believe it is unimportant.

A spokesperson for the Department for Business and Trade, which took over the responsibilities of the Department for International Trade earlier this year, said: “This scoping assessment reflects historic trading patterns and does not capture all the potential impacts of the deal.

“It does not account for future expansion of CPTPP, the value of increased supply chain resilience, or future changes to sectors the UK excels in – such as the increasing importance of services trade.

“Our accession to CPTPP sends a powerful signal that the UK is open for business and using our post-Brexit freedoms to reach out to new markets around the world and grow our economy.”

The department added that it continually reviews and updates its methodologies to ensure they are in line with “global best practice”.