Tokyo Report

The Shape of a Japan-UK Free Trade Agreement

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Tokyo Report

The Shape of a Japan-UK Free Trade Agreement

Limiting damages or designing a bold future?

The Shape of a Japan-UK Free Trade Agreement
Credit: (Neil Hall/Pool via AP)

After a series of delays, the United Kingdom finally left the European Union at the end of January. While Tokyo never wanted to see Brexit happen, it now has to make the most of it.

British Foreign Secretary Dominic Raab visited Tokyo in early February as part of his first foreign tour after Brexit and held talks with his counterpart, Japanese Foreign Minister Toshimitsu Motegi, in which the two countries reaffirmed their commitment to build the “new partnership as ambitious, high standard and mutually beneficial as the Japan-EU EPA (Economic Partnership Agreement).” As a statement, this is somewhat ambiguous and ambivalent. It does not speak about the exact nature of the bilateral arrangement the two countries are going to negotiate – a free trade agreement (FTA) or something else, such as the idea of Britain’s joining the Trans-Pacific Partnership (TPP/CPTPP).

This commentary argues that while Japan and the UK are well placed to pursue a bilateral deal that is more ambitious than the Japan-EU EPA, the direction and parameters of the bilateral negotiations will be affected by the state of the EU-UK FTA negotiations, including the length of the transition period.

In view of the future of the Japan-UK economic partnership, Tokyo has two goals. First, and more immediately, it needs to protect the interests of Japanese companies operating in the UK. Though the outcome of the EU-UK FTA negotiations will have a greater impact on those interests, a Japan-UK FTA will be seen as a reassuring factor that could attenuate the uncertainty.

Second, Tokyo – and London, for that matter – want to avoid a no-FTA end of the transition period. Until then, the Japan-EU EPA remains applicable to the UK, but it will end with the termination of the transition period. Unless there is a bilateral Japan-UK deal in place, trade between the two countries will be on the WTO terms, causing trade disruptions.

As for the Japan-UK FTA, there is a trade-off between (1) the need to ensure damage limitation – to replace the Japan-EU EPA on time – and (2) the desire to be more ambitious – aiming to conclude the most advanced FTA in the world, something which could set a new standard for other developed economies. The fact that the two countries need to conclude an agreement and be ready to implement it by the end of the transition period will certainly limit what could be achieved, as concluding a complicated and wide-ranging agreement is naturally time-consuming.

There does not seem to be a consensus in Tokyo on the preferred approach. In light of the practical requirement to prepare for the end of the transition period, Tokyo and London might need to lower their sights and focus on settling immediate problems, an idea supported by many in the business communities of both countries.

Nonetheless, Japan and the UK are, at the same time, perfectly placed to envision a new model of economic partnership between mature and advanced economies, covering not just trade in goods, but also investment, services, e-commerce, and new technologies such as artificial intelligence (AI), big data and biotechnology. If Tokyo and London could achieve this new level of economic partnership, it would send a strategic message to the world.

It could also be showcased as a success of the idea of “global Britain.” London aspires to conclude a series of FTA with the United States, Australia, India and other trading partners. But the initial optimism of the Boris Johnson government is already receding, particularly regarding a deal with the US, making a deal with Japan more significant.

As the weight of the agricultural sector in Japan-UK trade talks is smaller than many other trade negotiations that Tokyo has conducted over the past decade, most notably the TPP, experts in Japan argue that it is easier to be more ambitious vis-à-vis the UK. That is partly why – in addition to the fact that the Japanese market is bigger than that of the UK – Japanese trade negotiators are set to demand more concessions from the UK than from the EU. At the same time, since Japanese negotiators remain skeptical about the UK’s ability to handle multiple FTA negotiations simultaneously, they are still in the wait-and-see mode.

Given all this, one pragmatic compromise would be a phased approach: concluding an initial or interim agreement, to be followed by a more comprehensive and advanced deal. As for the first stage of this approach, there are two options. First, the two sides could choose to simply replicate the Japan-EU EPA as a trade continuity agreement to maintain the existing terms, currently applicable to Japan-UK trade. Second, Japan and the UK could make a minimum or skinny FTA, covering only those areas which the two countries find most urgent to avoid trade disruption.

In either case, one of the biggest administrative problems on the Japanese side is that any such deal involving tariff concession will need to be ratified by the parliament, meaning that it takes time and energy. There is, therefore, little incentive among the Japanese negotiators to have two separate agreements, both needing parliamentary approval. Rather, they prefer to put as much as possible into one agreement.

Here again, much depends on the EU-UK negotiations, which have now ground to a halt with countries in lockdown as they grapple with the COVID-19 pandemic. If Brussels and London agree to extend the transition period for a year or two based on the Withdrawal Agreement, that will give London and Tokyo more time, and less need to take the phased approach.

The most difficult and complicated scenario would be a situation under which the EU and the UK agree only to an interim agreement for the purpose of avoiding a formal extension of the transition period: something that can be called an “extension in all but name.” While this sounds like a pragmatic compromise for Brussels and London, particularly given the Johnson government’s commitment not to extend the transition period, it could make things complicated for other countries, including Japan. As long as the transition period officially ends, the EU-Japan EPA will cease to be applicable to the UK, requiring the two sides to seek a replacement on time. What is evident, however, is that no country wants to conclude a definitive trade deal with the UK without knowing the final shape of the EU-UK partnership.

The pandemic is now a new major factor affecting the EU-UK negotiations. An increasing number of people now argue that an extension of the transition period is inevitable. Whatever the reason, the extension of the transition period is good news for Japan-UK negotiations, as it allows for more time. At the same time, however, the COVID-19 outbreak makes it difficult for the two governments to start FTA negotiations.

Michito Tsuruoka is an associate professor at Keio University.