Business / Economy | ANALYSIS

Japan will push for best business outcome from Brexit, says Suga

Kyodo, AP, Reuters

Japan will continue to press Britain and the European Union to limit the effects on Japanese firms of Britain’s exit from the bloc, the government’s top spokesman said Wednesday, a day after British Prime Minister Theresa May outlined her plan for Brexit.

Chief Cabinet Secretary Yoshihide Suga told a news conference that Japan will keep pushing both sides to “keep the effect on the world economy and the activities of Japanese companies as small as possible.”

“In her address, Prime Minister (Theresa) May indicated her intention to make the forthcoming process more predictable and set a time frame for a smooth transition,” Suga said. “Many Japanese companies are doing business in Europe, including in Britain, and the Japanese government will continue to take great interest in developments related to (Brexit) reflecting this fact.”

May said Tuesday that Britain will not try to stay “half in, half out” of the EU single market for goods and services, and will instead seek a free trade agreement with the bloc.

In a long-awaited speech, May finally revealed the U.K.’s hand as it prepares to start EU exit talks. She said the U.K. wants to free itself from EU governance and stop paying millions into its coffers, but still remain friends, allies and tariff-free trading partners with the soon-to-be 27 nation bloc.

“We want to buy your goods and services, sell you ours, trade with you as freely as possible, and work with one another to make sure we are all safer, more secure and more prosperous through continued friendship,” May said in a speech to diplomats and dignitaries beneath the gilded paint work and chandeliers of a Georgian London mansion.

“You will still be welcome in this country as we hope our citizens will be welcome in yours,” she said.

The potential fallout from Brexit has spurred concern in world markets since Britons voted to leave the European Union in a tight referendum last June.

Asked what effect the Brexit process might have on ongoing negotiations between Japan and the European Union toward concluding a free trade agreement, Suga said the government wants to “watch for a while to determine what kind of effects the transition might have on the world economy and on Japanese firms.”

In her speech on Tuesday, May called for a deal to be done within two years, emphasized cooperation with the bloc and called for a “phased-in” transition to a Brexit.

The value of the pound reversed recent losses and staged its biggest single-day rally against the U.S. dollar since at least 1998. But there was a lukewarm reception from political leaders in EU countries, a reminder that agreeing on the kind of trade deal May wants will be an arduous — even painful — task.

“Where is the give for all the take?” the Czech Republic’s secretary of state for EU affairs, Tomas Prouza, wrote on Twitter. Ireland’s government said it was under no illusion about the scale of Brexit.

May outlined 12 negotiating priorities, including limiting immigration, exiting jurisdiction of the European Court of Justice, and ending full membership of the customs union that sets external tariffs for goods imported into the bloc.

Aiming for a comprehensive free trade agreement means she can enter negotiations with an almost blank canvas, largely free of politically unpopular compromises around freedom of movement or large payments into the EU’s budget.

But the process of agreeing on an FTA is fraught with risk. May has said she wants to settle Britain’s future relationship with the EU within two years, followed by a period of implementation.

Free trade deals usually take far longer than two years to complete — Canada’s FTA with the EU will have taken seven years by the time it is expected to come into force.

“(The) prolonged uncertainty over forming agreements will present a significant challenge to the economy and one from which consumers cannot be called upon to buy our way out,” said Jagjit Chadha, director of Britain’s National Institute of Economic and Social Research.

Consumer spending has been a main driver of Britain’s economy recently, with other sources of growth like trade and investment lagging.

Getting rid of barriers to trade in services, the dominant sector in Britain’s economy, is also likely to be hard, although those backing Brexit argue barriers already exist within the EU.

And the deeper the trade agreement, the more EU regulation Britain would have to abide by, according to the Centre for European Reform think tank.

Supporters of the FTA option argue this would allow Britain to trade with the EU largely as before while also leaving it free to make trade deals directly with other countries such as the United States, its biggest individual export partner, and emerging markets such as Brazil and India.

Brexit supporters also point to Britain’s large goods deficit with the EU — a record £8.59 billion in November 2016. They say the bloc could not afford to cut it off.

May seems to see this as a bargaining chip, stating in her speech that no deal is better than a bad deal — effectively acknowledging that Britain could resort to World Trade Organization rules, which set upper limits on tariffs countries can impose.

In such a scenario, Britain would face barriers on services, particularly in highly regulated sectors such as finance. That would be a “very dangerous path,” according to J.P. Morgan economist Malcolm Barr.

“One might expect a successful negotiating strategy to have ambitious objectives and a credible fallback position. May certainly has the former. But we doubt the prime minister has the latter,” he said in a note to clients.

Tellingly, just as May was setting out her pitch for an internationalist Britain built on cooperation, her Finance Minister Philip Hammond told parliament that Britain could get tough if a comprehensive FTA with the EU is not forthcoming, and slash business taxes in retaliation.

“If we don’t (get a sensible Brexit deal) the people of this country are not simply going to lie down and accept that they will be poorer,” Hammond said. “We will do whatever it takes to maintain our competitiveness and protect our standard of living.”