Brexit

Why Japan and the Trans-Pacific Partnership are key to UK’s future as an independent trading nation

BY Hugh Trenchard   /  18 May 2020

As the Prime Minister Boris Johnson tells us, defeating coronavirus is the most important challenge facing the nation. For the last two months, the government’s resources have been largely concentrated on battling the pandemic and the media has covered little else.

Some have argued that the economic damage resulting from the pandemic necessitates an extension to the Brexit implementation period, beyond 31 December. They claim that the British economy cannot adjust to the twin shocks of the pandemic and Brexit at the same time. I believe the contrary is the case; the best way to ensure recovery from the severe economic contraction that is now in train is to push ahead with completing Brexit as quickly as we can. It makes no sense for the country to remain in limbo for a day longer than necessary. To that end, it is good news that the Government has started negotiations on an FTA with the United States and will soon start the same with Japan.

The United States and Japan are perhaps our two most important trade and investment partners post Brexit. I do not need to explain why the US relationship remains of paramount importance.

The UK’s relationship with Japan is less well understood. I lived in Japan for 11 years in the 1980s and 1990s and since then have visited several times a year.  Our relationship with Japan is now better than it has ever been, covering a wide spectrum of sectors and there is a deep level of interchange in business and finance, culture, education and defence.

Japan has both great similarities to and differences from the UK. Both countries are islands, constitutional monarchies and are located adjacent to great continents from which, in both cases, much of their culture was derived. Since the Meiji Restoration of 1868 Japan has among Asian nations been the keenest to assimilate elements of European, but especially British, culture and social organisation, including its parliamentary system and its Post Office. Even today, the customs and rituals of Japan’s “Maritime Self-Defense Force” are modelled on those of the Royal Navy.

It is a pity that the coronavirus pandemic has caused the postponement of the planned State Visit by Japan’s new Emperor and Empress which was expected to take place in early May and would have served as a useful catalyst in developing further the excellent relationship between the two countries in the immediate aftermath of Brexit.

It wasn’t well understood in Whitehall how our Japanese friends felt about the China policy driven by the Coalition government between 2010 and 2015. George Osborne coined the phrase “Golden Era” to describe our relationship with China in 2015 and Government ministers repeatedly stated that the UK was China’s best friend in the West. Our Japanese friends felt more aggrieved by our show of affection towards China than was generally understood.

The facts show why that was the case. At the end of 2017 the accumulated stock of Japanese FDI in the UK amounted to £78 billion, compared with around £15 billion from China. Around 150,000 people in the UK work for Japanese-owned companies, which is double the number of those working for Chinese-owned companies.

There is of course every reason why British business should continue to make the most of the huge opportunities that the  Chinese market offers, as Japanese companies certainly are doing most successfully, but there was no need for the British government to display such unctuous deference to a regime which does not share our values and commitment to a free democratic society.

It is excellent news that DIT has announced that negotiations on the bilateral UK-Japan Free Trade Agreement will commence shortly.

This FTA will build on the EU-Japan Economic Partnership Agreement entered into in January 2019. The total value of UK-Japan trade in 2018 was £29 billion and the new FTA is estimated to increase that by a further £15 billion. This will benefit all sectors, but especially textiles, agriculture, and the services industry.

When the Implementation Period comes to an end on 31 December this year, we will be free, as circumstances allow, to diverge from over-protective, counter-innovative EU regulation. This will enable us to work with Japan and others to develop more appropriate regulation covering data transfer and artificial intelligence, building on the UK’s position as a technology power.

The UK intends to use its voice as an independent trading nation to champion free trade, fight protectionism and remove barriers at every opportunity. The UK and Japan are among the strongest advocates for free trade and most committed supporters of a rules-based international trading system. Working together in the WTO, IOSCO and other international institutions, we can create new opportunities to trade, boost our nations’ economies and bring greater prosperity to our peoples.

It is good that DIT’s announcement gives prominence to the UK’s intention to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). This is a multilateral free trade agreement comprising 11 countries, of which six are commonwealth countries.

The United States had originally intended to join but President Trump withdrew. The countries which signed up in March 2018 are Japan, Australia, Canada, New Zealand, Singapore, Malaysia, Mexico, Chile, Peru, Vietnam and Brunei Darussalam. The CPTPP does not infringe on national sovereignty in the way that the EU does. It is not a customs union and members are free to set their own external tariffs. Members may adopt equivalent regulations on a sector-by-sector basis but they remain able to change regulations if they so decide. The CPTPP is a free trade agreement but not an integrated single market like the EU. Australia, New Zealand and Canada are also among the UK’s priority countries for free trade agreements.

The UK would not of course replace the US but its accession would make the CPTPP more global and Japan and several other members have indicated that the UK’s early accession would greatly strengthen this new association of nations, and not merely in terms of trade, but also in geo-strategic terms.

Members of the CPTPP share a vision of a competitive rules-based global free trade system based on nations’ mutual recognition or equivalence of regulatory outcomes rather than enforced precise harmonisation of cumbersome and expensive rules which must be identical to the letter, as practised, in different ways, by both the EU and China. The influence of the common law countries sharing British style legal and accounting practices would make it relatively easier for the UK to join.

Japan has of course not developed its legal and accounting systems from British roots but its own practices are evolving in the right direction. The government’s vision of the UK as a leading advocate of free trade on the global stage – in its own right – makes us an ideal partner for the CPTPP. It also makes it more likely that the US might consider rejoining in the future.

It is worth noting that, in GDP terms, the EU (without the UK) is roughly equivalent to the CPTPP (plus the UK). If at some future date the United States decided to rejoin, the CPTPP would be much larger. The trend growth rate of GDP for the CPTPP 11 countries is around 2% compared with around 1% for the EU, due to differences in demographics and productivity. CPTPP remains the single largest free trade area outside the EU.

Membership would also give the UK largely unrestricted access to other markets, including Japan’s markets for agricultural products.

It should be relatively straightforward to negotiate accession, providing 11 “quick wins”, effectively 11 basic free trade agreements. This would make it easier to complete deeper bilateral agreements with individual members, some of which may take longer to conclude. It therefore makes sense to indicate formally our wish to accede to CPTPP as soon as possible after the commencement of negotiations with Japan, Australia and Canada.

It is to be hoped that the UK-Japan trade talks can make good and speedy progress even under the current difficult conditions.

It is 420 years since William Adams, an Englishman employed by the Dutch East India Company, sailed his ship into port in the Japanese island of Kyushu. With some interruptions, our trade and investment relationship has grown steadily closer and deeper, especially since the end of the Second World War seventy five years ago. Brexit provides an opportunity to write a new chapter in this unique partnership.

Lord Trenchard is Senior Adviser to Her Majesty’s Government on Japanese Financial Services and a former chairman of The Japan Society.


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