Brexit not only has a significant impact on the United Kingdom and Europe. The impact is global as well. Even as an independent nation, the UK is a big player in world trade. Another big player is Japan, being the third-largest trade country in 2018. Japan and the UK invest in each other, being in each other’s top 6 trading partners. However, Japan has a healthy and sustainable economic relationship with the EU; the EU-Japan Balance sheet is in almost perfect equilibrium. The upcoming years are crucial for Japan to lay the foundation of a new post-Brexit order. Unfortunately for the UK, according to Tokyo Review, the UK is not Japan’s highest priority. Nonetheless, the UK and Japan are vocal advocates for free trade and are determined to defend a rules-based international trading system. What are the current opportunities to trade and ensuring that the UK remains the gateway to Europe, or will this be the downfall that causes Japan to relocate their business elsewhere?
The Free Trade Agreement (FTA)
In 2020, Japan and the UK signed an FTA, namely the CEPA (UK-Japan Comprehensive Economic Partnership Agreement/日英包括的経済連携協定). This agreement is the first deal the UK has struck as an independent nation. With this deal, the countries wish to overcome the economic challenges surrounding COVID-19. In other words: Lower import and export tariffs.
For the next three years, the UK wishes to secure FTAs with countries covering 80% of the UK trade. Meanwhile, the total UK-Japan trade value is 29 billion GPB (in 2018). A long-term FTA between the UK and Japan could increase the total trade value by 15.2 billion GPB. By removing trade barriers, small and medium-sized enterprises that import and export goods gain benefits. This situation creates the desire for UK-companies to enter the Japanese market and Japanese companies to enter the UK-market as well. The covered areas in the treaty are:
- Agriculture, food and drink
- Digital and data
- Financial services
- Creative industry
- Small and medium enterprises (SMEs)
Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)
The CPTPP is one of the world’s largest free trade areas, with 13% of the GDP (Global Gross Domestic Product) in 2018. Japan is the largest CPTPP member, representing over 28% of the total trade. The UK wishes to join the CPTPP, with the signing of CEPA being the first step. If the UK joins, the GDP increases to 16%. The UK will benefit from significant long-term trade. The UK will benefit from investment opportunities in business in the Asia-Pacific region, and vice versa.
We all go through uncertain times. It is yet to be seen how Brexit and future trade treaties will unfold for the UK and Japan’s trade relationship. If you are unsure of what to do, talk to us, we would love to help. If you would like to read more about CEPA and the UK’s future plants to join CPTPP, you can find more in-depth information on the UK Government website. Meanwhile, we summarized benefits and (potential) threats for the UK-Japan trade in an overview below:
Benefits and threats for the UK
|Digital trade||The UK’s ambitious digital provisions, including the free flow of data between Japan-UK, lead to innovation and development of emerging technologies (blockchain, driverless cars, quantum computing). The estimated trade boost is estimated to be over 15 billion GBP.||The UK left the most significant free trade zone of the EU and Japan. Even with the UK’s extra focus on digital trade, tariffs could rise nonetheless.|
|Profession and business services||CEPA allows professionals to move more quickly and support recognition of professional qualifications, such as accountancy and the legal profession. The export of businesses from the UK to Japan, including accountancy, engineering, and legal services, is 1.5 billion GBP.||Political significance with CEPA is certain, but the economic impact is likely to be very small. This is due to limited improvements compared to the EPA (EU-Japan Economic Partnership).
According to UoS, lawyers worry about subsidy deals being weaker in Japan than in the EU.
|Financial services||With reduced barriers to cross-border trade and investment and co-operation between UK-Japan on financial regulation, the export of financial services to Japan is estimated to grow. The current export of financial services is 4.1 billion GBP.||Whereas CEPA is more potent than EPA, it can have drawbacks. For example, the UK wants to receive quotas for some agricultural products exported with a lower tariff. Instead, the UK can use left-overs from the EU’s quota with Japan, potentially putting UK exporters at a disadvantage.|
|Automotives||Cars are one of the UK’s top goods exports to Japan, worth around 1.1 billion GBP. By 2026 the British tariffs on Japanese cars are removed.||The EU is Japan’s biggest car market. If trading between Japan and the UK becomes undesirable, Japan can choose Europe instead. Since 2016, Japan has already postponed or closed some car factories and projects. Critics say that the UK’s GDP (Gross Domestic Product) is only boosted by 0.07%, a fraction of the lost trade with the EU.|