Nikkei Asian Review (25/08/2020) - The free trade negotiations between the U.K. and Japan, now entering their final stage, have evolved according to the rhythm of a Kabuki play. The drama opened slowly as both sides tested each other's intentions. The pace has since accelerated ahead of a notional September deadline set by Japan. But without agreement by December 2020, the end will be lively -- and likely painful for the U.K.
Fortunately, the prospects for a deal look reasonable. A Japanese delegation led by Toshimitsu Motegi, foreign minister, made substantial progress during two days of talks in London this month. One of the sticking points remains a British demand for greater market access for Stilton cheese, loudly championed by Liz Truss, the U.K. trade secretary. In other areas -- digital rights and a scheme to protect famous brands like Scotch and Kobe beef -- the two nations are reported to have reached agreement.
The polite atmosphere surrounding the talks should not detract from the high stakes involved. The U.K.-Japan free trade deal is the first test for prime minister Boris Johnson's ambitions for "Global Britain." Now that the U.K. has left the EU, the government wants to conclude free trade agreements, or FTAs, with countries covering 80% of U.K. trade within the next three years. The drawback is that Brexit, while spelling liberation from Brussels, also removes the collective punch of belonging to one of the world's most powerful trading blocs.
The Johnson government wants to start with FTAs with Japan, Australia, New Zealand, the U.S. and the EU, which is by far the U.K.'s largest trading partner. In each case, the U.K. is racing to ensure that agreements are rubber-stamped before December 31, the date when its own transitional arrangements on trade with the EU expire. The challenge is that the content of future bilateral agreements depends on the U.K.'s renegotiated trade relationship with the EU. At present, London appears to have settled for a modest "bare bones" trade deal with the EU; any change risks a knock-on effect against third parties.
Not everyone is convinced that an inexperienced U.K. bureaucracy can deliver the deals on time. New Zealand's deputy prime minister Winston Peters said Britain is not "match fit" for international negotiations. He likened it to a cricket team trying to win the Ashes -- the storied rivalry between England and Australia -- without having been on the field for 30 years.
"We (New Zealand) have had to look offshore for a long time and so we are seriously match fit ... in a way that I don't believe that the U.K. is because the U.K. has been locked up in the EU all these years. In terms of their trading skills and finesse and their firepower -- without being critical -- they've never had an outing lately."
A future FTA between the U.K. and Japan will inevitably mirror the EU-Japan Economic Partnership Agreement, or EPA, overwhelmingly approved by the U.K. parliament earlier this year. Truss wants something -- perhaps anything -- to show she has secured additional benefits for U.K. business. Hence her demands on Stilton cheese, the soft, strong-smelling yellow and blue English cheese. Tokyo is reluctant to make extra concessions, calculating that the U.K. is a smaller actor than the EU and is playing a far weaker hand.
Japan is nevertheless looking for extra tariff cuts from the U.K., beyond the EU-Japan deal. Truss (motto: "I am fighting to consign unacceptable and unfair tariffs to the rubbish dump of history") has given hope that the U.K. will eliminate auto tariffs from day one. This would be far superior to the eight-year phaseout agreed in the EU-Japan deal. The U.K. could later use zero tariffs as a bargaining chip with Brussels: when the Brexit transition ends next January, cars manufactured in the EU would face a tariff, while Japan's could enter the U.K. for free.
Beyond these trade bargaining chips, there are serious geopolitical calculations. The U.K. might use the FTA with Japan as a stepping stone to joining the Trans-Pacific Partnership, or TPP, a prospect welcomed by Prime Minister Shinzo Abe in an interview with the Financial Times last November. The U.K. sees Japan as an important partner in a world dominated by the economic superpowers, the U.S. and China, especially now it is out of the EU.
The U.K. and Japan are also major investors in each other's economies, ranking fifth and sixth respectively for inward foreign direct investment. Back in the late 1970s and 1980s, Japanese foreign investment in the U.K., especially in the car industry, was part of the country's economic renaissance under Margaret Thatcher. That investment was, of course, partly predicated on the U.K. being a member of the EU, "the offshore landing pad" for goods exported to the continental market.
In the post-Brexit world, the U.K. will struggle in the short-term to match the trade benefits that came with membership of the EU, both in terms of market access to the continent and belonging to a mighty trade bloc. On the most optimistic forecasts, if the U.K. could replicate all existing EU deals while also clinching agreements with the U.S., India, China and the Gulf states (with the EU failing to do so), U.K. GDP would be boosted by just 0.2% after 15 years. No amount of Kabuki theater can mask this grim reality.
Read more at https://asia.nikkei.com/Opinion/UK-and-Japan-race-to-reach-free-trade-agreement