A Japan-UK trade deal is more important than ever. Here are the key opportunities and tensions

Negotiations with the Japanese may be nowhere near as controversial as with the USA, but don't assume they'll be a walk in the park.

Outside of Europe, the country perhaps most put out by the UK’s decision to leave the EU is Japan. Japanese companies had invested in the UK on the promise that it would be a gateway into the EU’s single market, and Brexit was viewed as a betrayal of trust.

In the aftermath of the referendum, the Japanese took the unprecedented step of publicly urging the UK to maintain a highly integrated trade relationship between the EU and UK, advice the Johnson government has ignored.

With this in mind, today’s announcement that the UK and Japan are going to begin negotiations on a trade deal to replace the current EU-Japan agreement should be welcomed. After the US and EU, Japan is the third biggest investor in the UK and re-building bridges with the third biggest economy in the world should be of paramount importance.

But while the negotiations promise to be nowhere near as contentious as the UK’s trade talks with Trump’s America, this does not necessarily mean they will be without incident.

One of the reasons the Japanese decided against rolling over the existing EU agreement to the UK, and instead opted to engage in fresh negotiations, is the sector that plagues near all trade negotiations: agriculture.

Japan has been historically protective of its farmers, guarding them from outside competition. That was until recently, when it reduced its agricultural tariffs in trade deals with the EU, USA and the eleven countries of the so-called Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). It is now wary about opening up the sector further to the British, and will attempt to offer the UK as little as possible in the way of new market access.

It will also ask that the UK removes tariffs on car imports from day one (under the EU-Japan deal, car tariffs are instead gradually phased out over seven years). This should not be a big issue for the UK, but it comes with the inherent risk that Japanese car manufacturers then decide to shift their operations out of Britain, back to Japan, so as to export the final cars, tariff-free, to the UK directly.

The Japanese might also want to beef up provisions on investment protection, and push for the inclusion of often controversial investor-state dispute settlement arbitration panels, a process which allows foreign investors to bring claims against a host government in the event of perceived direct, or indirect, appropriation. They will also want to include a modern chapter on data, that guards against duties being placed on data flows, and the forced onshoring of data servers. The former could cause political problems for the UK as it was one of the main areas of contention in the failed EU-US trade talks, but the latter is ostensibly a UK objective also.

From a UK perspective, it will attempt to build upon the EU’s agreement with Japan and improve the deal for British exporters of services. However, there are limits to how far Japan can go, without also having to offer the same access to the EU due to provisions included in its deal with Europe. Yet, the possibility remains that the UK and Japan could do much more on the mutual recognition of professional qualifications. The UK could also much improve its offer on the temporary movement of services suppliers - think intra-corporate transferees and people travelling to deliver short-term contracts -where in the context of the EU’s deal with Japan the UK’s commitments were among the stingiest of all EU member states.

Japan will remain conscious of the UK’s negotiations with the EU, which remain more important to many of its companies than a UK-Japan trade agreement, but a deal with the UK is very much doable, and in the interest of both parties.

What with the fragmenting global trading system, trade war tariffs, the competing economic superpowers of the US, China and EU, and the increased disruption brought on by Covid-19, a close economic relationship between the UK and Japan is of greater importance than ever. And a free trade agreement between the two, if nothing else, provides a useful platform from which to build.

Sam Lowe is a senior research fellow at the Centre for European Reform, visiting research fellow at The Policy Institute, Kings College London and a co-founder of the UK Trade Forum.