North East England Chamber of Commerce – Written Evidence (JTN0017)

The North East England Chamber of Commerce represents 3,000 businesses across the North East England. We bring businesses together; ensure they have access to support and make their voice heard to create a Stronger North East.

As a region, we have several Japanese owned firms across a variety of sectors, particularly in Automotive and Chemical, employing thousands, but despite the regions strong exporting record, our trade balance is weighted vastly in favour of Japan- a beneficial agreement can help secure regional investment for the future, and promote new export opportunities to Japan.

1) Does the Department for International Trade (DIT)’s strategic approach, published on 13 May 2020, set out the right objectives for negotiations?

  1. The ambition to sign a free trade agreement between the United Kingdom and Japan in the short-medium term is something that should be supported. A deal agreed in a timely fashion will hopefully ensure that barriers to trade between two substantial economies are removed, continued market access for British and Japanese firms, while also sending a strong signal overseas that Britain is ready to trade with the world with the correct structures and arrangements in place.

 

  1. It is also promising to see a dedicated SME chapter, as with other Free Trade Agreement proposals. Further measures, guidance and proper promotion to support SMEs in maximising the benefits of new trade deals would also be useful.
  2. It is therefore promising to see specific consideration for the impacts of this agreement on the sector as preserving market access and reducing barriers to trade will be vital in protecting these jobs going forward.
  3. It would have been more promising to have seen similar levels of attention paid to other growth sectors of the North East economy such as renewable energy, beyond the relatively vague ambition to ‘further open’ energy markets.

 

  1. Of the top three exporting sectors from England to Japan (Road vehicles, Power generating machinery and Medicinal and Pharmaceutical products), there is already a significant presence of all three in the North East region. Ensuring that these firms can continue to operate effectively is vital for the viability of the North East economy, especially post-COVID, but as these are already established, this could explain why the North East is estimated to be one of the regions that experience the smallest GVA growth from this agreement. With that in mind, it is worth asking what consideration will be given to the government’s ‘levelling up’ agenda in areas such as the North East when it comes to this agreement.

 

3) Although both countries have expressed their aspiration for reaching a comprehensive FTA before the end of the Brexit transition period, they face significant time constraints. Japan has suggested that both sides would need to limit their ambitions in negotiations. In what circumstances might the UK and Japan pursue a limited version of a trade agreement, which covers only a handful of industries, instead of a comprehensive FTA? What areas are most likely to be included in any ‘mini-deal’?

  1. The situation in which a ‘mini-deal’ would be most necessary is if it appears that a comprehensive agreement is not possible by the end of the year, when the UK and Japan’s access to each other’s markets under the EU-Japan free trade agreement expires. Both sides could aim to agree the sectors that would be covered by a ‘mini-deal’ early, to prepare for this possibility.

 

  1. If this were to be the case, it would make sense to secure positions of strength in the national and regional economies, to ensure that the UK does not immediately become seen as a less attractive venue for business or investment than the European Single Market countries, who will continue to benefit from the EU-Japan FTA into 2021 and beyond.

 

  1. In the North East, the automotive, chemicals and pharmaceutical sectors would benefit greatly from being a part of this ‘mini-deal’ if a comprehensive FTA was not possible, by reducing barriers to trade and remaining competitive relative to European competitors. The region is also home to a quickly growing digital sector which benefits greatly from foreign direct investment. A ‘mini-deal’ that included provisions on easing inward investment would assist growth in this sector in the North East.

 

5)What effect could a UK-Japan trade deal have on the UK’s future ability to negotiate deals with other countries?

  1. The most obvious way in which these trade deals may impact the UK’s ability to negotiate future deals would be if Britain ties its regulatory regime to standards that are different to other nations. If standards in areas such as the environment, public subsidies, labour and taxation in a deal with Japan diverge significantly from those of the European Union, this will come at the cost of friction-less access to the European market.

 

  1.                     Approximately 60% of North East exports are sent into the European Single Market, compared to 2% to Japan. Achieving as frictionless trade as possible with the European Union is therefore a significantly more pressing issue than with Japan and a number of Chamber members, including large Japanese owned companies, have made the point that they view an agreement with Japan as relatively insignificant when compared to the ongoing negotiations between the UK and the EU.

 

  1.                     As has been recently highlighted by the Institute for Government, this problem is exacerbated by Britain having still not laid out its future domestic regulatory regime and pursuing ‘regulatory autonomy’ which could well come at the cost of market access in our largest economic partners. While this may have been done to retain flexibility in negotiations, the result is that it will make achieving the desired free trade agreements difficult and with only a few months until the end of transition, there is a lack of certainty regarding what our domestic regulation will look like in the future.

