UK and Japan sign historic free trade agreement

The UK-Japan Comprehensive Economic Partnership Agreement (CEPA) will be signed by International Trade Secretary Liz Truss and Japan’s Foreign Minister Motegi Toshimitsu in Tokyo later today.

The deal is the first agreement that the UK has secured that goes beyond the existing EU deal, with enhancements in areas such as digital and data, financial services, food and drink, and creative industries.

It brings together two of the world’s most technologically advanced nations, placing the UK at the forefront of shaping new global standards on digital trade.

Benefits include:

  • Cutting-edge digital & data provisions that go far beyond the EU-Japan deal, including enabling free flow of data, a commitment to uphold the principles of net neutrality and a ban on unjustified data localisation that will prevent British businesses from having the extra cost of setting up servers in Japan.
  • Supporting UK car and rail manufacturing jobs at major investors in the UK like Nissan and Hitachi through reduced tariffs on parts coming from Japan, streamlined regulatory procedures and greater legal certainty for their operations.
  • Strong tariff reductions on key agricultural products like pork, beef and salmon will benefit farmers and food exporters.
  • A boost for UK brands with protections for more iconic UK agricultural products, from just seven under the terms of the EU-Japan deal to potentially over 70, including English sparkling wine, Scotch beef and Welsh lamb.
  • British consumers to benefit from cheaper, high-quality Japanese goods – from udon noodles to Bluefin tuna and Kobe beef.

This deal could boost trade between the UK and Japan by over £15bn and drive economic growth in the long run, benefiting all parts of the country and Scotland, London and the East Midlands in particular. The signing of this FTA, and its subsequent ratification, will not only strengthen the UK economy but also help us to build back better from Covid-19.

Today’s signing of the agreement also signals Japan’s strong commitment to supporting the UK’s accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), one of the world’s biggest free trade areas, covering 13% of the global economy in 2018 and more than £110bn of trade in 2019.

International Trade Secretary, Liz Truss said: “Today is a landmark moment for Britain. It shows what we can do as an independent trading nation, as we secure modern and bespoke provisions in areas like tech and services that are critical to the future of our country and the reshaping of our economy.

“Trade is a powerful way to deliver the things people really care about. At its heart, this deal is about creating opportunity and prosperity for all parts of our United Kingdom and driving the economic growth we need to overcome the challenges of coronavirus.

“The agreement also has a much wider strategic significance. It opens a clear pathway to membership of the Comprehensive Trans-Pacific Partnership – which will open new opportunities for British business and boost our economic security – and strengthens ties with a like-minded democracy, key ally and major investor in Britain.”

Industry reaction

Dr Minako Morita-Jaeger, International Trade Policy Consultant and Fellow of the UK Trade Policy Observatory at the University of Sussex, said: “While the Agreement has a certain political significance, its economic impact is likely to be very small because it contains very limited improvements relative to the EU-Japan Economic Partnership Agreement (EPA).

“Concluding its first FTA as an ‘independent’ nation and signing an agreement with the world’s third-largest economy and the UK’s fourth-largest non-EU export market will alleviate some political pressure on the UK Government.

“While the UK Government has presented the Agreement as going far beyond the EU-Japan EPA, the Japanese Government’s evaluation is more downbeat and highlights the importance of maintaining market access at the EU-Japan EPA level with some improved rules for example with regard to e-commerce. The reality is that in order to conclude the deal within an unprecedentedly short negotiating time frame of two-three months, both governments had to downgrade the scope and the level of ambitions.

“The economic impacts of the Agreement look very small due to its minimum value-added. According to the Department for International Trade (DIT), the long-term economic gains from the Japan-UK FTA relative to no-deal account for £1.5 billion in the case of the UK (0.07% increase in UK’s GDP) and equally £1.5 billion (0.04 % increase in Japan’s GDP) in the case of Japan. Even these estimates probably exaggerate the gains, as the UK is currently already enjoying benefits of the EU-Japan EPA since February 2019.

“A major shortcoming in the agreement is the failure to build on the investment section of the EU-Japan EPA, which covers only investment liberalisation, which seems to reflect a lack of UK strategic policy-making. Japan is the largest investor abroad in the world, accounting for 14% of the world total in 2018, and the UK is the second-largest FDI destination for Japan accounting for $171.9 billion of FDI stock in 2019 following the US ($533.3 billion).

“Given that Japanese FDI has been playing an important role in UK economy and retaining its existing investment in post-Brexit is crucial, the UK Government should have shown a strong commitment to Japanese investment by including a comprehensive investment chapter encompassing investment protection and dispute settlement.

“Going forward, this will be an important lesson for the UK for future FTA negotiations. The UK Government needs to strategically analyse investment relations with its FTA partners, especially from the inward FDI perspective. The importance of this is heightened amid the double economic uncertainty from Covid-19 and Brexit. Enhancing investment policy cooperation through investment liberalisation, protection and dispute resolution mechanism is one way in which the gains from UK FTAs could be higher than the currently very small projected gains.”

Dame Carolyn Fairbairn, CBI Director-General, said: “The signing of the UK’s first independent trade agreement is a milestone for our economy and will be welcomed by businesses in many sectors. This deal has the potential to support jobs across the country through lifting British farming exports and supporting our manufacturing and services sectors. Consumers will also benefit through greater choice. Ultimately, trade is a powerful lever of economic growth. The CBI and its members will now work with government to take full advantage of the opportunities and ensure the benefits are felt in all parts of the UK.”