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The UK has agreed a free trade agreement (FTA) with Japan, the first deal of its kind since it exited the EU.

The British government says the agreement, which has been signed in principle and must still get approval from the Japanese parliament, will boost trade between the UK and Japan by more than £15bn.

The deal, which will come into force at the start of 2021, will eliminate tariffs on 99% of goods traded between the nations, while also reducing trade barriers in services exports.

UK trade secretary Liz Truss says the agreement “goes far beyond” the existing EU-Japan FTA struck in 2018, which the UK had been due to leave behind at the end of the year, when the Brexit transition period comes to an end.

Truss adds that the agreement secures “new wins” for British businesses in the manufacturing, food and drink, and tech industries.

For goods trade, the UK’s department for international trade (DIT) says there is tariff-free access for more UK goods, adding that “new and more liberal” rules of origin will allow British producers to source inputs from around the world for their exports to Japan, “making it easier and cheaper for them to sell to the Japanese market”.

Agriculture had been tipped to be one key area in the discussions, with analysts predicting in the build up to the talks that Japan would resist offering the UK the same level of access to its agriculture market as it did the EU.

Historically Japan has been relatively protective over its agricultural sector, though compromised on that in its trade agreements with Europe, the 2019 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and its deal with the US, also ratified in 2019.

As part of the UK-Japan FTA, there is a reduction in tariffs for UK pork, beef, salmon and “a range of other agricultural products”, says the DIT, adding that it has kept low tariffs for key food and drink products covered by quotas, such as Stilton cheese.

There were reports that talks between the two sides had stalled last month over the issue of food tariffs, with the press reporting that Truss had been particularly keen to get a better deal for British blue cheese producers.

Another widely tipped area of interest for Japanese negotiations was the auto sector. GTR reported in January that Japan would likely seek changes in tariffs on its car exports, with the EU-Japan deal involving a phasing out of a 10% tariff over a seven-year period.

Japan’s trade minister Hiroshi Kajiyama told local reporters in June that Japan would urge the UK to change this, and “bring forward the period for which tariffs will be removed mainly for auto and auto parts”.

In the end, tariffs have been reduced on parts coming from Japan as part of the FTA, a move which will benefit “major” Japanese investors in the UK such as Nissan and Hitachi, the DIT says.

The DIT adds that the FTA will also reduce trade barriers in services, including in the digital sector and in the financial services sector. Financial services are Britain’s biggest export to Japan, accounting for 28% of all UK exports to the country.

The agreement also contains new rules on intellectual property and data, which are aiming to support the digital economy.

 

A welcome development for UK exports

News of the agreement has been welcomed by British businesses and banks that support trade.

Adam Marshall, director general at the British Chambers of Commerce (BCC) says: “Businesses will warmly welcome this milestone free trade deal with Japan, which provides access to a major market for traders across the UK.”

“Chambers of Commerce stand ready to work with [the] government to ensure that the benefits of this agreement are felt by businesses on the ground. Firms will want to see the specific provisions to support small businesses replicated in future trade deals to help business communities thrive and grow in future,” he adds.

Head of trade for HSBC UK, Ian Tandy, says the FTA will provide “continuity in trading conditions from the start of next year and some reassurance for the 8,000 UK SMEs who are already exporting there”.

According to the British government, the FTA will provide a £1.5bn boost to the UK economy and increase UK workers’ wages by £800mn in the long run.

However, turning to other issues facing the country’s exporting future, in his response statement, the BCC’s Marshall notes that the government has to now focus its attention on securing a trade agreement with the EU.

“Whilst this agreement is undoubtedly cause for celebration, securing a free trade agreement with the EU remains critical to the future of businesses in the UK,” he says.

Negotiations between the UK and the EU are dragging on, with the two sides still struggling to come to an agreement on a number of issues, including state aid and fishing rights.

The deadline for talks is fast approaching, with Boris Johnson having previously said he would walk away from the negotiating table if an agreement with the EU is not reached by October 15.

DIT figures from 2018 show that the UK’s trade with the EU was worth £659.5bn, while that with Japan came in at £29.1bn.

 

CPTPP next?

The agreement with Japan may have implications for another future trade agreement, with the DIT noting the deal with Japan is an “important” confidence building step towards the UK becoming a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Earlier this week, negotiators from the 11 current members opened talks with UK trade officials to discuss potential UK accession to the CPTPP agreement, which was established in 2018 by Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

The free trade area removes tariffs on 95% of goods traded between its members, which could reduce costs for businesses and create new economic opportunities for UK exporters, the DIT says.

Ross Denton, head of international trade at law firm Ashurst says that it could be a significant step for the UK. “If the UK does indeed accede to the CPTPP, that will allow the UK access to a number of other key Asian markets.”

But, he adds that Brexit might ultimately hinder companies from making the most of the CPTPP, if the UK manages to join the agreement.

“While such access does allow UK businesses to build supply chains with Asia, it is not yet clear how aggressively UK businesses struggling with Brexit might grasp this opportunity,” he says.