Business | ANALYSIS

U.K. may struggle to top Japan-EU trade terms after Brexit

Despite hopes for a good free trade deal with Japan, the United Kingdom is unlikely to improve on the recent agreement between Tokyo and Brussels, and could end up worse off, experts say.

They argue the U.K., on its own, could lose negotiating leverage with Japan and fail to further open up the country’s services sector to U.K. firms — an area the government is keen to focus on in deals with advanced economies like Japan.

Foreign Secretary Boris Johnson hopes the U.K. can better the free trade agreement recently struck between Japan and the European Union, which will eliminate tariffs and lower regulatory barriers.

The U.K. will have to transition the EU’s trade agreements when it leaves the economic bloc in 2019 and will, in subsequent years, try to improve on the original deals.

However, trade experts are relatively skeptical about London’s attempts to exploit these new freedoms as trade in services is always a highly political issue and beset by regulatory hurdles.

“The EU, including Britain, couldn’t make Japan concede (on services) and neither could the United States with all its economic statecraft during the now-defunct Trans-Pacific Partnership negotiations,” said Hosuk Lee-Makiyama, director of the European Centre for International Political Economy in Brussels. “So, on its own, what is Britain’s secret weapon?”

And Paul James Cardwell, a professor from Strathclyde University, said there was “wishful thinking” and a danger of politicians in the U.K. “talking up” the prospects of an improved deal with Japan.

He said, “The U.K. is a large economy but based on services, and countries are generally reticent to include them in (free trade agreements). The card the U.K. has traditionally played in Japan as being a ‘gateway to Europe’ is a very different one to sell now.”

Indeed, Japan will be closely watching future trading arrangement between the EU and Westminster as this could have negative implications for the substantial Japanese investments in the U.K., particularly in the automotive, pharmaceutical and financial sectors.

Japanese firms will be hoping the U.K. is able to retain the benefits of the EU single market. The EU and Japan have agreed to eliminate tariffs for the auto industry and Tokyo will be hoping the arrangements can be extended to the U.K.

Peter Holmes of Sussex University, a specialist in European economic integration and other global public policy issues, said, “It could become harder for Japanese firms (in the U.K.) to have integrated cross-border operations in the EU post-Brexit.”

“As a result, I think there’s a strong possibility that Japan, as well as other countries who have an FTA with the EU, could seek further concessions when the FTAs are renegotiated,” he said. “If they are getting a worse deal from Britain than before, they could say, ‘we want compensation on some other aspects of trade’ otherwise we will pull our investments out of the country.”

The arduous task of transitioning all the EU’s trade deals before the U.K. leaves has been described by some as a “copy and pasting” exercise as most countries should be happy to continue the favorable trading arrangements they already have.

However, one of the main problems with transitioning the EU-Japan deal, which is likely to be implemented in early 2019, is the fact that Tokyo has already agreed with Brussels on a series of food-export quotas.

Lee-Makiyama doubts the EU will redistribute a share of those quotas to the U.K., and it is unlikely Tokyo will grant new quotas to the U.K. unless it can get something in return.

“If you are in the British dairy or agricultural sector, to put it bluntly, you have been thrown under a bus,” he said. He thinks it is probable that most aspects of the Japan-EU deal will be replicated and he does not rule out a deepening of trade in some areas.

The U.K. and Japan might agree on measures to simplify e-commerce by allowing the free flow of data between the two countries. London might also be able to accelerate the elimination of tariffs on leather goods, which would benefit firms like Burberry, Lee-Makiyama added.

Lori Henderson, executive director of the British Chamber of Commerce in Japan, said, “We hope that the U.K., negotiating as a single party, can be more direct, and flexible, in pursuit of mutually beneficial outcomes.”

She added that since Japan is “relatively open in terms of tariff barriers,” there is hope a bilateral deal could be even more ambitious than the Japan-EU deal in “seeking to reduce non-tariff barriers, such as divergence from international regulatory standards.

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