The UK and Japan are expected to complete negotiations on a new Free Trade Agreement (FTA) within the coming weeks, so today’s resignation announcement by Japan’s Prime Minister Shinzo Abe adds the momentary uncertainty of a leadership race and a wide-ranging cabinet reshuffle. But it is not expected to have a major impact on the ultimate conclusion of the talks.
A UK-Japan deal would replace the existing EU-Japan FTA, which the UK will lose access to when the transition period ends at the end of the year. If and when a deal is done, a key issue playing on many minds will be the differences between these two deals, and whether the UK has secured any extra wins (such as the much-publicised push from Trade Secretary Liz Truss for extra access for British Stilton).
The current expectation is that any deal will largely (if not entirely) replicate the status quo as far as goods are concerned, however. This may reflect trade-offs between the two sides’ offensive interests. One report suggested that the UK wanted to go further on agriculture, while the Japanese wanted to go further on cars. The two sides ultimately compromised by doing neither. In contrast, the deal is expected to go further than the EU did on services, digital trade and data flows; these are areas of mutual interest, making deeper co-operation easier to negotiate.
Ultimately, whatever the differences, a trade deal with Japan will be an important achievement for Global Britain. First, an agreement would preserve trade continuity and prevent an important relationship from defaulting onto World Trade Organisation terms at the end of the year. Moreover, Japan is not only the world’s third largest economy, it is also the UK’s fourth largest non-EU trading partner and the third biggest source of foreign investment in the UK, after the US and the EU.
This is also an important diplomatic relationship. The fact that Liz Truss’ opposite number is Japan’s Foreign Minister (rather than their Minister for Economy, Trade and Industry) highlights that Japan, like many other countries, sees trade and foreign policy as closely linked. This is something the UK can learn from as it leaves the EU.
A deal with Japan would be an important launchpad for UK accession to the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), an 11-member plurilateral trading bloc which Japan dominates in terms of economic weight.
The importance that both Tokyo and London have placed on these negotiations highlights that continuity with the EU’s trading partners is an important factor to consider as Brexit progresses, and one which is not given enough attention in the public debate. The EU has around 40 external trade agreements with around 70 other countries, accounting for around 15% of UK trade, but these vary enormously in their importance. Two thirds of that 15% figure is accounted for by just six countries – Japan, South Korea, Canada, Norway, Turkey and Switzerland.
Continuity agreements have already been concluded with Switzerland and South Korea, though these do not fully replicate existing arrangements. The Korean deal contains a clause requiring a renegotiation after two years, while the Swiss rollover does not replicate EU-Swiss regulatory alignment. The UK and Switzerland are also seeking a separate financial services deal, which would be welcome news for the many Swiss financial institutions with operations in the City of London.
As for outstanding EU FTAs, there have been reports of some recent progress with Canada. This brings a welcome end to a period of slightly sour trade relations. Following the previous British government’s pledge to unilaterally cut most tariffs in a No Deal Brexit scenario, the Canadians walked away from talks on rolling over the EU-Canada deal. The UK’s revised Global Tariff appears to have helped bring Canada back to the table, possibly vindicating those in government who argued that retaining tariffs would preserve negotiating leverage.
With time short, it is unlikely that the UK will be able to go much further than the EU did with Canada. As former Canadian Prime Minister Stephen Harper said at a Policy Exchange event earlier this summer, “the farther you get from a simple rollover the longer the process will take.”
Meanwhile, the UK’s trading relationships with Norway and Turkey will depend in part on the outcome of UK-EU negotiations. In particular, Turkey’s customs union with the EU would prevent it from lowering its industrial tariffs on UK products in the absence of a UK-EU FTA; this scenario would not prevent a UK-Turkey FTA, but would limit its scope significantly.
When it comes to Norway and Turkey, and indeed Switzerland, the value of trade continuity goes beyond economics. After Brexit, there is a strong strategic rationale for co-operating with and learning from countries which, like the UK, are geographically in the European neighbourhood but sit outside the EU.
These continuity agreements are an important short-term priority for the UK, particularly as there is hard deadline after which new trade barriers will be introduced by default. In parallel, however, negotiations for new trade agreements with the US, Australia and New Zealand continue, with the Government recently announcing that these will “intensify” in the coming months.
There is no real prospect of a US deal being concluded ahead of November’s presidential election (a reality now acknowledged by both sides), but this is no bad thing. As Policy Exchange argued in a recent paper, The Art of a US-UK trade deal, there is no reason to impose a deadline with the US and the right deal is better than a quick deal. A potential Biden Presidency might alter the optics of a transatlantic deal, but the substantive challenges and opportunities would remain broadly similar.
With less trade at stake and with less obvious potential obstacles than the US, deals with Australia and New Zealand could be concluded more quickly – though they should not be taken for granted either. Recent claims by officials from both countries that British negotiators lack experience should be interpreted as part of the theatre of negotiations. A more cogent criticism is that the UK needs to be clearer on what it wants, particularly on the controversial question of agriculture (which is not only a feature of the US talks). Australia and New Zealand are both major agricultural exporters and officials from both have emphasised, publicly and privately, that there is no prospect of a deal if the UK does not liberalise in this area.
This highlights the need for the UK to confront some tough policy choices, and to ensure its post-Brexit domestic and international policies on agriculture are fully joined up.
These new trade agreements are unlikely to be transformative to the UK economy as a whole – a US deal is expected to add around 0.16% to UK GDP over 15 years. These small modelled numbers are a feature of FTAs in general, rather than being unique to the UK. However, FTAs can make a big difference for particular sectors – particularly those where trade barriers are high (such as agriculture), or future growth industries where there is a need to establish global rules (such as digital services).
Trade agreements also have geostrategic value as a foreign policy tool, which is particularly important as the UK’s place in the world evolves after Brexit.
For these reasons, the tendency among some to contrast the modelled GDP gains of new FTAs to the larger modelled costs of leaving the EU misses the point. And in any case, we are where we are; given that Brexit is happening either way, pursuing FTAs with like-minded countries is sensible. Once the dust from the Japan talks settles, Global Britain will need to keep moving.
Dom Walsh is a Research Fellow working for the Britain in the World project at Policy Exchange.
