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30 April 2019

Dr Minako Morita-Jaeger is an international trade policy consultant and an Associate Fellow of the UK Trade Policy Observatory.

The UK managed to avoid crashing out of the EU on 12th April for the second time. But this delay extends uncertainty since the possibility of a No-deal Brexit on 31st October remains. The UK’s trade partners have been looking at Brexit uncertainty with great dismay. Japan is not an exception. Here, I highlight how this uncertainty is affecting Japanese businesses in Europe and analyse possible future UK-Japan trade relations based on the three scenarios currently in the UK political debate. This provides an update to the UKTPO blog on UK-Japan relations.

UK’s relative market attractiveness declining in Europe

On-going Brexit uncertainty has been diminishing confidence in the UK. According to the JETRO’s (Japan External Trade Organization) annual business survey, Japanese businesses’ evaluation of UK’s political and social stability has been declining since the 2016 Referendum. In the latest survey, conducted in September-October 2018, although political anxiety over Brexit was not as intense as it is now, Japanese companies doing business in Europe regarded the UK as the most politically and socially unstable country in Europe together with Romania. The survey also shows that the UK’s relative market attractiveness in Europe is declining. For example, the UK’s expected change in business profits in comparison with the previous year ranked the 2nd lowest among European countries both in 2018 and in 2019.[1]  About 70% of Japanese businesses were concerned about economic stagnation in the UK, and 60% were worried about the UK’s post-Brexit policy and regulatory changes, namely tariff rates and regulatory consistency with the EU.

Since the 1980s, the UK has been enjoying its role as a gateway to the EU for Japanese businesses. The UK has established its position as Japan’s second to top FDI destination ($153.6 billion of FDI stock, 2017), after the US ($491.3 billion of FDI stock, 2017).[2] Unfortunately, the continuing uncertainty over Brexit is already driving Japanese business to reconsider or restructure their business model in Europe although the degree of impact differs across business sectors and individual companies.[3] To date, some Japanese financial services companies have already moved their EU headquarters from the UK to Germany, Netherland and Luxemburg in order to acquire financial services passport. According to the JETRO business survey, some Japanese manufacturing companies have decided, or are considering, to move their headquarters from the UK or to redesign sales and production functions.

It is generally understood that the role of an FDI host country is to provide political and institutional certainty and predictability. The Brexit saga is doing the opposite, magnifying risks and imposing unreasonable costs on its foreign investors.

Three scenarios for a future UK-Japan trade deal

In August 2017, Japan and the UK agreed to quickly create a new bilateral economic partnership based on the EU-Japan Economic Partnership Agreement (not a roll-over) when the UK leaves the EU. Since then, Japan has been preparing for the process on the assumption that a withdrawal agreement would provide a legally-binding plan of the future EU-UK trade relationship. Thus, it was a big surprise for Japan when the UK Government suddenly asked Japan to switch to a ‘No deal’ basis for the UK-Japan agreement (a ‘roll-over’) towards the end of March 2019.

Currently, two problems hinder the enactment of a future UK-Japan trade partnership. First, the Political Declaration on the future relationship between the UK and the EU is ambiguous and not legally binding. Second, the UK itself has not yet formed domestic consensus on what it wants in terms of its future relationship with the EU.

The future UK-Japan trade deal entirely depends on the result of the EU-UK future trade relationship. For example, the three likely scenarios in the UK political debate: (1) the Government’s facilitated customs arrangements in the Political Declaration; (2) a permanent customs union with the EU; and (3) Common Market 2.0 would result in a completely different type of UK-Japan trade deal. (Gasiorek and Winters explained the economics of the three options in the UKTPO blog of 3rd April).

In assessing the options, the Japanese Government would start from its request in September 2016 to maintain the status quo between the EU and the UK. These include: (i) maintaining the current tariff rates and customs clearance procedures; (ii) free movement of capital and unrestricted investment; (iii) continuous access to labour with the necessary skills from across the EU; and (iv) harmonised regulations and standards.

Scenario 1: Facilitated customs arrangements

The facilitated customs arrangements option excludes the single market. In this case, Japanese businesses’ requests on the free movement of services, capital and people are completely neglected. Because the UK Government retains its red line of independent trade policy, this gives way for the future UK-Japan trade deal. However, the inclusion of terms such as ‘ambitious free trade agreement between the EU and the UK’ and ‘ambitious customs arrangements’ in the Political Declaration are far too ambiguous to form the basis of a Free Trade Agreement (FTA) with a third country. For example, it is not clear at all to what extent ‘free movement of goods’ with the EU would be maintained in terms of customs duties and procedures, or what kind of rules of origin would govern EU-UK trade. As for non-tariff barriers, Japan has no clue as to what extent the UK will disentangle itself from the EU regulatory framework.

