UK-Japan Free Trade Agreement and Its Economic and Strategic Implications

The United Kingdom and Japan signed a trade agreement in October 2020. The deal is significant, because it was the first such agreement UK signed post Brexit as an ‘independent economic trading nation’ (UK has also finalized an FTA with Vietnam, which will be effective from Jan. 1, 2021 and signed one with Singapore recently). The UK–Japan Comprehensive Economic Partnership Agreement (CEPA) has gone beyond the pre-existing agreement with the European Union. The FTA will boost bilateral trade between the two countries by around $19 billion and also reshape post-Covid-19 economies of both countries, significantly concentrating on digital and data, financial services, food and drink, and creative industries.

This deal is a significant breakthrough for UK — which aims to secure trade deals with countries that cover 80% of UK’s trade by 2022. The Boris Johnson government also believes that it will send a strong message to Brexit critics, who had argued that an independent UK wouldn’t be able to do major trade deals.

Impact on UK

The CEPA aims to make 99% of British exports to Japan tariff-free, increasing trade between them by around $20 billion and also aims to remove British tariffs in a staged manner, which are expected to reach zero in 2026. Using the EU-Japan deal as a bench mark, CEPA goes beyond that, and explores areas of digital trade and data transfer enabling both sides to trumpet it as a cutting-edge, new-generation EPA. It is estimated, that the CEPA will boost the UK economy by only a mere 0.07%, but as mentioned earlier it has important strategic implications such as paving the way for UK’s entry into the CPTPP.

UK’s entry into the CPTPP

The CEPA is significant, not only because it is pivotal to UK’s efforts of build back better’/recovering post-Covid-19 but also because this trade agreement paves the way for UK’s entry into the Comprehensive Progressive Trans-Pacific Partnership (CPTPP), which covers 13% of the global economy and $147.4 billion (£110 billion) worth of trade.

International Trade Secretary, Liz Truss while commenting on the FTA with Japan said: “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.”

Japan has extended its support to UK’s entry into the CPTPP along with Vietnam. The Japanese PM, Yosihide Suga, in a pre-recorded video message delivered at the APEC (Asia-Pacific Economic Cooperation) CEO Dialogues, also referred to the expansion of CPTPP, alluding to the entry of UK (interestingly, even China has expressed interest in joining the CPTPP).

The FTA between UK and Japan also symbolises the start of a new partnership between Japan and UK post-Brexit, which will also have an impact on G7 considering their common goal of free trade especially when UK takes up the G7 presidency.

Broader message

Apart from the economic impact, this deal sends a signal to both the British people as well to Brussels. To the former, that the Johnson government is capable of striking such deals post-Brexit, and to the latter, that UK is a reliable trading partner for major economies like Japan. This fits well into UK’s larger scheme of things which does not only include economic ties with the Indo-Pacific, but also political and security ties.

Will UK’s FTAs and possible entry into CPTPP propel U.S. to join CPTPP?

It remains to be seen if the entry of UK into the CPTPP will propel the U.S. to think of joining the agreement. The U.S. had withdrawn from what was then referred to as the Trans Pacific Partnership (TPP) in 2017 (immediately after taking over as U.S. President Donald Trump signed an executive order to pull the U.S. out of the agreement). In the aftermath of the signing of Regional Comprehensive Economic Partnership (RCEP), U.S. President-elect Joe Biden had stated that: “…we have to make sure that the rest of the world and we get together and make sure there are certain right lines the Chinese understand.”

Biden also stated that the U.S. needed to work with other democracies to check China’s growing economic clout. Many viewed this as a possible indicator of the U.S. joining the CPTPP, though this will not be an easy task and there will be numerous impediments to the same.

With UK’s ‘Global Britain’ vision gaining traction with UK signing more trade deals, most recently with Singapore, the UK needs to have a clear direction in regards to the EU-UK relationship post-2021 negotiations to re-establish its position as an independent economic nation as well as a strategic partner. Its FTA with countries like Japan, Singapore and Vietnam are also important, not just in the context of strengthening trade ties with these countries but also the emphasis on UK playing an important role in Asia.

With Biden’s thrust on working more closely with democracies and checking Beijing’s economic influence, it is possible that the U.S. along with other democracies could work jointly to provide an alternative economic vision to that of Beijing. While many supporters of the Democrats too have become more insular in terms of their economic orientation, for checking China’s growing economic clout, a cohesive vision is important and the U.S. needs to take the lead.

The views and opinions expressed in this article are those of the authors.

Tridivesh Singh Maini is a New Delhi based Policy Analyst associated with OP Jindal Global University, Sonipat, India. 

Mahitha Lingala is a Hyderabad (India) based Freelance Policy Analyst.

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