The Japan-UK Comprehensive Economic Partnership Agreement (CEPA) -running to stand still or stepping stone?
The UK took a first step in its post-Brexit Free Trade Agreement (FTA) agenda by signing the UK-Japan Comprehensive Economic Partnership Agreement (CEPA) on 23rd October. The UK government immediately proclaimed the deal ‘a historic Free Trade Agreement’. Although a detailed analysis will have to be carried based on the newly released legal text, we can already make a first assessment, and draw lessons for future FTA negotiations.
A big political boost for the UK
The main value of the UK-Japan CEPA appears to be political, especially for the UK. Initially, the UK’s top priority post-Brexit was immediately striking an FTA with the US. But prospects for a speedy deal prospect rapidly diminished due to uncertainty from the upcoming US presidential election and British public concerns on safety standards of US agricultural products and on NHS. Thus, the UK was eager to demonstrate its capacity to strike a trade deal as an ‘independent trading nation’. The FTA with Japan, which is the world’s third largest economy and the UK’s 4th largest non-EU export market,[1] perfectly fits the UK’s domestic political narrative.
On the Japanese side, there was no domestic political pressure as such. Japan has concluded 17 FTAs that cover major trading partners, including the EU (EU-Japan Economic Partnership Agreement) and the Asia Pacific countries (Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)). Domestically there is a high expectation on concluding the Regional Comprehensive Economic Partnership (RCEP) which includes China.[2] However, there was a strategic foreign diplomacy motive to be the first country to a sign a FTA with UK post-Brexit. By doing so, Japan wanted to cement a strong foundation upon which to develop its strategic alliance with the UK for trade and foreign relations more broadly.
Limited economic value on top of ‘continuity’
By contrast to its political significance, the economic value of the FTA mostly lies in ‘continuity’. It allows Japan and the UK to achieve a smooth transition from the EU-Japan Economic Partnership Agreement (EPA) to the Japan-UK FTA on 1st January 2021. Amid increasing risk of no-deal on the EU-UK future relations, avoiding business disruption between Japan and the UK was paramount for Japanese and British business, especially for Japanese companies doing business in Europe.
The Agreement seems to create only limited economic value on top of ‘continuity’ for two reasons. First, the Japan-UK FTA on its own cannot reproduce the EU-Japan-UK trilateral relationship that existed when the UK was part of the EU’s single market and common commercial policy, and won which Japanese and UK firms’ engaged in Global Value Chains (GVCs) and supply chains in Europe were heavily reliant. Recalling that the top concerns for Japanese business doing business in Europe are regulatory changes, tariffs and the end of free movement of people between the EU and the UK (as a consequence of the UK’s leaving the EU customs union and single market), the end of frictionless trade between the EU and the UK does seriously affect business even if the EU and the UK successfully reach an FTA.
Second, the Japanese and UK Governments had to downgrade the scope and the degree of ambitions in order to conclude the Agreement within the limited negotiating timeframe (even though based on the EU-Japan EPA). Although a detailed examination of the Agreement, which has just become publicly available, is not yet done, its value-added relative to the EU-Japan EPA looks limited to some finely narrowed-down improvements in rules (e.g. e-commerce, rules of origin, and financial services) and the UK’s immediate reductions of tariffs on some car and rail manufacturing inputs that were scheduled to be phased out in 4 to13 years in the EU-Japan EPA. The Agreement thus cannot be considered to ‘go far beyond than the EU-Japan EPA’ as claimed by the UK government.
Domestic policy-discussions towards CPTPP accession negotiations are necessary
Given the fact that Japan and UK markets are already de-facto open both in terms of trade and investment and that the high-degree of market liberalisation commitments were made in the EU-Japan EPA, if the two countries wanted, regulatory cooperation could have played a pivotal role. And although the UK-Japan CEPA can be considered as a political stepping stone for the UK’s accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), substantial shortfalls would need to be addressed.
In this respect, a significant short-coming of the Japan-UK FTA is that it failed to include a comprehensive investment chapter which encompasses investment protection and dispute resolution like the one in CPTPP. This is mainly because the UK still needs to develop a comprehensive investment strategy. It is unclear what kind of foreign direct investment (FDI) policy framework the UK would like to design Post-Brexit and the role that FTAs might play in achieving investment-related policy objectives.
Investment is indeed at the heart of the UK-Japan bilateral relationship. The UK is the second largest FDI destination for Japan accounting for $171.9 billion of FDI stock in 2019 and Japan is the largest investor of the world (14%, 2018). Amid double uncertainty from Covid-19 and Brexit, retaining Japanese investment is economically crucial for the UK. The FTA is thus a missed opportunity for the UK to show a strong commitment to Japanese investment.
For accession to the CPTPP, the UK would need to review its current investment relationship and investment legal framework with CPTPP members and establish its position on a dispute resolution mechanism, notably on Investor-State Dispute Settlement (ISDS).
The rules on e-commerce are another important issue. The e-commerce rules in the UK-Japan FTA may be considered as one step towards the CPTPP – by including some new key provisions, such as the free flow of data and prohibition of imposing data localisation requirements – but it is not a comprehensive stand-alone e-commerce chapter like the one in the CPTPP. Moreover, there is a legal and conceptual divide between the EU’s approach to digital trade governance, that values safeguarding data privacy and security, and the Asia Pacific approach, which is more geared to data flow liberalisation. Whether the UK would make a policy shift from the EU style regulatory governance to the Asia-Pacific style regulatory governance would become an issue. Like investment, the UK needs substantial policy-discussion on its post-Brexit digital trade policy and digital rule-making using FTAs. The National Data Strategy launched in September 2020 appears to be consistent with the Asia-Pacific approach to data governance.
The remaining agendas in investment and e-commerce are illustrative of the next steps the UK need to take. But these substantive policy-discussion has to take place first at the UK domestic level before it can negotiate deals with its trade partners.
In short, the Japan-UK FTA has a certain degree of political value but its economic value is limited by the narrow scope of what could be agreed in the time available. As the UK looks to future CPTPP accession, substantial policy-discussions have to take place inside the UK, to enable this to happen.
[1] ONS (2020). UK total trade: all countries, non-seasonally adjusted. UK’s goods exports to Japan account for 1.9% (£7,262 million in 2019) of its total goods exports and services exports accounts for 1.6% (£7,987 million in 2019) of its total services exports.
[2] RCEP covers 15 countries: ASEAN plus Australia, China, Japan, New Zealand, and South Korea. These countries aim to conclude the negotiation by the end of 2020.
Dr. Minako MORITA-JAEGER, is a Fellow of UK Trade Policy Observatory, University of Sussex