Scenario 2: A permanent customs union with the EU

From a manufacturer’s perspective, a permanent customs union with the EU would be a slightly better option than the ‘facilitated customs arrangements’. It enables the status quo of current tariff rates against non-EU countries and duty-free trade between the UK and the EU. However, Japanese businesses’ concerns on non-tariff issues, such as unified regulations and standards on goods, are completely neglected. Also, neither a single market for services nor labour mobility within the EU are included in this scenario. While the new agreement may require rolling over the tariff schedule and rules of origin part of the EU-Japan Economic Partnership Agreement, other parts of the Agreement, such as services, intellectual property rights, TBT/SPS related regulations, and data transfer, would all have to be negotiated between the UK and Japan. Like scenario 1, a degree of the UK’s regulatory alignment with the EU will determine the extent of non-tariff barriers.

Scenario 3: Common Market 2.0.

This option would mean that the UK would re-join the European Free Trade Association, being a part of the EU Single Market. The two major advantages for Japanese businesses are (i) free movement of labour and (ii) unified regulations and standards between the EU and the UK. A downside is that the UK would have independent tariffs and rules of origin, which would surely affect Japanese manufactures’ regional supply chains in Europe. In contrast to scenario 2, under this option, there would be a need for a UK-Japan trade deal on goods. Among Japan’s 18 bilateral and plurilateral FTAs, there is no goods-only FTA. The Japan-US Trade Agreement on Goods (TAG), the negotiation of which starts this month, may become the first case, but this would be a special case to avoid a trade war with the US. It cannot serve as a precedent for the UK-Japan future trade deal.

Last but at least, it should be noted that while Brexit uncertainty is diminishing the UK’s relative market attractiveness in Europe and is preventing the negotiation of future UK-Japan trade relations, the EU-Japan EPA, which entered into force this February, is providing new business opportunities in the EU 27. For the UK Government, rebuilding the confidence of Japanese investors and increasing its market attractiveness relative to Europe would be the key economic issues when it comes to the trade deal with Japan.

Footnotes

[1] UK’s expected business profits in 2019 in comparison with the previous year: While 33.7% answered ‘better’, 66.3% answered ‘the same’ or ‘worse’. For comparison, Italy ranked the top 2nd, 70% answered ‘better’ and 30% answered ‘the same’. JETRO business surveys, December 2018 (above).

[2] JETRO Japan’s outward FDI statistics.

[3] Japanese business analysts debate about Brexit and the Japanese business model. For example, see ”Nihonkigyou ga eikokutettai wo kentousubeki riyuu”, in Japanese (“The reasons why Japanese companies have to consider disinvesting from the UK”), January 2019.

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April 30th, 2019

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Image of Alan Winters3 April 2019

Dr Michael Gasiorek is a Senior Lecturer in Economics at the University of Sussex and a fellow of the UK Trade Policy Observatory. L. Alan Winters CB is Professor of Economics and Director of the Observatory.

Understandably the politics surrounding the UK’s exit from the EU are dominating current discussions. But the economics of the options still matter, and it is not always evident how well the core economic issues are understood.

In the light of the Government’s ‘approach’ to Labour to find a consensus and in the light of the indicative votes, the aim of this blog is to clearly outline the economic issues and summarise the likely consequences associated with two of the current (indicative) options. (more…)

April 3rd, 2019

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1 April 2019

Dr Ingo Borchert is Senior Lecturer in Economics and Julia Magntorn Garrett is a Research Officer in Economics at the University of Sussex. Both are fellows of the UK Trade Policy Observatory. 

During the first round of the indicative voting process at Parliament, the motion that proposes a permanent customs union attracted the second highest number of Ayes and was rejected by the slimmest margin of all eight motions.  This result shows the prevailing preoccupation with trade in merchandise goods.  Amongst other things, a customs union alone does nothing for services trade.  In this blog, we set out why the continued neglect of services trade is a major concern for the UK economy.[1] A twin-jet aircraft with just one engine on would ordinarily be bound for an emergency landing rather than for a smooth journey ahead. (more…)

April 1st, 2019

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11 February 2019

Alasdair Smith ian Emeritus Professor of Economics at the University of Sussex and is a member of the UK Trade Policy Observatory

Parliamentary discussions on Brexit seem to be making no progress towards a decision that can command a majority and the timetable for future Parliamentary votes is uncertain. The only result of last week’s discussion in Brussels was an agreement to hold further talks later this month, a jaw-droppingly relaxed timetable in the circumstances.

The Labour Party leadership has produced a statement with two objectives both of which are probably unattainable: a customs union with the EU in which the UK has a significant voice in the setting of EU trade policy, and a close relationship with the single market that falls short of membership. The Conservative Party is having internal discussions (with civil service support, a constitutional innovation) about the Malthouse Compromise, whose oxymoronic objectives are a new backstop that is not a backstop or an agreed withdrawal without a withdrawal agreement.

Out of this unpromising material, however, some outcome must emerge before March 29. (more…)

February 11th, 2019

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17 January 2019

Dr Peter Holmes, Reader in  Economics at the University of Sussex, Director of Interanalysis and Fellow of the UK Trade Policy Observatory

Since the Government’s defeat in the House of Commons, there has been a flurry of comments, notably from Steve Baker arguing that Mrs May’s deal can be replaced by some form of Free Trade Agreement.