 

6) The UK Government has expressed a strong interest in using a potential FTA with Japan as a steppingstone to joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). How might a trade deal with Japan help the UK to join the CPTPP and what benefits would there be in joining?

  1.                     If a trade agreement did result in a growth in trade from the North East to Japan, then this growing base of exporters selling goods to the Pacific and presence of UK firms in the Pacific may then produce more support for CPTPP membership, and help grow trade to other Pacific nations.

 

  1.                     Joining the CPTPP would be beneficial for British trade by reducing barriers such as tariffs and making investment between CPTPP nations easier and would for the most part be supported. The size of the CPTPP means that there is a large potential to increase levels of trade between the UK and this part of the global economy, which is expected to grow quickly in the coming years. If there is to be an increase in the level of friction between the UK and the EU, then it makes sense to attempt to diversify UK trade rather than being overly reliant on the European market.

 

  1.                     There is also an obvious incentive to expand access to this market with regards to services, which would support a strong part of the UK economy and build on the EU-Japan trade deal. There is potential for the USA to become members of the CPTPP in the future, which may well give increased access to US markets for UK companies, without going through the difficult process of negotiating both Free Trade Agreements with the US and the EU, and the accompanying difficulties of traversing both of their somewhat contradictory regulatory environments.

 

  1.                     It is important to note that the measures taken to join the CPTPP must not jeopardise market access that our region relies on, namely with the European Union. If alignment of standards in certain areas for CPTPP membership means that we diverge significantly far from European standards as to negatively impact British access to the European Single Market, then this cannot be said to be a worthwhile venture.

 

  1.                     A Japanese-owned member of the Chamber that operates in pharmaceutical manufacturing made this point regarding the standards of British-made pharmaceutical products going forward. Their worst fear was that if an attempt to quickly sign an FTA with other countries such as Japan, we may align our standards in areas such as pharmaceuticals or chemicals at a point that neither closely fits with the European standards, nor those of the United States. 95% of the products that this company makes are exported and the vast majority of these exports are to either the European Union or the United States. If an FTA with Japan or another nation tied our standards to a level that led to further restricted access to much bigger markets for UK exports (US or EU), then this is not worthwhile.

7) How might Japanese investment in the UK be impacted by a UK-Japan trade agreement? What provisions should be included in order to maintain or attract Japanese investment?

  1.                     The EU-Japan free trade agreement has specific measures to liberalise investment between the two parties, including removal of limits on foreign ownership of firms in each territory and free movement of capital. If Britain wishes to use the EU-Japan agreement as a point to work from and move beyond in areas, then it seems difficult to see how the agreement could have a negative impact on investment in the future. The North East traditionally has received a substantial level of direct investment from Japanese firms in a number of sectors including automotive, pharmaceuticals and advanced manufacturing, and measures to allow this to continue are of importance to the region’s economic health.

 

  1.                     One member of the Chamber also operating in the pharmaceuticals sector made the point that as their organisation has plants across Europe, that with uncertainty over trade between the UK and the EU going forward, it is getting more difficult to justify investing in Britain, rather than in Amsterdam or elsewhere in Europe. The company in question has invested over £1bn in new technologies in recent years and spoke of the value of government Research & Development tax credits, as well as capital grants from government in supporting this investment. Measures such as these and other financial incentives will be well-received and would be the most likely to result in investment growth.

 

  1.                     From a historic perspective, the UK was seen as a reliable investment for access to the European market- creating and having a unique selling point, or reason to invest, can be crucial and a decisive factor when looking for new partners.
  2.                     A Japanese member also spoke of the cultural importance of meeting and speaking to dignitaries and political stakeholders in inhibiting successful business relationships and influencing investment decisions.

 

8) What rules of origin and cumulation requirements are necessary in a UK-Japan trade agreement, and how might they play into the UK’s trading arrangements with the EU?

  1.                     The automotive sector has a significant presence in the North East, supporting tens of thousands of jobs in manufacture and in the connected supply chains. Much of the supply chain in this process involves ‘just-in-time’ procedures, with parts travelling from Europe or elsewhere to be assembled in the North East, before being re-exported out of Britain, as well as different manufacturing processes taking place in different locations, not exclusively within the UK. Around 80% of finished products for the automotive sector that are exported from the North East are sent to the European Union.

 

  1.                     The viability of the sector relies heavily on access to the European Single Market and therefore a triangulation of preferential rules of origin arrangements will be required between the UK and Japan, as well as the UK and the EU, while cumulation  of value added between all three parties will also be necessary. Additional tariffs or restriction to the European market should be avoided to be avoided to secure the long-term viability of the sector.

