Commentary / World

FTAs easier said than done

by Hugh Cortazzi

Those arguing for Britain to leave the European Union (Brexiters) talked glibly of quickly achieving free trade agreements with major countries outside the EU once this is legally possible. But was such optimism justified?

There have been reports in the media that Australia has expressed willingness to conclude a treaty and that the Americans have retracted their earlier threat that Britain would be at the end of the queue for trade negotiations. But such reports need to be treated with caution.

It is incontrovertible that freeing trade from restrictions has added significantly to employment and prosperity. But “free trade” does not mean the abolition of all rules and regulations governing trade in goods and services, as some naive people seem to believe. A “bonfire” of regulations is “pie in the sky.”

Every country has its own rules on health and safety. Pharmaceutical products are constantly being developed, but there are no effective world standards for testing and certification.

Many trade-related issues, such as environmental concerns, involve more than one country. Restrictions on dumping products in foreign markets at prices less than the cost of production or of products and services that are subsidized in their country of origin are not going to be set aside and need to be agreed with third parties.

Most sophisticated products and services in the globalized world in which we live include components originating from other countries. Hence the need for rules on country of origin.

Agricultural products cause particular problems as most countries provide some forms of subsidy or protection for agricultural products. The permitted level of subsidy- and tariff-free quotas have to be agreed with each country with which an agreement is being made. Fishing immediately raises the question of stock preservation.

Services that are important for Britain raise other problems. To what extent are professional qualifications to be recognized and how are immigration visas to be granted. Insurance and banking are subject to different forms of supervision. Shipping and aviation are subject to complex rules in every jurisdiction.

Trade between Britain and Japan has developed and changed greatly since the EU assumed responsibility for them in the 1980s. Japanese investment in Britain both in manufacturing and finance has become increasingly important to both countries. British investment in Japan is much smaller, but Japanese restrictions on foreign investment have been greatly modified. Discrimination against Scotch whisky, which was for many years a major problem, has been largely eliminated.

Britain and Japan concluded in 1962 after eight years of negotiation a revised Treaty of Commerce and Navigation. So far as I am aware the treaty has not been denounced by either party, though its terms will have been largely subsumed in the trade arrangements reached between Japan and the EU.

The treaty was governed by the provisions of the General Agreement on Tariffs and Trade (GATT), which was itself subsumed by the World Trade Organization. Both countries accepted that bilateral trade would be conducted on the basis of the MFN (most favored nation) principle, which rules that if one nation is granted rights and privileges these must be accorded to all other states with which a country has conclude an agreement.

In theory, therefore, trade between Japan and Britain could be governed after Brexit by this treaty and by WTO rules, and it should be relatively simple to agree on new arrangements. But would it?

Having been responsible for trade negotiations with Japan in the late 1960s, the years following the ratification of the revised treaty, I am not at all sure that satisfactory arrangements could be made swiftly. The Ministry of Economy, Trade and Industry (METI) doubtless is not as mercantilist or dirigiste as its predecessor, the Ministry of International Trade and Industry (MITI), and Anglo-Japanese trade only impinges marginally on Japanese agriculture, although I recall difficult discussions on biscuits.

Japanese shipping and aviation have changed greatly over the last 30 years, but I fear that negotiations in these areas will also be fraught. There are too many vested interests on both sides.

Nontariff barriers are now generally more significant barriers to trade than tariffs. Unfortunately, Prime Minister Shinzo Abe’s third arrow does not seem to have made much of an impact so far on the Japanese regulatory environment and I can foresee many long discussions, especially where powerful Japanese lobbies are involved.

“Britain and Japan Vol. II: Biographical Portraits,” published in 1997, contains two articles about the revised treaty of 1962 by a senior British official and a Japanese diplomat who were closely involved in these negotiations. Although they were writing about a treaty concluded half a century ago, their comments should be read by those likely to be involved in future negotiations.

One major issue in the final round of negotiations was that of “national” treatment of investment. At that time, while Britain was prepared to accord national treatment (i.e. treatment of Japanese companies as if they were British companies), the Japanese government wanted to exclude British companies from a wide range of activities, including banking and public utilities.

Another big issue then was British fears that Japanese products would be exported to the British market in concentrated and overwhelming quantities (shuchu gouteki yushutsu to use the Japanese terminology of the time). Agreements were reached by pragmatists on both sides and VRAs (voluntary restraint arrangements) limited Japanese exports in sensitive products. These were phased out long ago, but it would be foolish to conclude that there will be no major issues to confront during future Anglo-Japanese trade negotiations.

Even if Britain can reach agreement with Japan without too much difficulty and delay, negotiations with other countries will not be easy. Britain does not have the necessary trained negotiators.

The new ministers involved will have to learn quickly and recognize that they misled voters by telling them that free trade was an easy and speedy option.

Hugh Cortazzi was the British ambassador to Japan from 1980 to 1984.