One must immediately point out that the treaty basis of the Withdrawal Agreement does not include a long-term trade agreement. This can only be negotiated after Brexit. But even if it could be negotiated now, it would not solve the problem of the Irish Border. The UK and the EU in both the Good Friday Agreement and the Dec 2017 joint statement committed themselves not merely to barrier-free trade in goods with no hard border in Ireland, but to the preservation of an All-Island Economy. (more…)

January 17th, 2019

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Image of Alan Winters10 December 2018

L. Alan Winters CB, Professor of Economics and Director of the UK Trade Policy Observatory 

The Brexit Withdrawal Agreement and the Political Declaration are being presented as a means to end the uncertainty about the UK’s future relationship with Europe. But in an explainer for the ESRC’s UK in a Changing Europe, Professor L Alan Winters argues that this is not the case. Uncertainty will continue regardless of what happens to the Withdrawal Agreement.

Briefly, he argues that, if the Withdrawal Agreement is approved by Parliament and the EU:

  • The backstop it mandates requires a customs union between the UK and the EU and that most EU regulations for goods will apply in Northern Ireland. However, there is no regulatory alignment between the rest of the UK and the EU and so, if the backstop came into operation, there would be border formalities both in the Irish Sea and as UK goods entered the EU via any other route.
  • Negotiating a trade agreement with the EU will take a lot longer than the 21 months allowed for it in the Withdrawal Agreement, not least because every EU member state has a veto over trade agreements.
  • The Political Declaration that defines the parameters for that negotiation is imprecise in critical places and is, anyway, non-binding.

However, neither would rejecting the Withdrawal Agreement resolve the uncertainty. There is a wide range of possible outcomes all but one of which impose serious economic harm and/or require further negotiation. The option that involves least uncertainty and cost would be to remain within the EU; however, trying to achieve that outcome involves both significant political risks and the risk of ‘no deal’ if the attempt failed.

‘Through a glass, darkly’ is biblical – 1 Corinthians 13:12 – and is interpreted as meaning that we can see only imprecisely and via a mirror, but that, in the end, all will become clear. Seems about the best we can hope for.

Read the full article, What are the options for the UK’s trading relationship with the EU after Brexit?

December 10th, 2018

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17 October 2018

Dr Michael Gasiorek is a Senior Lecturer in Economics at the University of Sussex and a fellow of the UK Trade Policy Observatory.

UK-EU negotiations are in a mess. There appears to be a genuine impasse, where the stumbling block is the issue of no border in Ireland. The EU has indicated it is for the UK to make a better offer, while the UK is arguing that the EU needs to be more reasonable.  Both are right, if they want to avoid ‘no deal’. (more…)

October 17th, 2018

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Image of Alan Winters26 September 2018

L. Alan Winters CB is Professor of Economics and Director of the UK Trade Policy Observatory and Nicolo Tamberi is a Research Assistant in Economics for the Observatory

The brusque dismissal of elements of Mrs May’s Chequers plan at the informal meeting in Salzburg last week has stimulated feverish attempts to revive the case for a deep and special UK-EU Free Trade Agreement (FTA), under the title of a CETA-plus agreement. This effort received substantial reinforcement from the Institute for Economic Affairs’ paper of 24 September 2018. None of the discussion, however, has dealt seriously with the fact that an FTA will require the introduction of border formalities on UK-EU trade and that these will both violate the commitment to the absence of a border in Ireland and create serious congestion at those ports dealing with UK-EU flows, which will increase trading costs and cut trade with the EU. (more…)

September 26th, 2018

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Photo of Emily Lydgate19 September 2018

Dr Emily Lydgate is a lecturer in Law at the University of Sussex and a fellow of the UK Trade Policy Observatory.

In its Chequers White Paper, the UK government has proposed that, in order to facilitate a frictionless border, it will operate a dual customs regime known as a Facilitated Customs Arrangement (‘FCA’). By replacing rules of origin checks at the EU-UK border with internal monitoring, the FCA requires firms to establish ‘robustly’ the destination of their products to ensure that correct duties have been applied, and then, if they wish, to seek rebates if they have been overcharged. Past UKTPO blogs have addressed logistical challenges and strategic downsides of this ‘Fantastically Complicated Alternative’ (see also Does the Chequers Agreement provide any steps to Brexit heaven?)

But would it be compatible with the rules of the World Trade Organization? The precise details of the FCA’s operation remain unclear. Barring a dispute, it’s not possible to settle the question definitively, but the FCA does prima facie pose a risk of WTO non-compliance. We presume that the UK government has undertaken some analysis of this, and that it covers (at least) the following issues. (more…)

September 19th, 2018

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9 July 2018

Dr Michael Gasiorek is Senior Lecturer in Economics at the University of Sussex and Managing Director of InterAnalysis. He is a Fellow of the UKTPO.

In good part, the answer depends on the extent to which this agreement moves on from the Government’s previous position, is feasible, is credible, and is acceptable to the EU. It also depends on whether it will be acceptable to the Conservative party, which the resignations of David Davis and Boris Johnson throw into serious doubt.

In this blog, I focus on one aspect of this –  the extent to which the “facilitated customs arrangement” (FCA), which is central to the agreement notionally reached at Chequers, is substantively different from the previous idea of a “New Customs Partnership” (NCP). (more…)

July 10th, 2018

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