Free trade areas, customs unions, single markets and monetary unions, the WTO’s rules, and trade creation against trade diversion on a tariff diagram with a partner price between the world price and the tariff-inclusive price. Through the UK’s accession to the CPTPP.
On 15 December 2024 the UK became the twelfth member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the first country to join since the bloc formed in 2018 and the only one without a Pacific coastline. Members include Japan, Canada, Australia, Mexico, Vietnam, Malaysia and Singapore. Tariffs on most goods traded between members fall to zero over time; the UK gets lower tariffs on whisky, cars and cheese, and cuts its own on palm oil, rice and bananas from members.
The government’s own estimate of the long-run gain was about £2bn a year, 0.08% of GDP, because the UK already had deals with nine of the eleven. Critics pointed out that cheaper Malaysian palm oil would displace imports from Indonesia, a non-member that still pays the tariff, and that the EU, which takes over 40% of UK exports, is not in it.
When a country joins a trade bloc, who gains, who loses, and can the whole country end up worse off?
Source: Department for Business and Trade, UK accession to CPTPP, in force 15 December 2024; HM Government impact assessment, July 2023.
A trading bloc is a group of countries that reduce trade barriers among themselves. In order of depth:
The World Trade Organization sets the rules for its 166 members: tariffs are bound at agreed ceilings, members must treat each other equally (most favoured nation), and disputes go to a panel. Blocs are an allowed exception to equal treatment.
Joining a bloc has two effects. Trade creation: dearer home production is replaced by cheaper imports from a member, a welfare gain. Trade diversion: cheaper imports from a non-member, still taxed, are replaced by dearer imports from a member, a welfare loss.
On 15 December 2024 the UK joined the CPTPP, a trade bloc of eleven Pacific countries including Japan, Canada, Australia and Vietnam.
Tariffs between members fall, so UK buyers can import from Vietnam or Malaysia tariff-free, while the same goods from, say, India still pay the tariff.
Is the UK bound to gain?
Joining a bloc is a mixture of freer trade and new discrimination. Trade creation, where members replace home production, raises welfare; trade diversion, where members replace cheaper outsiders because the outsiders still face a tariff, lowers it. Which dominates is an empirical question, and for the CPTPP the government’s own estimate of the gain was about 0.08% of GDP.
Start before membership. The world price is **£6**, but a **£4 tariff** on all imports lifts it to **£10**. At £10 home firms supply Qs1 = 8m, buyers want Qd1 = 10m, and the 2m gap is imported from the cheapest source, the rest of the world. The government collects £4 on each: £8m of tariff revenue, the shaded rectangle.
Check: Before joining the bloc the country applies a £4 tariff on all imports. The world price is £6. Imports enter at:
Buyers pay the world price plus the tariff. At £10 home firms supply 8m, buyers want 10m and 2m are imported.
Now the country joins a bloc. A member can supply the good at **£7**, tariff-free; the world’s £6 still carries the tariff, so world goods cost £10 and lose out. The price falls to £7: home firms contract to Qs2 = 5m, buyers expand to Qd2 = 13m, and imports jump to 8m, all from the partner. The 2m that used to come from the world now comes from the partner too.
Check: The country joins a bloc. Members’ goods enter tariff-free at the partner price of £7; non-members still pay the £4 tariff, so their goods cost £10. Buyers now pay:
Tariff-free partner goods at £7 undercut taxed world goods at £10, so the domestic price falls to £7 and the world supplier loses the market.
Trade creation. Two gains. Triangle **A**: 3m units that cost between £7 and £10 to make at home are now imported at £7, saving the resources, worth £4.5m. Triangle **B**: 3m extra units are consumed by buyers who value them at between £7 and £10, worth another £4.5m. Together, £9m of welfare gain from replacing dear home output with cheaper member imports.
Check: Between Qs2 and Qs1 (5m to 8m), 3m units that were made at home at a cost of £7 to £10 are now imported at £7. The gain to the country is:
Each of those units cost more to make at home than the £7 import price; the saving is the area between the supply curve and £7: trade creation on the production side.
Trade diversion. The original 2m imports used to cost the country £6 each from the cheapest source; the £4 tariff went to its own government. Now they come from the partner at £7. Buyers see a cheaper price, but the nation pays foreigners £1 more per unit and loses the revenue. Rectangle **C**: £2m of welfare loss. The bloc has diverted trade from the efficient producer to a less efficient member.
