UK-Japan trade negotiations: Analysis of the negotiating objectives

Introduction

The United Kingdom (UK) and Japan are seeking to establish a revised trading relationship underpinned by a comprehensive free trade agreement (FTA). The two sides are in the midst of intense negotiations in order to establish common ground and resolve any tensions, aiming to conclude and ratify an FTA by the end of the year. This briefing provides an analysis of the negotiating objectives and discusses how the negotiations might be impacted by various economic and political considerations.

Background

HM Government and the Government of Japan formally commenced trade negotiations on June 9, aiming to conclude an FTA before the transition period for the UK’s exit from the EU expires on January 1, 2021. Liz Truss, UK Secretary of State for International Trade, and Toshimitsu Motegi, Japan’s Minister of Foreign Affairs, kicked off the talks via videoconference. Discussions thereafter will be led by Graham Zebedee on the UK side, and Hiroshi Matsuura will serve as Japan’s chief negotiator.

In preparation for the negotiations, on May 13, the UK Department for International Trade had published a policy paper on UK-Japan free trade agreement: The UK's strategic approach, which sets out its negotiating objectives, response to the call for input from the industry and results of the scoping assessment.¹ Liz Truss stated that a UK-Japan FTA would “provide more opportunities for businesses and individuals across every region and nation of the UK and help boost our economies following the unprecedented economic challenges posed by coronavirus.” The UK is keen in particular to secure benefits for its financial services and textile industries, as well as deepen collaboration in digital services trade. HM Government estimates UK-Japan FTA could bolster UK GDP by around 0.07 per cent, or £1.5bn, in the long-term.² It is also estimated that a UK-Japan FTA could boost trade between the two countries by £15.8 billion in the long run, and increase workers’ wages by £800 million. The Government of Japan has not yet published its negotiating objectives, but has given indications of its priorities through various public statements.

The countries aim to build on the existing EU-Japan Economic Partnership Agreement (EPA) while ensuring that existing benefits are maintained. It is understood that Japan is unhappy with the UK’s departure from the EU, given that many Japanese companies had invested heavily on the assumption that the UK would have continued access to the EU Single Market. Japan therefore has a strong interest in the outcome of UK-EU future relationship negotiations and will likely be unwilling to agree terms with the UK which might negatively impact those parallel discussions.

Japan has set a negotiating period of only six weeks to agree an FTA, meaning that the talks would be concluded by the end of July. Matsuura warned that both sides will need to limit their ambitions given the short negotiating period. Indeed a significantly longer period of time may be necessary to secure an ambitious deal incorporating deeper market access provisions, as both sides would need to undertake complex impact assessments to work out the costs and benefits for their respective economies, and in particular, the impact on domestic businesses. This approach may necessarily result in an FTA which mirrors the EPA with some supplementary provisions in areas such as digital services and agriculture. The reason why Japan has requested such a short negotiating period is to enable the Diet (the Japanese parliament) to ratify the treaty in its Autumn session in time for the end of the transition period. If no UK-Japan FTA is in place by the end of the transition period, the two countries will revert to trading on the basis of World Trade Organization (WTO) terms, as the UK will no longer be party to the EPA.

The UK Government also hopes that a UK-Japan FTA will help the UK to eventually join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which would improve access for UK businesses to markets in the Asia-Pacific region. Motegi has welcomed the UK’s interest in joining the CPTPP and stated that Japan will provide the necessary support. There is no doubt that the UK could leverage a freshly concluded FTA in its accession talks, given that Japan is among the most powerful signatories to the CPTPP.

Cross-sectoral measures – goods

HM Government’s position on goods is to secure broad liberalisation of tariffs on a balanced and mutually beneficial basis, taking into account UK product sensitivities, and secure comprehensive access for UK industrial and agricultural goods into the Japanese market through the reduction or elimination of tariffs. It would develop simple and modern rules of origin that reflect UK industry requirements and consider existing as well as future supply chains, supported by predictable and low-cost administrative arrangements. Given that many UK exporters currently have highly integrated supply chains, HM Government is keen to allow UK products exported to Japan to continue including components from Europe and other parts of the world. It is understood that Japan considers rules of origin under the EPA to be unduly complex and skewed in the EU’s favour, and therefore a key area in which the EPA can be built upon.

In terms of sanitary and phytosanitary measures (SPS), HM Government intends to uphold the UK’s high levels of public, animal, and plant health including food safety. Ensuring access for UK agri-food goods such as beef and cheese to the Japanese market is a priority for the UK, which would be secured through commitments to improve the timeliness and transparency of Japanese approval processes for UK goods. There are however concerns that, due to the short timeframe to negotiate an FTA and the contentious nature of agriculture in most trade negotiations, the UK will not be able to secure meaningful commitments to export agricultural goods to the Japanese markets.

Cross-sectoral measures – services

The services sector is of considerable importance to the UK economy, making up a staggering 81 per cent of total UK economic output in 2018.³ The expansion of UK export of services is therefore an important objective of HM Government’s trade policy, which it hopes to further under a UK-Japan FTA. HM Government is aiming to secure ambitious commitments on market access and national treatment to ensure certainty for UK services suppliers in their access to the Japanese market. It is also seeking to secure best-in-class rules for all services sectors, as well as sector specific rules to ensure transparency and support the UK’s “world-leading” services industries, including key UK export sectors such as financial services, professional and business services, telecommunications and transports services. HM Government also sees it important to ensure certainty for UK services exporters in their continuing access to the Japanese market and transparency on Japanese services regulation.