 

9) What are the costs and benefits of a UK-Japan trade deal to the various regions of the UK?

  1.                     The North East already has a significant economic relationship with Japanese organisations, with a number of large Japanese firms from multiple sectors having offices within the region and an above average % of North East exports being sent to Japan.

 

  1.                     The North East is unfortunately one of the regions that is expected to receive the smallest boost in GVA from this proposed deal, according to government estimates provided in the Strategic Approach. It appears that for the North East, the most important aspect of this deal, is to conserve and protect the firms that are already in the North East, ensuring that they continue to have market access to the UK (and vice versa) and can continue to invest in our region, rather than stimulating new economic growth. If it appears that there are certain sectors that are set to benefit from this trade deal that are not present in the North East economy, such as textiles, then investment could be directed to assist the growth of these sectors in the region, thus supporting the levelling-up-agenda.

 

10) The Department for International Trade (DIT) has conducted a preliminary impact assessment that outlines gross value added (GVA) of a UK-Japan trade deal on regions in the UK, as part of its negotiating objectives How do you evaluate the economic analysis behind DIT’s impact assessment?

  1.                     The assumption made within the economic estimates that the UK and EU will trade with ‘zero-tariffs’ is something that is not guaranteed. As the North East sends the majority of its exports (approx. 60%) to the European Union, if tariffs did come in to play at the end of the year, this may well result in businesses no longer operating in the region meaning that any hypothetical business growth from a Japan trade deal, would cease to exist. With continued uncertainty around the future relationship between the UK and EU then it seems a risk to base economic estimates on the assumption that there will be no tariffs between these markets.

 

14) How might an early removal of tariffs on Japanese automobile and auto part imports, which is faster than the timescale agreed in EU-Japan EPA, impact the UK automotive industry? How might the UK automotive industry approach any new competition that might arise?

  1.                     Following the end of the transition period, it is vital that British firms retain their competitiveness against their European rivals. A quicker reduction in tariffs on goods entering Britain may well mean that Britain is seen as a slightly better place to do business for Japanese firms as compared to other locations within Europe. This could potentially influence decisions over investment between sites in the UK and those in Europe in favour of the UK. This possible competitive advantage must be weighed against possible threats to domestic firms within automotive supply chains which could be undermined by an immediate cut in tariffs. It could be worthwhile in the future to assess which parts of the established supply chain come from UK firms and tailor the UK Global Tariff or trade deal conditions around this, either leaving certain products with tariffs or having only a slightly accelerated tariff reduction timetable.

 

  1.                     As always, it is important to note that the UK automotive sector relies on access to the European market to be viable. Any economic benefits or threats are dwarfed by the possibility of there not being a trade deal between the UK and the EU that allows for the movement of goods between the two.

 

15) Considering the important role of supply chains in the automotive sector, what rules of origin and cumulation requirements should be included in a UK-Japan trade agreement? How might they play into the UK’s trading arrangements with the EU?

  1.                     As previously mentioned, the triangulation of rules of origin, allowing Japanese parts to count towards local content from the UK to EU, is crucial for automotive industries. This is particularly the case with the new generation of automotive, electric vehicles, because the EU is not well developed in EV production, many parts come from Japanese suppliers.
  2.                     To maintain current market access levels for automotive industries and develop automotive production into the future, it makes sense that any FTA accommodates the future trajectory of the industry. Therefore, ensuring that the automotive sector can benefit from forward thinking and triangulated Rules of Origin should be a priority.
  3.                     It would also be sensible to replicate the “phasing” mechanism of the EU-Japan agreement, to allow automotive assemblers and supply chains to adjust to new Rules of Origin content rules and regulations, source the right suppliers for their need, and to understand new processes.A deemed assumption of content will give business time to get evidence and documentation in order.

16) Would there be a significant economic benefit to UK consumers if there was an early removal of tariffs on Japanese automotive imports? How large would the economic benefit be?

  1.                     The result of this may be that some automotive manufacturing inputs and fully assembled cars from Japan may be cheaper and this could be passed on to consumers. In the North East, the majority of assembled cars are exported to the European Union, so while a reduction of tariffs between UK and Japan may ensure the viability of the current manufacturing process in the short term and result in some savings for UK consumers, the biggest priority in the longer term is that assembled automobiles can be sold outside of Britain, especially in the European Union.

17How might negotiated provisions on reducing tariff and non-tariff barriers for UK automotive exports to Japan benefit UK businesses?

  1.                     Trade liberalisation is a force for good, the further a deal can reduce the burden of risk and bureaucracy, the more attractive that market and likely business are to export there. This in turn will increase the flow of information and skills between operating businesses and provide stronger links with Japanese buyers and suppliers.
  2.                     In general, mutual trade liberalisation should be seen as a positive force for business.

