Why the EU-Japan trade deal matters, not least for Brexiting Britain

In Blog by Philippe Legrain0 Comments

By Hosuk Lee-Makiyama

Free traders haven’t had much good news lately. So far this year, we’ve seen President Donald Trump withdraw the US from the Trans-Pacific Partnership (TPP), start to renegotiate the North American Free-Trade Agreement (NAFTA) and threaten trade wars with Germany and China. Meanwhile, Europe’s trade policy has been mired in crisis following the near-failed ratification of its Comprehensive Economic and Trade Agreement (CETA) with Canada and legal wrangling over its Singapore free-trade agreement (FTA). Then of course, there’s the divine comedy of Brexit.

Yet the announcement last week, just before the G20 summit in Hamburg, that the EU and Japan have reached a political agreement on their FTA is a welcome glimpse of hope. A trade deal with Japan, the world’s third-largest national economy, is the largest one that the EU could pursue, with the potential to provide similar gains as one with the US or China. It involves a near-complete removal of import tariffs and simplified rules of origin and will create the world’s largest free-trade area, bigger than NAFTA. That’s great news for Europeans, less so for Brexiting Brits.

At its heart is a deal dubbed “cheese for cars”: European farmers and food producers will gain good (but not always unlimited) market access in Japan for many of their products, while Japanese manufacturers will be able to export car parts mostly used by car factories in the EU duty-free. Japan barely exports any finished cars to the EU; two-thirds of the Toyotas, Nissans and other cars sold in the EU by Japanese brands are made in European factories by local workers – and the tariff cuts on car parts will slash their costs.

Now that politicians have reached broad agreement on the deal, mandarins still need to fill in the gaps. Unlike some authors who have no prior expertise on EU FTAs (and on this one in particular), I believe that negotiating the remaining details could happen within a year, and that the EU could start applying the agreement provisionally in 2019. For the UK, this timing is uncannily close to the deadline of the Article 50 negotiations. The UK may be out of the EU by the time the Japan agreement comes into force, or soon after.

Theresa May’s government has never touted Japan as a top priority for its post-Brexit trade deals, preferring to talk up the prospect of trade deals with Britain’s former colonies. Yet Japan’s economy is bigger than those of Australia, Canada, New Zealand and Singapore combined. Normally, such hard numbers would matter more than imperial nostalgia. But these are not normal times.

Indeed, if Britain leaves the single market and the customs union, it will be hit several times over. Japanese car plants in Britain, such as Nissan’s in Sunderland, will lose their unimpeded access to the EU single market (which accounts for 80% of their sales). Their costs will be higher than equivalent factories in the EU, which will be able to import car parts from Japan duty-free. And British exporters will have worse access to Japanese markets than EU ones, and indeed worse access to EU markets than Japanese ones!

Unless the UK stays in the single market and customs union and can immediately replicate the EU-Japan agreement, this could be the nail in the coffin for the UK as a base for Japanese investments in cars, energy and infrastructure equipment. Most Japanese car companies have alternative plants in France, the Czech Republic, Poland, Spain and Turkey – all covered by the new trade agreement, and where they will be able to ship components and move staff without hassle.

At last year’s G-20 meeting, Japan expressed (in a very public manner) that it felt entitled to answers about what Brexit would entail for its investments in the UK. A year later, the British government still cannot provide them.