January 31 marks the UK’s official departure from the European Union, starting the timer on Prime Minister Boris Johnson’s ambitious plans to secure a free trade agreement (FTA) with the bloc within a year. Beyond that immediate pressure, however, the UK is being urged to protect relations with other important trading partners – not least Japan.
The Department for International Trade (DIT) announced today that exports of goods and services to Japan totalled nearly £15bn in the year to September 2019. It says Japanese demand for British exports has grown by 32% in the last five years, attributing the increase in part to sporting equipment being supplied by British firms ahead of the 2020 Olympic Games in Tokyo.
International trade secretary Liz Truss described Japan as “an important and lucrative market for the UK” and vowed to create “more opportunities for business to begin exporting” to the country.
However, the FTA agreed between Japan and the EU in 2018 will not automatically roll over to the UK after Brexit. The government sought feedback on the possibility of a new FTA in a call for input published in September, but talks will only begin in earnest once the UK is no longer a member state.
Sam Lowe, a senior research fellow at the Centre for European Reform (CER) think tank and a committee member of the UK Trade Forum, tells GTR that of the government’s target markets there are good reasons to prioritise Japan.
“The US is going to be really tough, while Australia and New Zealand are nice to have but not hugely economically significant,” he says.
“Japan does matter from an economic point of view and has broader significance, while is actually doable and not as controversial as the US. It’s unlikely to hit any snags politically or throw up many problems.”
One example of that broader significance is protecting Japanese investment in the UK. As Japan is one of the largest investors in the UK after the EU and US, Lowe believes “mending the relationship should be prioritised explicitly”. A by-product of agreeing an FTA could be that investment becomes more attractive.
UK-Japan trade in itself is not insignificant. In terms of goods alone, UK exports to Japan were worth £7bn in 2018 while imports were worth £9.8bn, according to a DIT paper published in September last year.
Turbojets, machinery, engines, vehicles and parts accounted for the largest sectors for both exports and imports. The UK leans on Japanese imports for electrical machinery, precious metals and railway locomotives, while Japan imports high volumes of pharmaceutical products and optical parts.
A UK-Japan FTA
A free trade agreement between the UK and Japan would likely mirror the existing EU agreement in most respects, CER’s Lowe believes, but with some “minor tweaks”.
“The main reason Japan wants to renegotiate and is unwilling to roll over the EU FTA is because of agriculture,” he says.
“There is an issue there whereby the Japanese have offered up quite a lot of market access over the last few years because of the CPTPP, the trade agreement with the EU, and the agreement with the US.”
From Japan’s perspective, rolling over the existing EU agreement to the UK would, in effect, amount to giving away more access to its agriculture market, while the UK is not expected to seek equivalent access anyway.
According to a paper published by the Initiative for Free Trade think tank, a de-emphasis on agriculture “is in the UK’s interest”. It estimates that the gains to the UK could be half of those generated for the rest of the EU, depending on the baseline use.
“Europe’s single-minded priority on agricultural goods and processed agricultural products has resulted in an agreement that does not fully represent the offensive interests of the UK,” says the paper, authored by Deborah Elms, vice-chair of the Asia Business Trade Association, and Hosuk Lee-Makiyama, director of the European Centre for International Political Economy.
Tariffs on cars could also differ. The EU agreement includes the phasing out of an existing 10% tariff on cars imported from Japan, in exchange for non-tariff measures and regulatory reforms, over a period of seven years.
“I could imagine that the Japanese ask for that tariff reduction to happen in the UK more quickly,” Lowe says, meaning British companies are left to decide whether it is more cost-effective to import fully assembled cars or just parts. “The answer is we don’t know yet. Though transfer costs have come down, they do still add up.”
What’s next for the UK-EU deal?
The pressing issue for the UK government, meanwhile, is whether an agreement can be reached with the EU – its largest trading partner – more quickly than for any other FTA in history.
The UK will cease to be a member of the bloc from 11pm local time on January 31, at which point an 11-month transition period will begin.
During that time, the UK will continue to be treated as if it is an EU member state, so existing trade tariffs, quotas and regulatory regimes should remain in place, but without a new agreement would move into a no-deal arrangement on January 1, 2021.
An extension can be sought, as long as it is agreed before the start of July this year, but Prime Minister Johnson has remained insistent that will not happen, while European Commission president Ursula von der Leyen has said officials “are ready to work day and night to get as much of this done within the timeframe we have”.
Charles Brasted, a partner at Hogan Lovells in London and head of the law firm’s public law and policy practice, says: “Although this is speculation, it’s very unlikely that option will be used. That’s my view. Does that mean they couldn’t then be an extension? It doesn’t – the EU and UK could agree some other method for extension.”
Brasted, speaking during a webinar hosted by the law firm, says any further delays would likely be “dressed up in some other way”, and existing legal protections enshrined in the UK Withdrawal Act could easily be overcome thanks to Johnson’s parliamentary majority.
For CER’s Lowe, negotiating an FTA by the end of the year is possible. A larger concern would be its immediate implementation from January 1 next year.
“Going from the status quo to this new free trade agreement overnight would be quite disruptive,” he says. “It would look and feel quite a lot like having left with no deal at all, in that all of a sudden businesses will have new regulatory barriers to trade, there’ll be new customs procedures, there’ll be issues around authorisation and lorries backing up at the border.”
Though there is historical precedent for gradually phasing out barriers to trade – such as the seven-year phasing out of car import tariffs in the EU-Japan FTA – Brexit presents a different proposition.
“What we’re talking about here is phasing in barriers to trade, which is slightly more complicated,” Lowe says. “Every time you phase in a barrier you make it a little bit worse for someone, so there is then the question whether you want to drag this out forever or just do it all at once.”