18) Should electric and hybrid vehicles be differentiated from other motor vehicles when setting tariff rates in a UK-Japan trade agreement?

  1.                     It would be good to know what the intentions of such a policy proposal are. If it were merely to collect revenue to invest in green technology solutions or electric vehicle infrastructure, then this could be beneficial.
  2.                     If however it is part of a market-based solution to incentivise the purchase of electric or hybrid vehicles rather than fossil fuelled vehicles then this policy is unlikely to be enough and has some flaws.

 

  1.                     In the North East currently, electric and hybrid vehicles make up approximately 10% of vehicles assembled in the region. If this is part of a campaign to expand the usage of electric and hybrid vehicles, simply placing a tariff on fossil fuel powered vehicles to make them less attractive is not sufficient on its own. Firstly, there is no guarantee that current supply chains and manufacturing facilities would be able to instantly change their processes to meet a dramatic spike in demand for electric and hybrid vehicles. An appropriate policy programme would allow time for companies to adjust their manufacturing processes and supply chains with proper consultation as to what government wants to achieve in the long-term with relevant stakeholders such as car manufacturing companies.

 

  1.                     There is also the strong possibility that simply increasing the price for the consumer of one product will have no impact on the sales of another. People may not be in the position to buy an electric or hybrid vehicle, be unaware of the tariff or of a government desire to increase the usage of these cars. Any future attempt to increase the popularity of electric or hybrid vehicles must utilise joined up policy tools which include financial incentives, investment into charging infrastructure to calm consumer’s concerns around not being able to charge their cars and a long-term advertising campaign to increase consumer awareness. A tariff on non-electric cars may be useful within this context, but alone it is unlikely to have the desired effect.

 

  1.                     The North East does have extensive expertise and experience in the manufacture of electric vehicles, with 26% of European Electric Vehicles being produced in the North East. If government aims to expand the production of these vehicles then the North East will surely play a prominent role. Directing investment and job growth in this area will also help to meet the government’s levelling up aims.

 

19) How might negotiated digital trade provisions serve as enablers for businesses in the UK? What provisions would bring the most benefit and so should be the highest priority in this area?

  1.                     Equivalence of data protection regulations between the UK, Japan and the EU would beneficial for firms trading within these three markets, allowing the free-flow of data without extra measures taking place, while consumer data remains protected.

20) What might be the trade-offs for the UK in agreeing ambitious digital trade provisions with Japan? How might the UK’s data protection standards and provisions for protecting users from online harms be affected by any deal?

  1.                     As Japan is not a member of the European Union, it does not fall under the EU’s General Data Protection Regulation (GDPR), which currently governs UK data protection. In 2019 Japan received an Adequacy Decision from the European Commission meaning that Japan’s data protection standards are deemed at a level high enough to allow data to flow between the EU and Japan without further safeguards.

 

  1.                     That the data protection standards of both Japan and the EU are so closely aligned should suggest that there should be minimal, if any, changes to Britain’s standards and provisions because of this deal. Britain’s data protection regime once we longer come under the jurisdiction of the GDPR has yet to be finalised and reports suggest that it will closely mirror GDPR, but if any changes are to be made they will not be because of this Free Trade Agreement.

22) Japan is an important market for the UK agriculture and food export industry. The Japanese agriculture industry has expressed concerns regarding granting additional access to its market if the provisions in the EU-Japan EPA on agriculture and food are rolled over in an FTA with the UK. If such provisions are not included in a UK-Japan trade deal, what consequences might there be for the UK agriculture and food industries?

  1.                     This would be unfortunate for firms that export to Japan, or plan to do so, as it would make their products less competitive in this market. It is important to have some sense of perspective with regards to this, however. Food and food-related exports from the UK to Japan, according to UK Trade Info totalled approximately £270 million in 2019. This is around £30 million less than the nearest European nation, Sweden (approx. £300m). The exports to the entire ‘European Community’ for these products was approximately £13.6 billion, therefore the possible consequences of barriers to trade with the European market significantly outweigh those of any possible arrangement with Japan.

23) If the UK and Japan agreed a limited version of a trade deal, which either eliminated or reduced provisions related to agriculture and food, what might be some of the impacts on UK agriculture and food industries?

  1.                     The North East has a significant number of food and drink exporting companies, so any reduction in tariffs and non-tariff barriers to trade brought about through this deal would be beneficial as this would make these products more competitive in this market. Seeking reductions in trade barriers for sectors of strength in regions that traditionally have lower economic performance is exactly what government should be aiming to do, in line with the levelling up agenda.

 

28 August 2020