Japan is taking hard-headed approach to UK trade talks

Greetings from Japan. In another timeline, the Tokyo Olympics would be starting in 10 days’ time, but it’s so humid that a walk down the street can raise a sweat. Japan’s trade negotiators no doubt have the air-conditioning turned up as they work from home on an ultrarapid deal with the UK. According to the timetable laid down by Japan’s chief negotiator, Hiroshi Matsuura, there are just two-and-a-half-weeks left for Japan and the UK to make an agreement.

Today’s main note explores Japan’s approach to that deal, based on a recent event held in Tokyo under the Chatham House rule (which means the content can be reported but neither the speaker nor their affiliation may be revealed). Our policy watch looks at the red tape facing UK companies that trade with the EU, while our chart of the day examines the consumer drag on US imports.

A tale of two lower ambitions

Japan is working on UK trade talks at two distinct levels. Politically, Tokyo regards the UK as a historic ally, a peer and a country that could go either way on future relations with China. Prime minister Shinzo Abe and his government is keen to help. At the negotiating level, however, the attitude is much more hard-headed and Tokyo seems keen to extract every concession it missed in free trade talks with Brussels.

To start with, Japan is looking for extra tariff cuts from the UK, above and beyond what was in the EU-Japan trade deal. “We think the UK will be very happy to eliminate auto tariffs the minute the agreement comes into force,” said one participant at the recent Chatham House rule event on Brexit. Under the EU-Japan deal, the EU’s 10 per cent tariff on automobiles only falls to zero in the eighth year, so scrapping it overnight would be a win for the Japanese car industry.

Tariff cuts and the urgent timetable may also hint at London’s thinking about the deal. If the UK cuts tariffs on Japanese automobiles to zero, it will send a message to Brussels: if you fail to strike a good free trade agreement with us, then when the Brexit transition ends, your cars will face a tariff while Japan’s can enter the UK for free.

Japan has a couple of other priorities, both of which are set to be in the deal. “We do have a strong interest in including investment and digital trade measures on an ambitious nature in the Japan-UK economic partnership agreement,” said an event participant. The EU-Japan deal did not include an investment protection mechanism, because the EU wanted an open investment court system. Japan regards getting this in a UK deal as pure upside, because its companies are huge investors in the UK whereas “UK investment in Japan is almost non-existent”, as one participant put it.

Digital trade was also left out of the EU-Japan deal because of EU concerns over data protection. By contrast, Japan agreed a wide-ranging digital trade agreement with the US last year, and there are similar provisions in the regional Trans-Pacific Partnership deal. Japan is keen to sign the UK up to something similar, allowing technology giants such as Sony to trade in the UK without discrimination, customs duties or any requirement to store data locally.

The deal will also be conspicuous for what is not in it. Matsuura said the shortness of time meant both sides would have to “lower their ambitions”. In practice, that is likely to mean there is nothing much in areas of UK trading strength such as legal and financial services. It will certainly mean zero quotas for UK exports in sensitive areas such as agriculture — it is up to London to argue with the EU for a share of its existing quota for barley or cheese. “Why should we give now to a country that doesn’t have real agricultural access in Japan?” said a participant.

The ace in its hand, Japan believes, is rules of origin. “With 28 countries, the rules of origin worked very much in favour of the 28,” said a participant. Under the EU-Japan deal, parts originating anywhere within the EU counted for the purpose of reduced tariffs; unless Japan agrees that can continue then, for example, Scotch whisky in a bottle from France might not count as a UK product. “The UK has a very integrated supply chain with Europe,” said a participant. Tokyo is betting that London will want that to continue.

Charted waters

Jitters about the health of the US economy continue, with stocks affected by concerns over the rollback of reopening measures in the US as Covid-19 cases continue to rise in some states. US imports linked to consumers’ discretionary spending are still struggling, with only healthcare showing an uptick in June compared with the previous year.

Policy watch

UK companies trading with Europe will have to absorb a post-Brexit bureaucracy burden and fill in an extra 215m customs declarations between them at a cost of about £7bn a year, according to government officials, write George Parker, Peter Foster and Daniel Thomas.

The scale of the additional red tape involved in future trade with the EU was confirmed as UK cabinet office minister Michael Gove laid out the government’s plans to manage the UK’s borders in a 206-page document that included the admission: “Customs declarations are complicated.”

Gove has not disputed industry estimates that about 50,000 new private sector customs agents will have to be hired by business to deal with formalities at the UK-EU border — regardless of whether the two sides reach a trade deal.

The Cabinet Office minister was speaking on the day the government launched an upbeat advertising campaign to prepare the country for the end of the Brexit transition deal on January 1, under the strapline: “UK’s new start — let’s get going.”

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