Financial services

Given the strategic importance of the financial sector to the UK economy, it is no surprise that HM Government has prioritised securing greater access for UK financial services firms to the Japanese markets. It intends to expand opportunities for UK financial services to ease frictions to cross-border trade and investment, complementing co-operation on financial regulatory issues.

A large number of Japanese financial institutions have long-established a presence in the City of London in order to service European clients, which means that the Government of Japan will be keen to ensure continued access to the UK financial markets. Japan will also have a strong interest in the terms under which UK firms will access the EU markets following the transition period.

Financial services has historically been a difficult area to secure trade liberalisation due to the complexity of regulatory frameworks, which can present significant obstacles to market access. Greater regulatory co-operation will be essential to enabling greater trade liberalisation between the UK and Japanese financial markets, with sharing of regulatory expertise potentially leading to greater harmonisation, and in turn, smoothing market access. To that end, HM Government envisages the reduction of regulatory obstacles to facilitate market access for UK businesses and investors, underpinned by regulatory cooperation as well as public consultation, use of regulatory impact assessments and retrospective review.

Digital and e-commerce

Digital trade is an area where the parties envisage greater liberalisation compared with the EPA, in particular with regard to data protection and cross-border transfer of data. HM Government is aiming to secure “cutting-edge” provisions which maximise opportunities for digital trade across all sectors of the economy, while also promoting a world leading eco-system for digital trade that supports businesses of all sizes across the UK.

Now that the UK have left the EU, HM Government considers that more progress can be made in areas such as the free flow of data, which will support emerging fields such as artificial intelligence (AI) and the UK’s position as a technology superpower. The UK is therefore aiming for an FTA with ambitious digital provisions to help it take the lead on innovation and support the development of emerging technologies.

Investment

HM Government has set out its intention to agree rules that ensure fair and open competition, and address barriers to UK investment across the Japanese economy, ensure UK investors in Japan continue to enjoy high standards of treatment, and maintain the UK’s right to regulate in the national interest. It is understood that the Government of Japan has requested that barriers to foreign investment are avoided, as well as the implementation of measures to promote investment in the UK, which may include the easing of regulations. It is likely that the UK and Japan will find common ground in negotiating an investment chapter given the strong mutual interest in continued investment in their respective economies. One area where the two parties may build on the EPA would be to introduce an investment protection mechanism to resolves disputes, which would be highly beneficial to Japanese firms that had invested heavily in the UK.

Given that the UK is due to introduce a stricter regime for screening of foreign investments on national security grounds, HM Government will be keen to ensure that such powers are guaranteed under a UK-Japan FTA. Indeed, the need for government regulation in this area may be accentuated by the Coronavirus pandemic, which may result in widespread insolvencies in sectors most impacted by the restrictions and fall in consumer spending.

Automotive

The automotive sector is a priority for the Government of Japan and is therefore seeking the complete removal of tariffs on passenger cars. Under the UK Global Tariff (due to become applicable on 01 January 2021), a 10 per cent tariff would be placed on imports of passenger cars into the UK. Hiroshi Kajiyama, Japanese Trade Minister, said that Japan wants to see the removal of tariffs on automobiles “as quickly as possible,” adding that countries will set high-level standards on digital commerce and strive to promote trade and investment. This is highly significant as Japan’s ambitions would go beyond the EPA, under which EU tariffs (set at 10 per cent) on passenger cars are set to be abolished incrementally over a seven-year period until 2025 (currently standing at 8.8 per cent). This may raise concerns in the EU that the UK would enjoy a competitive advantage should Japanese car manufacturers be able to export automobiles to the UK free of tariffs. HM Government states that a UK-Japan FTA should retain the EPA Automotive annex, but has not indicated an intention to offer greater concessions on tariffs.

The Government of Japan will be keen to utilise a UK-Japan FTA to protect the investments of major Japanese car manufacturers in the UK. It may use the negotiations as an opportunity to apply diplomatic pressure on HM Government to ensure that the European supply chains of Japanese car manufacturers are not severely disrupted by a limited UK-EU future relationship.

Sustainability

HM Government has made it a strategic objective of UK international trade policy to promote its environmental objectives with trading partners, which is reflected in its approach to a UK-Japan FTA. It is aiming to ensure that the parties reaffirm their commitment to international environment and labour standards, ensure parties do not fail to enforce their domestic environmental or labour protections in ways that create an artificial competitive advantage, and include measures which allow the UK to maintain the integrity and provide meaningful protection of the UK’s environmental and labour standards.

With regard to tackling climate change, HM Government is aiming to secure provisions that support and help further its commitments on climate change and in particular achieving net zero carbon emissions by 2050.⁴ This would  involve promoting trade in low carbon goods and services, supporting research and development collaboration and maintaining both parties’ right to regulate in pursuit of decarbonisation, and reaffirming their respective commitments to the UNFCCC and the Paris Agreement.

Concluding remarks

The outcome of the negotiations will be crucial for businesses operating and investing between the UK and Japan, ensuring that market disruption is avoided at the end of the transition period. There may also be significant opportunities for businesses, especially in the automotive and digital sectors, as the UK and Japan seek to build on the commitments of the EPA. It is important that businesses understand the impact that the future trading relationship between the UK and Japan will have on their operations in order to capitalise on potential market opportunities.