TheCityUK – Written Evidence (JTN0024)

Executive Summary

  1. TheCityUK is the industry-led body representing UK-based financial and related professional services (FRPS). The industry contributes more than 10 per cent of UK GDP and employs over 2.3 million people. It is the largest taxpayer, the biggest exporting industry and generates a trade surplus greater than all other net exporting industries combined.

 

  1. We welcome the opportunity to respond to the House of Lords EU International Agreements Sub-Committee into the ongoing UK-Japan free trade agreement (FTA) negotiations. This response covers the questions most relevant to TheCityUK’s members, including on digital trade. It draws from and builds on TheCityUK’s response, in January 2019, to HM Treasury’s consultation on a potential Global Financial Partnership with Japan, as well as our comprehensive submission, in November 2019, to the Department for International Trade (DIT) consultation on UK trade with Japan. TheCityUK would be happy to provide further detail on any of the issues raised in this response. 

Does the Department for International Trade (DIT)’s strategic approach, published on 13 May 2020, set out the right objectives for negotiations? How effectively does that strategic approach represent the interests of different groups and regions across the country, including the devolved nations, businesses, civil society, and individuals?

  1. TheCityUK was pleased to respond to the DIT consultation in November 2019 as HM Government sought to develop its negotiating objectives. The DIT is right to emphasise the importance of removing protectionist barriers to cross-border trade, which is more critical than ever in light of the significant impact of COVID-19 on the global economy. The UK and Japan are strong potential partners. The two countries share many characteristics: both are like-minded free-traders, committed to the global rules-based system; both are strong innovators, facing new challenges from technology, cyber, data and other 21st century issues.

 

  1. A successful UK-Japan FTA could also provide both countries an opportunity to establish a new, mutually beneficial framework for a comprehensive bilateral regulatory dialogue which could cover areas like cross-border financial services trade and potentially help lead to mutual recognition agreements.

 

  1. TheCityUK welcomes the commitment of the UK and Japan to use the EU-Japan Economic Partnership Agreement (EPA) as the basis of a UK-Japan FTA. The DIT’s strategic approach to the FTA negotiations rightly includes commitments for financial, professional and business services, which account for a substantial share of UK-Japan services trade. The strategic approach also takes into account many of the priorities identified in TheCityUK’s submission to the DIT consultation in November 2019, including enhanced cooperation on financial services regulatory issues, a framework for mutual recognition of professional qualifications and provisions for temporary business travel. In particular, TheCityUK welcomes the DIT’s outline approach to securing ambitious digital provisions, including supporting the free flow of data across borders, which will be covered later in this response.

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 initial ‘mini-deal’?

  1. If successfully concluded, the UK-Japan FTA would be one of the fastest trade agreements ever negotiated. This raises the prospect that both sides will have to temper their ambitions if the FTA is to be in place once the UK ceases to be covered by the EU-Japan EPA in January 2021, although both sides will, equally, be aware that an FTA must be of sufficient breadth to meet World Trade Organisation rules. As a minimum, the UK-Japan FTA ought to cover all industries included in the EPA if the UK is to maintain its current level of access to the Japanese market, and vice versa. This should include all provisions on services granted in the EPA, particularly given the importance of services to the UK-Japan trade and investment relationship.

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

  1. A UK-Japan FTA agreed within the timelines proposed by both governments and which reflects the UK’s negotiating mandate could serve as a major milestone for the UK’s new independent trade and investment policy. It could also serve as a bridge to the UK joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) (see answer below). Any FTA provisions that are new may have a value as precedents to be drawn on in future negotiations. On the other hand, every trade negotiation is different and agreements, once concluded, should not necessarily be applied as models in other contexts. UK-Japan trade talks have taken place in unique circumstances, in that both governments used the existing EU-Japan EPA as a clear starting point for talks and agreed to seek to conclude a new agreement in a short timeframe. Other trade talks will take place in different contexts and require different thinking.

