The UK government announced a historic free trade deal with Japan, its first post-Brexit independent trade pact, tipped to boost trade between the two countries by an estimated £15.2 billion in the short term. The deal with Asia’s largest advanced economy officially took just over three months to conclude, although negotiations have been going on in the background for several years, and the full text of the agreement will not be available for scrutiny until October.
The main points of the deal seem to be a commitment to closer trade relations between Japan and the UK; some limited additional preferential treatment for UK goods exporters; reciprocal benefits for UK and Japanese service sectors including unrestricted digital trade and a framework for greater potential access for financial services; greater freedom of movement for workers; and a step towards possible UK accession to the Trans-Pacific Partnership.
According to the UK government, once implemented, the UK-Japan Comprehensive Economic Partnership Agreement will allow UK businesses to benefit from tariff-free trade on 99% of exports to Japan. The deal also promises to create more openings for those looking to expand into Japan, or potentially new market competition which all businesses should be aware of, whether they export or not. This raises questions about how differences in approaches to corporate governance in Japan and the UK, and the level playing field such governance aims to promote, will affect future trade between the two countries.
While Japan is estimated to account for just 2% of British trade, the deal is expected to enhance trade relations between the two countries and provides some security for British and Japanese businesses that their current trading conditions will continue. However, given that many Japanese businesses have traditionally used Britain as a hub to access the EU market and are keen for this continue unhindered through an EU-UK trade deal, there is still a risk that Japanese exporters will cool their enthusiasm for the UK if it fails to maintain enhanced trade relations with the EU.
EU-Japan Trade Agreement
One notable advance the agreement makes over the EU-Japan deal is in cumulation and rules of origin. Under the terms of the deal published so far, British exports to Japan of some products containing large amounts of EU or international parts will count as goods originating from the UK. The UK-Japan deal also allows the UK to apply for up to 70 geographical indications (GIs) on special products, up from the seven it has under the EU-Japan deal.
The deal contains some beneficial provisions for services, including a boost for “digital trade” through a ban on data localisation, allowing data to flow freely between the two countries – a benefit strongly angled for by Japan’s large tech companies. It also promises to widen market access to Japan for UK financial services firms, including new British fintech companies that have been growing rapidly in the UK, by streamlining the process of applying for licences to operate in Japan.
The deal with Japan is potentially a stepping-stone towards the UK acceding to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP), an 11-nation trade bloc (including Canada, Australia and Mexico).If achieved, this could open up significant trading opportunities for UK businesses to markets where they currently have relatively limited access. This is expected to be a complex, multi-year negotiation, however.
The Covid-19 pandemic has increased scrutiny on corporate governance in many jurisdictions, with pressure mounting on businesses to demonstrate high ethical standards and transparency throughout their business, supply chains and partnerships. This is something UK businesses and investors will need to bear in mind when evaluating opportunities in Japan, given the differences in corporate governance standards. For Japan’s part, as noted above, the attitude of Japanese exporters used to using the UK as a hub for accessing EU markets may be tested if the UK fails to secure a solid trade deal with the EU.
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At Valsen Fiduciaries Group, we are at your disposal to discuss how you and your organization can take advantage of the opportunities and manage the arising challenges in corporate governance as a result of the UK-Japan trade deal. Please contact us through [email protected] or +248 2 525 217