Teacher tip: Students see the price fall and assume everyone gains. The test is where the imports came from before. Replacing home output: creation, gain. Replacing cheaper non-member imports: diversion, loss.
Check: The original 2m imports came from the world at £6 (plus £4 tariff to the government). They now come from the partner at £7, tariff-free. For the country as a whole this is:
The £3 buyers save on those units was mostly tariff going to their own government, now lost. The real cost of the goods to the country rose from £6 to £7: trade diversion.
Net effect: £9m gained, £2m lost, £7m better off. At a partner price of £9.50, though, creation would be tiny and diversion would still cost the lost tariff: a net loss. Blocs help most when members are efficient and the old tariff was high. The UK already traded freely with nine of the eleven CPTPP members, hence a gain of 0.08% of GDP.
Check: Creation gains are £9m and the diversion loss is £2m. Joining the bloc makes the country:
Net welfare is creation minus diversion. The closer the partner price to the world price, and the larger the fall in the domestic price, the more creation dominates.
The bloc’s type matters. In a free trade area like the CPTPP each member keeps its own external tariffs, so goods need rules of origin to prove they were made inside the bloc. In a customs union like the EU the common external tariff removes that need, but members give up their own trade deals. The WTO sits over all of this, binding tariffs and policing disputes.
Check: The EU is a customs union and single market; the CPTPP is a free trade area. A consequence for the UK is that:
A customs union pools external trade policy and removes internal borders; a free trade area leaves external policy to members and so needs rules of origin to stop trade deflection.
The whole old tariff-revenue rectangle, from £6 to £10 over the 2m original imports, is shaded as the loss. Only the part between the world price and the partner price, £6 to £7, is lost to the nation; the rest, £7 to £10, is revenue the government loses but consumers now keep: a transfer, not a loss.
Using a diagram, explain the difference between trade creation and trade diversion, and assess whether joining a trading bloc such as the CPTPP is likely to benefit the UK.
A trading bloc is a group of countries that remove trade barriers among themselves. The CPTPP is a free trade area: members abolish tariffs on each other’s goods but keep their own tariffs against outsiders, so rules of origin are needed. The EU is a customs union with a common external tariff and a single market with shared regulation, a far deeper arrangement.
Joining a bloc has two opposite effects. Trade creation occurs when tariff-free imports from a member replace dearer home production. On the diagram, with a tariff the domestic price is the world price plus the tariff; joining lets the partner’s goods in at a lower price, so home output contracts and consumption expands. The two triangles between the old and new prices, under the supply curve and under the demand curve, are gains: resources freed from high-cost production and extra consumption valued above its cost. Trade diversion occurs when imports from a member replace imports from a cheaper non-member that still pays the tariff. The country now pays the partner more than it paid the world, and the tariff revenue it collected is gone; the rectangle between the world price and the partner price over the original imports is a loss.
The net effect depends on the numbers. Creation dominates when the partner is nearly as efficient as the world producer, the old tariff was high and demand and supply are elastic. For the UK and the CPTPP the government’s own estimate was a gain of about 0.08% of GDP, because the UK already had free trade agreements with nine of the eleven members and the remaining tariff cuts, on goods such as palm oil, partly divert trade from non-members such as Indonesia.
**However,** the static diagram misses dynamic effects: a larger market brings economies of scale, competition, investment and the spread of ideas, which is why the EU single market is thought to have raised UK GDP by several per cent over decades. It also misses costs: rules of origin paperwork in a free trade area, and the loss of an independent trade policy in a customs union. Geography matters most: trade falls steeply with distance, so a shallow agreement with distant economies cannot substitute for deep integration with neighbours that take over 40% of UK exports. The CPTPP is likely to benefit the UK modestly and at little cost, but it is a small addition rather than a strategy.
CPTPP accession: Department for Business and Trade, the agreement entered into force for the UK on 15 December 2024; the government’s own estimate of the long-run gain to GDP was about £2bn a year (0.08%). The market on the diagram is invented, chosen so the areas are easy to calculate. Diagrams drawn with Rough.js and perfect-freehand, both MIT licensed.