The UK Government has expressed a strong interest in using a potential FTA with Japan as a steppingstone to joining to 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. Japan is a party to the CPTPP, and Japanese negotiators will no doubt seek provisions consistent with Japan’s CPTPP commitments.  A trade deal with Japan that incorporates elements of the CPTPP could smooth the way for UK accession to the CPTPP. At a general level, the key advantage of accession to the CPTPP would be to bring about simultaneously, and in a single step, trade and investment agreements between the UK and some major economies. While in many respects (for example, the range of disciplines included) it follows past trade/investment agreements, the CPTPP can be properly classified as advanced, with fully up-to-date business-friendly language on some questions of key importance for services, and with market access openings in services and investment that fit with the UK’s economic structure.

 

  1. Longer-term, UK accession could carry the following broader advantages for UK trade and investment policy and for the CPTPP itself:

 

  1. In general, the CPTPP, in its current form, would guarantee market access and non-discriminatory treatment to a wide array of services exporters, including in FRPS, subject to the ongoing existence of various non-conforming measures in different CPTPP members. The overall assessment is that there would be worthwhile benefits for the industry, even if potentially limited in terms of the removal of certain key barriers.

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. Japan is the UK’s sixth-largest investment partner globally and second largest outside the EU-27 after the US, with two-way investment valued at £881.3bn in 2017.[1] Inward foreign direct investment from Japan in the UK is largely concentrated in the financial services sector. Nearly 1,000 Japanese companies have a commercial presence in the UK. Collectively, they employ more than 100,000 workers in the UK, with the majority of these jobs outside London.[2] It is also important to note that hitherto Japan has viewed the UK as a base from which to do business with the EU, and therefore the shape of the UK’s future relationship with the EU is likely to affect Japanese investment into the UK going forward.

 

  1. The UK-Japan bilateral trading relationship has a long history and is equally strong, especially trade in services. Bilateral trade in services reached £12.6bn in 2018. Financial services accounted for 57% of all UK services exports to Japan at a value of £4.377bn in 2018 (with insurance and pensions for instance accounting for £412m). In the same period UK imported £1.972bn of financial services from Japan.  Although Japan is already a mature and significant market for UK, as the world’s third-largest economy and given its demographic profile, there is significant scope for a further increase in bilateral services trade in the future.

 

  1. The UK and Japan should pursue an agreement which binds liberalisation at the highest possible level and has minimal restrictions on market access, including rights of establishment and freedom to provide services, and flexible provisions covering the movement and temporary presence of business personnel. Any agreement should include transparent, stable and predictable rules governing investment and allow UK investors to freely transfer their capital to the Japan, and vice versa.

 

 

  1. In particular, any of the following barriers to trade and investment should be avoided:

Japan is a part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which includes an investor-state dispute settlement (ISDS) mechanism. What ISDS arrangements do you think would be appropriate in this deal? What are the possible risks or opportunities for the UK in negotiating any ISDS arrangements?

  1. In a UK-Japan FTA, as in any FTA, investment protection provisions will need to be crafted to respond to a number of needs and circumstances. These will include the actual nature of the investment in question; the level of protection required taking account of the risk of expropriation in the jurisdictions that are party to the FTA; the definition (broad or narrow) of “investment”; the balance to be struck between protection of both parties’ investments, on the one hand, and both parties’ right to regulate, on the other; the definition of fair treatment of investors; the definition of expropriation; any exclusions that are decided upon; the type of dispute resolution (state-state or investor-state) that is chosen; the approach to decision-taking in disputes (for instance, arbitral tribunals or a court system); and applicable law in disputes. Mapped across all of these will be the need to devise provisions that work for investment both by service-providers and by suppliers or manufacturers of goods.

 

Digital goods and services

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. The whole area of digital trade, data localisation, data movement and data privacy represents a network of challenging issues. The ongoing free flow of data is vital both for day-to-day cross-border business and for longer-term economic development, jobs and growth. It is estimated that half of all trade in services is enabled by digital technologies and related data flows. International trade requires data-flows not to be disrupted. The FRPS industry is among many which critically depend on the free flow of data, which is also essential to business stability and to the detection and prevention of financial crime and related offences. Furthermore, at a time of heightened reliance on frequent exchanges of information, data connectivity has become an essential underpinning of modern life. If information flows are impeded, consumers, companies, governments and entire economies can no longer leverage the full benefits of the digital economy. Unfortunately, over the last ten years measures that restrict the flow of data across borders have significantly increased and, by some calculations, doubled.  

