Henry Newman is Director of Open Europe.
We should all welcome the news that Japan and the EU have reached a high-level outline agreement on a potential free trade deal. Why? Because, broadly speaking, the more economies can trade with each other, with lower tariffs, fewer barriers, and no quotas, the more prosperous we will be. Liberal free trade is in of itself a good thing.
But – shout some (particularly parti pris commentators determined to push a particular view opposing Brexit) – this must be bad news for Britain. No. Trade is not a zero-sum game. All can be winners.
The Japan proposal provides yet another example of a potential deep and comprehensive trade agreement of the very sort the UK itself will want to agree with the EU once we leave. The EU was already willing to sign up to a comprehensive free trade arrangement (FTA), with customs cooperation, with an economy right across the Atlantic: Canada. Surely, we should be able to agree a similar deal for the UK, if not one substantially deeper. Now the EU has taken an important step towards another such deal with an economy, even further away. How could the EU justify FTAs with Canada and Japan, but not with the UK? How would they explain this to those businesses which currently export to the UK from the continent or Ireland?
Depressingly, political analysis in the UK seems trapped in a Groundhog Day re-run of the Brexit Neverendum. Thursday’s leader of the Evening Standard returned to a familiar theme with somewhat inaccurate comments: “Today the EU reached agreement on a free trade deal with Japan, which won’t cover Britain when we leave”.
Firstly, the agreement is not finalised. We are yet to see the full details. Key issues are still not resolved – not least the dispute resolution mechanism. Secondly, it’s not necessarily correct that the deal (if it’s signed) won’t apply to the UK when we leave. The Government is seeking to ‘grandfather’ across the EU’s existing free trade deals, including the Canada deal CETA, just as Open Europe proposed in our report on leaving the Customs Union: Nothing to Declare. And even if the Japan deal is not yet locked down when we leave, it provides a model on which both the UK and Japan can build for a future trade deal. Thirdly, a Japanese government spokesman told an audience in Brussels that the trade deal was agreed on the basis that it was with all EU28 member countries. That suggests that Japan will be keen to extend the same liberal trade access to post-Brexit Britain as to the UK.
It’s obvious that the EU is determined to use JEEPA (the somewhat-bizarre name for the Japan-EU agreement) to bolster its image. That’s perfectly legitimate – though some may find it bizarre that Donald Tusk, the President of the European Council, seems to be trying to troll Theresa May. He tweeted that they had “concluded EU-Japan political and trade talks” and that this was evidence of “Global Europe”. This was widely interpreted as a dig at the Prime Minister’s Global Britain slogan.
To hammer the point home, Tusk used a press conference to say that in “the discussion about Brexit, we have heard statements claiming that it isn’t worth being in the European Union, as it is easier to do global trade outside of the EU. Today we have shown that this is not true”. Tusk is right to be sensitive. The EU is, through Brexit, losing its second biggest and (arguably) most innovative economy, as well as its loudest voice in favour of free markets and liberal trade. And although the EU may now have a high-level agreement with Japan, that has taken years, and it is still far from signing deals with the world’s two biggest economies.
Some will raise their eyebrows and question whether the ‘breakthrough’ in EU-Japan talks could relate to the EU’s determination to win a PR coup, both to counter its damaged image following Brexit, and to get one over Britain. Perhaps. But there are also broader dynamics at play. Japanese opinion has been disquieted by the advent of Donald Trump. The President’s withdrawal from an Asian trade agreement – the Trans-Pacific Partnership. JEEPA allows Shinzo Abe, Japan’s Prime Minister, another potential ribbon-cutting moment.
What will happen to Japanese investment in the UK, and particularly the car industry? The Japanese have been very vocal in outlining their concerns to Government, during the referendum and since. It seemed that they had received sufficient assurances. But there is inevitably uncertainty. The automobile industry is one of those most affected by Brexit – and specifically by the UK leaving the Customs Union. In particular there are concerns that car components will be subject to tariffs.
Again, JEEPA provides a helpful model as the agreement specifically notes that trade in car components will be liberalised. JEEPA also provides for the potential for liberal cumulation. This is somewhat technical, but essentially allows for goods to be considered as originating locally for customs purposes if they are from, or are transformed in, Japan or the EU. This sort of arrangement is exactly what the UK needs from its future FTA with the EU. To repeat the point, if Japan can have such an offer then why can’t the UK?
Within Government, there’s a battle waging. The Chancellor and Brexit Secretary both accept the Lancaster House position that the UK ought ultimately to leave the Customs Union. They disagree about timing. David Davis likes to quote a statistic that free trade arrangements boost trade by a quarter. Philip Hammond is a sceptic. The Treasury has challenged the Department for International Trade to ‘prove’ through economic modelling that new free trade deals will more than compensate for the UK leaving the Customs Union. This misses the point – not least because FTAs are only part of the picture.
The key point is that outside the Customs Union the UK will be able to determine its own overall trade policy. We will no longer be bound by the EU’s protectionist tariff structure and can lower duties on a host of goods, or take other steps towards trade liberalisation, as we see fit. We will be able to agree deeper free trade deals which play to our services strengths, and are designed to suit our needs, rather than a lowest common denominator fitted to the EU28. There will be costs to leaving the Customs Union, but there are significant benefits too. Ministers need to stop squabbling and get on with making preparations to do it.