GR Japan – Supplementary Written Evidence (JTN0047)

 

  1. The governments of the UK and Japan are to be congratulated on concluding the UK’s first free trade agreement, the UK-Japan Comprehensive Economic Partnership Agreement (CEPA), which will enter into force on 1 January 2021. This note identifies some of the most notable gains from the deal and challenges that remain.

 

Benefits

 

  1. Bilateral trade agreements send a positive message and demonstrate a commitment to the relationship in both countries – almost regardless of the actual content.  Although the macroeconomic benefits of this deal are likely small, compared, for example, with the impact of the UK-EU trade negotiations, it is nevertheless important because it demonstrates that the UK is capable of negotiating independent trade agreements outside the EU.  This was a more straightforward deal than most, since both countries had a strong incentive to agree a deal quickly and as it largely reflected the existing EU-Japan Economic Partnership Agreement (EPA), but the process has built up experience and negotiating capacity in the UK government that will be important going forward.

 

  1. One important outcome of the negotiations is that the UK secured Japan’s explicit support for the UK to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), an objective that Secretary of State for International Trade, Liz Truss, and others, have been open about.  Japan also views this as a “win”, as many issues Japan would like to have covered bilaterally, such as investor-state dispute settlement (ISDS) mechanisms, are already part of the CPTPP framework.  The UK may not be ready to address these issues yet, but if it is serious about joining the CPTPP, it will need to accept the CPTPP parameters to join.

 

  1. Stilton became an unlikely focus of negotiations for the UK, despite the negligible marginal economic impact of increased stilton exports to Japan.  However, while the deal has been criticised for only securing access to “leftover” EU quotas, this is actually a pragmatic and quite effective solution as only 58% of the EU’s quota was used up in the first year of the EPA – leaving ample room for UK cheese exports.  So, while Japanese do not consume much cheese, which may explain the unused EU quota, the outcome for British cheese is, in principle, better than it may appear.  

 

Challenges

 

  1. While it was politically salient for the UK to seal a deal before the end of the transition period, it has also been keen to show it got a “good deal”.  As the first independent UK trade agreement since leaving the EU, initial coverage of this deal has raised questions about how far it is appropriate for British civil servants to go in conveying the merits of a deal to the British public, particularly before details are available for independent scrutiny.  

 

  1. According to official figures, Japan got a better deal than the UK. Partly, Japan is likely to reap greater economic benefits, because exports to the UK from Japan are higher than those from the UK to Japan.  Japan is expected to gain £13 billion in increased exports while the UK is expected to get an export boost of £2.6 billion.  The tariff reductions are also unequal, with £137.1 million fewer tariffs on Japanese imports to the UK, while the equivalent for UK imports to Japan is less than a quarter, at £30.4 million.  Furthermore, tariff reductions are generally being implemented far more quickly in the UK than in Japan.  For example, those on some car and rail manufacturing products, are being lifted immediately in the UK, whereas many of the tariff reductions in Japan are being phased in over many years.

 

  1. Non-tariff barriers to trade, such as technical barriers and regulations, were not substantially addressed by the deal.  For example, CEPA only refers to “encouraging” national standardising bodies to follow international standards.  A major part of our work is to engage the Japanese government on regulatory issues affecting multinational companies and industries.  From this experience, we suspect that a generic and non-binding line in a bilateral treaty is unlikely to make any difference in practice.  While admirable in intent, and not unhelpful, real-world changes in Japanese regulations, standards and laws are generally hard-won through multi-faceted processes that engage a wide range of stakeholders.  It will still be necessary to make the case for win-win changes to policymakers and regulators. 

 

  1. Another “win” which may be less than it appears is the mutual agreement on e-commerce and financial services.  On digital trade, the CEPA essentially follows CPTPP provisions prohibiting restrictions on data flows, mandates for local storage, and forced turnover of software source code.  These provisions are also applied to the financial sector, an important area for the UK.  Although this could provide some improved certainty for businesses, the impact is likely to be negligible in practice, as it essentially provides no new commitments on market access, but rather an affirmation of the status quo, on matters which are unlikely to sway investment decisions.

 

  1. The deal was focused primarily on “continuity” with the existing EPA, due to the extremely tight timeframe.  This meant both sides had to compromise on their ambitions.  For example, Japan was unable to secure better elimination of tariffs on imported autos than agreed in the EPA.  The deal will be reviewed in five years but that is unlikely to result in much change. Trade relations will, for example, be impacted much more if the UK joins the CPTPP, than by any future changes to this deal, and Japan has acknowledged that a UK-EU trade deal would be of greater importance than this bilateral agreement for Japanese businesses and investment in the UK.

 

  1.                     As both governments will be aware, just because a deal is signed, this does not mean that practices automatically change – companies will need support to take advantage of its terms.  It is essential therefore that companies actually make use of its provisions.  For the deal to have an impact, both countries need to proactively convey the details of the deal, particularly to smaller businesses who potentially stand to gain most.  However, the new relationship between the UK and the EU is likely to overshadow the new deal with Japan.  In short, real economic benefits are possible, but how much will be gained beyond the political symbolism will depend on companies knowing about them and taking advantage of the opportunities.

 

Conclusion

 

  1.                     Both parties needed this deal to be signed, so this negotiation was an easy start for the UK.  The US, among others, will prove much tougher.  During these more difficult negotiations, the UK will need to hone its ability to make concessions and to consult widely on the impact of its choices on different sectors.  The outcome of these more difficult negotiations may in time come to define the real meaning of “Global Britain”. 

 

  1.                     Most importantly, the CEPA shows that the UK has a friend in Japan – and in today’s world that still counts.

 

5 November 2020