 

  1. TheCityUK would wish a UK-Japan FTA to include a joint commitment not to adopt data localisation measures (including in financial services) except in very clearly defined conditions. For our members it is important that frictionless cross-border data movement is embedded into the UK’s future trade agreements and that the trend towards greater localisation is stemmed. It is notable that the EU-Japan EPA does not include provisions on the free flow of data in the financial services chapter, but instead commits both parties to reassess the inclusion of such provisions into the Agreement within three years of the date of entry into force of the EPA (by February 2022). We have noted a proliferation of data localisation measures in the Asia-Pacific region and would prefer provisions similar to those included in the US-Mexico-Canada Agreement (USMCA), which also formed the basis of the US-Japan Digital Trade Agreement.

 

  1. Specific provisions in a UK-Japan FTA that would be useful for UK-based firms include broad guarantees for business done electronically (for example, online sale and purchase of FRPS products); rules that ensure that personal information on the internet is protected; and cooperation on issues related to e-commerce, for instance on combatting spam. Financial institutions should not be required to adopt or transfer particular technologies. TheCityUK would welcome a commitment not to impose customs duties on electronic transmissions, as well as provisions on the recognition of e-signatures in either jurisdiction, as is set out in the EU-Japan EPA.

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. The UK and Japan are both strong innovators, facing new challenges from technology, cyber and data. The FTA negotiations therefore represent a unique opportunity for the two countries to agree ambitious digital trade provisions that would not only help to increase bilateral trade and investment, but also to help shape global standards. Closer alignment between the UK and Japan on data protection and privacy standards could help to facilitate a global code-of-conduct for treatment of cross-border data that would bring enhanced benefits to individuals and businesses alike.

 

  1. In line with the global shift towards a digital economy and the growing importance of digital assets, the threat from cyber-crime and the need to protect digital assets and personal data will increase enormously. The UK and Japan should look to establish an enhanced relationship based on equivalence of standards for data protection and transfer; these should also allow for future developments by creating a bilateral dialogue that ensures anticipation of new issues and the ability to work together to resolve them, whether such issues are bilateral or originating from third countries.

 

  1. As TheCityUK noted in its report “The future US-UK trading relationship: Creating a transatlantic digital market in services”, when barriers to data processing or cross-border transfers are permitted under FTAs, there is often an attempt to ensure that any measures must be justified on legitimate public policy grounds and follow a least trade restrictive approach. FTAs should aim to ensure that legitimate concerns in areas such as privacy and data protection are not misused as justifications for protectionist trade measures.

Japan and the US signed a ‘mini-deal’ on digital trade last year. Considering that the UK is negotiating trade deals with both the US and Japan at the same time, how might this impact the UK’s negotiating leverage in this area?

  1. The US-Japan Digital Trade Agreement is a sectoral accord equal in scope to the relevant digital trade provisions of the USMCA. Among some of the most valuable outcomes for the FRPS industry of the US-Japan Digital Trade Agreement are the prohibition of customs duties on digital transmissions; safeguards for the free flow of data across borders; acceptance of the use of electronic signatures and authentication on digital transactions; non-discriminatory treatment of digital products; and the prohibition of data localisation measures.

 

  1. The UK has until now participated in the EU’s FTA negotiations with third countries. However, these FTAs do not entirely liberalise data-movement in relation to financial services and contain exceptions. The UK’s concurrent trade agreement negotiations with Japan, the US and other trading partners present an opportunity to liberalise digital trade further. Greater alignment between governments favouring open trade could also lay the groundwork for international initiatives to remove and prevent forced data localisation measures in other markets.

Conclusion

  1. In this submission, TheCityUK has outlined some of the key considerations with respect to the UK-Japan FTA negotiations, including the importance of agreeing ambitious provisions on digital trade. TheCityUK would be happy to provide further detail on any issues raised in this evidence.

 

31 August 2020

 

 

 

 

[1] ONS, Geographical breakdown of the UK international investment position, The Pink Book

[2] British Embassy Tokyo; Ministry of Economy, Trade and Industry of Japan