Business | Brexit: How it affects Japan

As U.K. eyes post-Brexit trade deal with Japan, its hand may not be as strong as it thinks

by Chris Russell

Staff Writer

This is the second of a three-part series examining what could happen to British and Japanese companies affected by Brexit.

With the U.K. looking to secure its economic future and seize the purported benefits of Brexit, London has been ramping up its negotiating capacity and making overtures to trade partners.

Japan is one of them. Late last month, British trade minister Liz Truss visited Tokyo to discuss a possible trade deal with Foreign Minister Toshimitsu Motegi, although formal negotiations are prohibited while the U.K. remains a member of the European Union.

There was a slight contradiction, however — the U.K. effectively already has a trade deal with Japan.

The EU-Japan Economic Partnership Agreement, which came into force in February, removes tariffs covering 97 percent of goods from the EU either immediately or gradually over several years, affecting industries such as agri-food, pharmaceuticals and autos. It also includes provisions on services including in the finance, transport and commercial sectors. Its arrival saw London hail a £3 billion boost to the U.K. economy in the long run.

Depending on how the Brexit saga pans out, British firms could still reap some of the benefits. Under the agreement reached by former Prime Minister Theresa May, the U.K. would continue to be treated as an EU member for the resulting transition period. But should a “no-deal” Brexit become reality, the U.K. would fall out of the EPA.

Although London has signed some continuity agreements mirroring the terms of EU trade deals, such as with South Korea, the U.K. is pursuing a new agreement with Japan.

“We want to have an ambitious, comprehensive arrangement with Japan that covers many modern industries — for example artificial intelligence, financial services — and helps build the links between our two economies,” said Truss after her meeting with Motegi.

Tokyo had reportedly resisted attempts to replicate the EPA, believing it is in a position to extract better terms from London than it already has.

Truss’ visit also saw the launch of a public consultation in relation to the proposed trade deal, which will run until Nov. 4. The trade minister reiterated London’s interest in joining the Trans-Pacific Partnership agreement, a massive 11-member trade deal that Japan helped spearhead, which is now called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP.

As any trade deal still needs to be formally negotiated, ratified and implemented, British firms potentially face a lengthy period outside the EPA or an equivalent.

And while the general consensus is that it is too soon to say what benefit the EPA is having, experts cite the loss of the deal with Japan as one of the main downsides of a no-deal Brexit.

“It’s more a question of the potential we lose,” said Tom Keen, EU exit and international trade adviser at the National Farmers Union. “That loss of potential becomes all the more important when we consider that if we are less competitive on the European market, because of the tariffs they would impose for production, then any other market access, even if it’s small, is useful.”

According to Keen, falling out of the EPA also risks undermining the U.K.’s push to increase exports — namely, the lifting of a ban on British beef expected to bring a £75 million windfall over five years.

And with British firms possibly facing much less favorable trade compared to EU competitors, they could slowly find themselves being displaced in trade with Japan.

“There could be this gradual shift in supply in which the U.K. gets undercut by similar European producers,” said Meredith Crowley, an economist at Cambridge University specializing in international trade.

Such developments would be ironic given that the U.K. was one of the main driving forces behind Europe’s agreement with Japan.

Faced with these potential impacts, speed will be key. During talks at the Group of Seven summit in France in August, both Prime Minister Shinzo Abe and his British counterpart Boris Johnson expressed a commitment to securing a deal quickly after Brexit.

A further indication of the priority the U.K. gives such a deal can be drawn from the number of ministers who have visited Japan since the 2016 referendum, with the visit by Truss — who arrived off the back of stops in Australia and New Zealand for similar talks — being just the latest.

Her predecessor, Liam Fox, visited three times during his tenure, and May arrived in 2017 to meet with Abe. Johnson, meanwhile, made his own appearance in Tokyo that same year while he was foreign minister.

But in order to help make Brexit live up to its billing as restoring autonomy and sovereignty, thereby enabling the U.K. to secure better trade deals, London will have to achieve its aim of securing an agreement that goes above and beyond the EPA.

Its capacity to do that, however, will depend on the strength of the U.K.’s negotiating hand, and not everyone is convinced it is all that strong. Crowley compares the U.K.’s approach of pursuing bilateral deals post-Brexit to that of South Korea, which also favors such arrangements, but with the crucial difference that Seoul has arrived at negotiations with high tariffs in place and a lot of market access to offer.

The U.K., conversely, already offers relatively low tariffs under WTO terms and would stand to gain more from a multilateral trade arrangement, such as the European single market or the TPP, that would allow integration into regional supply chains.

“The fact that they’re going for a bilateral must mean that they think they can get a lot in terms of market access, maybe in the service sector, but then the question is, what would they offer the bilateral partner in order to get all that great service market access?” said Crowley. “And unlike Korea, they don’t have a lot to offer in terms of reductions in tariffs.

“It’s a little tricky to think where the strategic gains are for them.”