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Britain in rescue mission to replicate EU trade deal with Japan

The United Kingdom has officially launched a bid to negotiate a post-Brexit free trade agreement with Japan, to replace the European Union’s own trade agreement with the East Asian country.

Although the launch of the UK-Japan strategy paper on Wednesday by UK International Trade Secretary Liz Truss is packaged to look like an exciting new trade initiative, there is no disguising the fact that this is in fact a rescue mission to salvage as much as possible of the benefits the Japan EU Economic Partnership Agreement or JEEPA, which Japan has declined to roll over to apply to the UK as it currently stands.

Britain will lose access to the benefits of JEEPA, which has been in force since February 2019 – once the current transition period ends on 31 December.

The government’s headline figure – that the UK economy stands to gain by 0.07% of output in the longer-term – is based on a comparison with 2018 data, before JEEPA came into force. The relatively recent launch of the EU-Japan agreement has thus spared London the embarrassment of having to couch its figures in terms of the extent to which Brexit damage can be mitigated.

End-year deadline looms

London is optimistic that it will be able to boost British export prospects for digital trade, services, and goods such as cars, textiles and food and drink, with the conclusion of a new bilateral FTA.

But as in the case of the EU-UK negotiations, the ambition to develop a wide-ranging agreement will have to be set against the reality that UK-Japanese trade will be reset to baseline World Trade Organization terms as from 1 January next year, unless some kind of deal, interim or otherwise, is concluded in the meantime.

The fact that the UK has launched negotiations with Japan before embarking on talks with Commonwealth partners Australia and New Zealand is indicative of the haste with which London needs to move forward with this dossier.

“Japan is one of our largest trading partners and a new trade deal will help to increase trade, boost investment and create more jobs following the economic challenges caused by coronavirus,” Truss said in a statement.

“Both sides are committed to an ambitious timeline to secure a deal that goes even further than the existing agreement especially in digital and data.”

She also emphasised that the negotiations with Japan were viewed as being an important step towards acceding to the Comprehensive and Progressive Agreement on Trans-Pacific Partnership – known as CPTPP – which she described as “a key UK priority”. Japan is already a member of the 11-nation bloc.

Focus on data and digital trade

The strategic and economic case for the UK-Japan FTA is set out in a 96-page document which sets out – in very broad terms – UK objectives and priorities for the upcoming negotiations.

There is a strong focus on data and digital trade.

“Ambitious digital provisions … can help us take the lead on innovation, supporting the development of important emerging technologies such as blockchain, driverless cars and quantum computing,” DIT’s document states.

The government’s enthusiasm in this area is shared by industry lobby group TechUK.

Digital happens to be an area where the EU and Japan have not been able to find common ground on critical issues such as the issue of data flows.

“We believe we have a huge opportunity to build on the Economic Partnership Agreement and create state of the art digital trade provisions, including on data flows, as well as regulatory cooperation on cyber security and emerging technologies,” said the organisation’s CEO, Julian David.

On services, the UK is aiming for “ambitious commitments on market access” and “best-in-class rules for all services”, with financial services seen as being the sector best placed to make gains over and above the provisions of JEEPA – although here too, safeguarding what has already been negotiated by the EU will have to be London’s top priority.

The document repeats almost word-for-word the mantra with which the government defended the launch of the UK-US negotiations earlier this year, namely that the National Health Service and all associated healthcare services “will not be on the table” in the negotiations.

Rules of origin issues overshadow goods chapter

For trade in goods, the emphasis will be placed on replicating the tariff concessions from which EU exporters are benefiting under JEEPA, and also to “secure the current staging schedule for tariff liberalisation.”

The latter is an acknowledgement that Japanese tariffs on many sensitive products are being phased out, over a period of up to 15 years for some products, and that UK businesses would be at a disadvantage vis-à-vis their European competitors if they failed to “inherit the clock” on liberalisation, to use the document’s language.

However, for UK manufacturers, and for the car industry in particular, rules of origin will be critical in determining whether the tariff concessions obtained have any real value.

This is because the auto sector has notoriously complex supply chains, with typically around 75% of components in UK-built cars being sourced from either the EU or third countries. Under typical FTA rules of origin, such vehicles would not be eligible for tariff reductions.

The strategy paper hints obliquely at this issue, calling on the two sides to “develop simple and modern Rules of Origin that reflect UK industry requirements and consider existing as well as future supply chains”.

However, UK industry sources have warned that only a diagonal cumulation agreement which essentially allowed for free movement of components between the EU, the UK and Japan would be sufficient to maintain auto trade volumes at current levels. Such a move would be unparalleled, and would depend on securing tariff-free trade between the UK and the EU.

The UK also makes a request for the maintenance of UK geographical indications on the Japanese market, although it takes a more nuanced approach to the subject than the EU generally does in trade negotiations, saying that registration of GIs should “get the balance right for consumers so they are not confused or misled about the origins and the quality of goods.”

At present, six UK food and drink product names are protected in Japan under the existing EU FTA – but DIT claims that “there should be protections for more UK GIs” under the new agreement.

Japan sees opportunities for better deal, but clock is ticking

However, a broader question for the UK is what Japan is prepared to concede in a negotiation in which both sides have much to lose if a deal is not struck by the end of the year.

A positive for Tokyo is that the UK has relatively moderate offensive interests in agriculture, as  compared with the EU or the CPTPP countries. This has encouraged Japan to be more assertive in its dealings with the UK, and indeed was probably instrumental in persuading Tokyo to ask for a brand new deal with the UK, rather than simply rolling over the existing EU one.

But like the UK, Japan must decide whether to push for the comprehensive deal that it believes is within reach, or to scale down its ambitions and act to secure existing trade opportunities before the end-year deadline.

“There does not seem to be a consensus in Tokyo on the preferred approach,” Michito Tsuruoka, an associate professor at Keio University, wrote recently in The Diplomat.

“In light of the practical requirement to prepare for the end of the transition period, Tokyo and London might need to lower their sights and focus on settling immediate problems, an idea supported by many in the business communities of both countries.”

A two-stage agreement – a ‘phase one’ accord later this year to prevent immediate trade disruption, followed by a more comprehensive deal at a later stage – thus seems like a distinct possibility.

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