The Japan-UK Trade Agreement and the Shadow of Brexit

The highly anticipated Japan-UK comprehensive economic partnership agreement (EPA) was formally signed on October 23, the first post-Brexit agreement London signed as an independent nation and amid stalling EU-UK trade negotiations, low morale, and a resurgence of coronavirus cases across Europe. Britain’s International Trade Secretary Liz Truss paid a special visit to Tokyo to sign the new agreement, calling it “groundbreaking” despite criticisms that it only covers a minor part of the UK economic interests, and leans more favorably towards Tokyo. What should have been a landmark agreement for international trade is instead less about economics than politics – for Britain to show that it can negotiate its own deals without the EU, and for Japan to provide some assurances to its companies in Britain while uncertainty continues to surround Brext.

Since the 2016 Brexit referendum, one of the key debates surrounds post-Brexit international trade with the EU, the UK’s largest trade partner. By triggering article 50 of the Treaty on European Union (TEU), London not only decided to leave the European market, but also left the world’s largest free trade zone created by the EU and Japan, leaving Japanese business in limbo facing high tariffs and jeopardizing Japan’s trade relations with Europe.

Brexit uncertainty has left Japanese business in limbo facing high tariffs and jeopardizing Japan’s trade relations with Europe

The EU-Japan Economic Partnership Agreement (EPA), reached in February 2018, ended decades of voluntary export restraint (VER) requests, mainly from the European side, and erased trade barriers for two of the world’s largest economies. This freshly formed trade block has proved particularly convenient for European firms who struggled in the Japanese market on account of import tariffs, but also for Japan, who indeed has a lot to gain from this FTA. A free trade deal with its third largest trade partner after China and the United States is not a mere diplomatic overture. In fact, the political value of such a deal is undisputable, especially at a time when uncertainty over the priorities of the next U.S. administration and Beijing’s ambiguity and growing assertiveness cast doubt on the resiliency of the Pacific archipelago. Brexit, however, threatens the stability of this arrangement.

Meanwhile the UK has been in a vulnerable position following Brexit and has been anxious to prove its ability to strike trade deals on its own. Britain’s soft power and internationally competitive economy are invaluable assets when facilitating free trade agreements, yet major trade deals take years to negotiate and its relatively weaker negotiating position compared to the EU would inevitably affect the outcome of such agreements, as well as penalizing British economic interests. Nevertheless, dramatic times call for drastic measures, and Westminster can now count on a deal which is undoubtedly better than nothing, and which London hopes will pave the way for other bilateral trade agreements.

Dramatic times call for drastic measures, and for Britain the agreement is better than nothing

For Tokyo, the agreement only ensures continuity with the country’s 15th largest trade partner – a negligible achievement. Japanese companies would still face an unpredictable situation without the conclusion of a EU-UK trade agreement. Just over a year ago, then-Foreign Minister Kono Taro voiced concerns that over 1000 Japanese companies based in the United Kingdom could relocate to the EU should Brexit take place without an agreement. The European market is of particular importance for Japanese carmakers and they cannot take further risks by remaining in the United Kingdom. In fact, Honda could be only the first of several which will leave the UK to safeguard their European business. A resizing of Japanese Foreign Direct Investment (FDI) in the UK is also likely to take place in the case of a hard Brexit.

More importantly, the Chinese and U.S. markets are also on shaky ground for Japan when it comes to politics. – Tokyo’s trade balance with China has fallen into the red while it runs a trade surplus with the United States. The EU-Japan balance sheet, meanwhile, is in almost perfect equilibrium – an indicator of a healthy and sustainable economic relationship. As the EU grows in strategic and economic importance for Japan, the upcoming years will be crucial for Tokyo to lay the foundation of a new post-Brexit order. Should there be the need to choose between the European and the British market, Japan has made it clear that it will not go for the latter. Unfortunately for Britain, their interests are not the highest priority for Japan.

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Andrea A. Fischetti is a government scholar conducting research on Asia-Pacific Affairs and East Asian Security at the University of Tokyo and at the Asia Pacific Initiative. He was a visiting student at the Hiroshima Peace Institute of Hiroshima City University, and a research assistant at the House of Commons in the British Parliament. Mr. Fischetti earned his MA in War Studies from King’s College London, following a BA with First Class Honours in International Relations, Peace and Conflict Studies.

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