UK, Japan Begin Historic Trade Negotiations In A Post-Brexit Landscape

The U.K. and Japan, two of the largest economies in the world, have commenced talks to reach a trade agreement in a post-Brexit, covid-19 world.

British officials are seeking to replace the old trade agreement the U.K. presently has with Japan through the European Union.

In the event London and Tokyo fail to reach a new deal by Jan. 1, 2021 the two nations will be forced to default to trading terms dictated by the World Trade Organization – meaning the imposition of various tariffs and other obstacles.

Currently, bilateral trade between the U.K. and Japan amounts to $40 billion annually, with about 9,500 British-based businesses exporting products to Japan.

The U.K. also hopes a trade deal with Japan will lead to Britain joining the 11-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP. This measure would greatly help British businesses access markets in the Asia-Pacific region.

Due to covid-19-related restrictions, negotiations with Japan will initially be conducted through video links between the U.K.'s International Trade Secretary Elizabeth Truss and Japan's Minister for Foreign Affairs Toshimitsu Motegi.

“This deal could increase trade between our countries by [$19.1 billion and] act as an important milestone towards the flag of United Kingdom’s accession to CPTPP while benefiting every region and nation of the U.K.,” Truss tweeted.

Truss has said she intends to build upon the existing trade pact between Tokyo and the European Union.

"We aim to strike a comprehensive free trade agreement that goes further than the deal previously agreed with the EU, setting ambitious standards in areas such as digital trade and services," she stated. "This deal will provide more opportunities for businesses and individuals across every region and nation of the U.K. and help boost our economies following the unprecedented economic challenges posed by coronavirus.”

The foreign ministry in Tokyo stated that it wants negotiations to “build a new economic partnership and work towards an early agreement to secure business continuity for both countries."

Sam Lowe, a senior research fellow at the Centre for European Reform, and a co-founder of the U.K. Trade Forum, wrote in the Telegraph that Japanese companies had always viewed Britain as their gateway to the European single market. But the U.K.’s decision to depart the EU thwarted that strategy.

“In the aftermath of the [Brexit] referendum, the Japanese took the unprecedented step of publicly urging the U.K. to maintain a highly integrated trade relationship between the EU and U.K., advice the [Boris] Johnson government has ignored,” Lowe wrote.

Now, with a new deal possible, Lowe highlighted the importance of Japan to Britain’s economy – citing that after the U.S. and EU, Japan is the third largest investor in the U.K. and “re-building bridges with the third biggest economy [Japan] in the world should be of paramount importance.”

But Lowe cautioned that negotiations with Tokyo won’t be easy.

“One of the reasons the Japanese decided against rolling over the existing EU agreement to the U.K., and instead opted to engage in fresh negotiations, is the sector that plagues near all trade negotiations: agriculture,” Lowe explained. “Japan has been historically protective of its farmers, guarding them from outside competition. That was until recently, when it reduced its agricultural tariffs in trade deals with the EU, [U.S.] and the eleven countries of the… [CPTPP]. It is now wary about opening up the sector further to the British, and will attempt to offer the U.K. as little as possible in the way of new market access.”

Lowe anticipates that Japan will also request that Britain immediately remove tariffs on car and auto parts imports.

“This should not be a big issue for the U.K., but it comes with the inherent risk that Japanese car manufacturers then decide to shift their operations out of Britain, back to Japan, so as to export the final cars, tariff-free, to the U.K. directly,” Lowe offered.

On Tuesday, Japanese trade minister Hiroshi Kajiyama said: "In the negotiations, we hope to urge Britain to bring forward the period for which tariffs will be removed mainly for autos and auto parts ... as well as adopt high-level rules on digital trade."

On the British side, Lowe noted, Truss will likely seek to improve terms for British exporters of services.

“However, there are limits to how far Japan can go, without also having to offer the same access to the EU due to provisions included in its deal with Europe,” he cautioned.

On the whole a close economic relationship between the U.K. and Japan “is of greater importance than ever” Lowe proposed, given the backdrop of a “fragmenting global trading system, trade war tariffs, the competing economic superpowers of the U.S., China and EU, and the increased disruption brought on by Covid-19.”