UK Japan Comprehensive Economic Partnership Agreement (CEPA)
This article was originally written in November 2020 for the University of Sheffield's Spotlight on East Asia series. There is an update at the end.
The recently signed UK Japan CEPA was the UK’s first post-Brexit trade agreement, which, according to the British Government website, will increase trade with Japan by an estimated £15.2 billion, deliver a £1.5 billion boost to the UK economy and increase UK workers’ wages by £800 million in the long run. The website also asserts that this agreement goes beyond the existing deal Japan already has with the EU. However, the Government’s spin may be mis-leading, especially since these calculations are based on a value-add for the UK relative to the outcome of a no-deal Brexit and do not factor in the losses incurred from leaving the EU Japan EPA. There is also evidence that many of the benefits for exporters have been deliberately exaggerated- a recent tweet by the Department for International Trade claimed that the deal would result in greatly reduced tariffs on soy sauce, whereas in reality, tariffs on soy sauce will stay the same-at 0%. A recent study conducted by the UK Trade Policy Observatory (UKTPO) at the University of Sussex has shown that only 10 products will have lower tariffs as a result of this deal, none of which have been sold to Japan recently.
Given that Japanese companies controlled the 2nd highest value of inward FDI in the UK on an ultimate basis in 2018, there have also been criticisms as to why this deal does not go further than the investment section of the EU Japan EPA by ensuring that Japanese investment into the UK is given more protection. This also seems short-sighted given the risk-averse nature of Japanese business and the concerns of the Japanese business community in the UK about changes in UK regulations and legislation and the constraints on free movement between the UK and the EU, which were also reflected in a survey I conducted with a group of Japanese companies at Baker McKenzie, when giving a presentation on the Cultural Background to Brexit in 2018.
Although it is too early to judge the long-term economic value of this hastily agreed trade deal, it is becoming clear that one of its main values to the British side is as a political point scoring, confidence-boosting Brexit-bonus. By over-exaggerating its relative benefits, they seem to have adopted the Japanese cultural concept of tatemae-’putting on a certain face to represent a situation that means something quite different’.
That said, it is understandable that the UK wishes to strike a deal with the world’s third largest economy, especially given the importance of Japanese companies to the UK economy and the precariousness of that going forward. The very real possibility of the UK/EU negotiations resulting in a no-deal Brexit, alongside the already damaging economic fallout of Covid 19, would cause great economic uncertainty and damage, at least in the short-term.
From this perspective, the UK does not look like a very attractive partner for Japan, a country that is very risk-averse in business and values long-term obligations, reliability, stability and trust. The Brexit vote left the Japanese business community feeling let down on the unwritten obligations they felt had been set in motion: unlimited access to the EU in return for locating many of their European headquarters in the UK. Japan was the first country to openly lobby the British government after the Brexit referendum urging them to avoid a no-deal Brexit, citing the devastating impact that it would have on the numerous Japanese UK-based companies, who are relying on open borders with the EU and who have made it very clear they may have to ‘re-assess their situation’ if a no-deal Brexit happens. Anyone who has worked with the Japanese knows that they need to have copious amounts of detail and contingency plans when sudden changes such as Brexit happen. The subsequent lack of clarity on an agreed EU/UK deal has unsurprisingly led to many Japanese companies moving parts of their business operations outside of the UK.
That probably explains why Japan pushed this UK deal through at an uncharacteristically fast pace. They needed to ensure continuity and some stability for the Japanese companies based in the UK or trading with the UK from Europe, who will lose access to the Japan EU EPA from January 2021.
This trade deal is also very symbolic for Japan, who have been keen to showcase their economic strength and openness in global trade. Part of Shinzo Abe’s Abenomics growth strategy was to promote and lead key trade-deal negotiations, including the aforementioned EU Japan EPA, which was the world’s biggest deal when it came into place in 2019. Abe was also keen to ‘take the lead’ on the TPP negotiations after the US pulled out. Japan has just signed The Regional Comprehensive Economic Partnership (RCEP), with 9 other Asian countries, which is now the world’s largest trading bloc. This UK Japan trade deal was certainly one of the legacies of Abenomics and their Best Alternative to a Negotiated Agreement (BATNA) if the UK leaves the EU without a deal. We will have to wait and see what it really means for the UK in these uncertain times.
Update in November 2022
Unfortunately, recent figures show that exports to Japan from the UK have actually dropped and not increased due to the benefits of the trade deal. Understandably, Covid and the war in Ukraine have increased uncertainty and Japan only recently opened up to physical visitors. However, Japan is certainly open for business and keen to form partnerships with non-Japanese companies, not least due to their dwindling domestic markets and Government policies that have substantially opened up the Japanese market for higher levels of inward FDI. Japanese SMEs have become much more global in recent years and larger Japanese businesses are also recording record high levels of overseas M&As and are much more open to partnerships-this will certainly benefit foreign companies looking for these opportunities.
I have just returned from giving a presentation as an expert for the EU Japan Organisation for Industrial Cooperation to Belgian companies who are going on the biggest ever trade mission to Japan in a few week’s time so there is certainly appetite for working with non-Japanese companies. Although many of the Belgian companies were benefitting from the EU Japan EPA, there is no reason why UK businesses cannot access the Japanese market too. The key criteria is that they understand the Japanese market and its suitability for their product and understand how to communicate effectively with the Japanese to enjoy sustainable business there.
Sarah Parsons is the MD of EWI and an expert for the EU Japan Centre for Industrial Cooperation on Business Communications with Japan. She has also presented for the Department for International Trade to support SMEs on their understanding of Japanese Business Communications. EWI have supported many Western businesses understand and access the Japanese market. We specialise in making sure you really understand the Japanese market and how they communicate in business so you can enjoy sustainable activities there and not just meet a partner with no idea how to nurture this relationship long-term. See our Solutions for businesses wanting to work with Japan.