For Japan-U.K. trade deal, speed was of the essence

With just months to go before the U.K.'s transition out of the European Union, Japan and Britain’s broad agreement on a bilateral free trade pact came as a relief for both sides as the clock ticks down.

While the main agenda item during their negotiations was to seal the deal under the tight year-end deadline to avert any fallout from Brexit, Japan and the U.K. also aimed for more ambitious terms compared to the Japan-EU Economic Partnership Agreement.

But because the two nations were forced to prioritize the speed of the negotiations, the Japan-U.K. trade deal mostly reproduced the Japan-EU pact, with the exception of some new elements such as digital and data provisions that keep barriers low to ensure a business-friendly environment.

It’s unclear at this point whether Japan and Britain would really enjoy visibly greater economic benefits than from what the Japan-EU deal offers, but the agreement is symbolically important for London to highlight its independence from the EU, some experts said.

“It was a tough negotiation, but we have been able to reach a broad agreement in just three months,” Foreign Minister Toshimitsu Motegi told a news conference Friday.

“As we have agreed to the deal, which is more advanced and of a higher level than the Japan-EU EPA, we expect that trade and investment between Japan and the U.K. will be facilitated,” he said.

Under the Brexit transition period scheduled to terminate at the end of this year, the U.K. has remained part of the Japan-EU treaty, which took effect in February 2019 after five years of negotiations. Had no Japan-U.K. deal been reached, tariffs on traded goods would have increased, a scenario that has likely been avoided now.

The two nations will each aim to get parliamentary approval so that the deal can enter into force on Jan. 1.

A Japanese Foreign Ministry official who briefed reporters said that in order to maintain smooth trade and business activities, speed was the top priority in concluding the deal. But, the official said, given the short negotiation period, including additional tariff removals and specifics on digital trade was “a great achievement.”

While the two nations hailed the result, the U.K. side appeared to be more strongly stressing the significance of the deal, calling its first major post-Brexit trade agreement “historic” and saying that it goes “far beyond” the Japan-EU EPA, which was used as a template.

But it remains unclear whether the new deal will have a bigger economic impact than the Japan-EU pact.

The British government says that the Japan-U.K. trade pact is expected to boost trade with Japan by about £15 billion (¥2 trillion), but did not say when this figure would be realized, according to the Financial Times. British media also reported that the U.K. will only see a 0.07 percent increase for its gross domestic product after the deal.

Because the two sides had to come to an agreement in a matter of months — an extremely short period of time for a trade negotiation — it was apparently impossible for the two sides to persuade each other to take more ambitious steps to open their market in sensitive areas such as the auto and agriculture sectors.

Japan wanted Britain to remove tariffs on cars faster than the EU. But ultimately London only agreed to eliminate the 10 percent tariffs on cars imported from Japan by 2026, the same time frame as the EU-Japan deal.

Although Tokyo said some additional tariffs on auto parts and other industrial products will be removed immediately, the tariff deal will mostly be the same as the Japan-EU EPA.

Meanwhile, London had reportedly been hoping to convince Japan to further open up its agricultural sector, something that was a bridge too far for Tokyo.

In the end, the two sides have played up progress on digital trade, an area where they could reach an agreement quickly, as a major area to differentiate the new deal from the Japan-EU pact.

In recent years, the realm of digital trade has become an increasingly heated point of contention in global trade talks as internet companies expand their presence in markets around the world.

Both Japan and the U.K. agreed not to impose the so-called data localization rule, which generally requires companies to store personal data on their citizens on servers within their borders. In order to protect technological secrets, they will also not mandate that companies disclose the source codes of software and algorithms.

Japan and the EU have agreed that they will refrain from demanding the disclosure of source codes, but algorithms are not included.

Digital trade “won’t probably bring immediate economic benefits but I think they, especially the U.K., wanted to stress that the new deal is different and has some additional points compared to the existing (Japan-EU deal),” said Tomoya Kondo, senior economist at Daiwa Institute of Research’s London Research Centre.

For the U.K., the agreement with Japan has symbolic significance as the first major trade deal since Brexit and as it continues to struggle to reach an agreement in trade talks with the EU, Kondo added.

“I think the U.K. wants to emphasize that this is a fruit from the decision to leave the EU,” he said.

Indeed, Britain seems to be strongly highlighting its post-Brexit ability to make its own deals. For instance, one of the new terms under the trade pact is that Japan and the U.K. will have more dialogue between financial regulators in an effort to clear even more barriers.

This is “something that would be impossible were the U.K. still in the EU,” a news release said on the British government's official website.

Also, as the U.K. hopes to participate in the 11-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership in the future, “reaching an agreement with some CPTPP nations, such as Japan, Australia and New Zealand, the U.K. can demonstrate that it is now able to freely negotiate with them as a result of Brexit,” Kondo said.

KEYWORDS

trade, EU, U.K.-Japan relations, Brexit, CPTPP

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