Korea ‘Continuity Brexit’ model may work in Japan

As the United Kingdom urgently seeks a free trade deal with Japan, the best model for it may lie in Japan’s neighborhood rival – South Korea.

The UK formally exited the European Union – the long-awaited “Brexit” – with a whimper rather than a bang on January 31. In fact, the UK remains inside the EU’s single market and customs union. This “transition period” ends on December 31.

Heavy lifting lies ahead. With a potential “no-deal Brexit” still hovering over the table, negotiations on the terms of the UK’s trade Brexit commence in March. They are likely to be vexed.

In the meantime – and before the terms of the UK’s future economic relationship with the EU are set in stone – London is seeking to kick-start Free Trade Agreements (FTA) negotiations with multiple countries and blocs. Two are with Asian powerhouses Japan and South Korea – but London’s progress with the latter outstrips that with the former.

London looks far

British Prime Minister Boris Johnson has consistently stated that one benefit of Brexit is the freeing of the UK to independently negotiate trade terms with countries worldwide. Speaking in London on February 3, Johnson stated that the UK was prioritizing FTAs with Australia, Japan, New Zealand and the United States, as well as with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPATPP. The latter is a multilateral FTA that covers the economies of Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

Prior to Brexit, the UK did not negotiate FTAs: All were handled by the EU’s massive bureaucratic machine. Now that the UK has cast itself adrift, the country has been forced to beef up negotiating resources, fast.

British bureaucrats conducting trade negotiations in and for the EU have been recalled to London’s Department of International Trade, established in 2016, and new recruits have been added, explained Daniel Carruthers, trade policy counsellor at the British Embassy in Seoul. These include persons with negotiating experience with multilateral organizations, specialist lawyers, analysts, and graduates with trade law and policy majors.

Global heads have also been hunted. “We have brought in people with overseas experience working on trade negotiations with other governments, including New Zealand and Australia,” Carruthers said. “One of the DIT senior director generals is a former trade negotiator for the New Zealand  government.”

There are now 4,500 people in DIT; 1,400 are assigned to 114 countries. The fruits of DIT’s labors are already apparent.

Last August, in an impressive feat of pragmatism, London and Seoul jointly agreed to utilize the broad terms of the existing EU-Korea FTA – which entered into force in 2015 – as the template for a bilateral Korea-UK FTA. This “Continuity FTA” will take effect immediately when the UK leaves the single market at year’s end.

It is not just Korea. The UK has concluded and signed 20  trade-continuity agreements with 48 countries to date, Carruthers said.

However, no continuity agreement exists between London and Tokyo, even though an EU-Japan free trade deal, the Economic Partnership Agreement (EPA), entered into force last year.

Vague outcome

Last weekend, UK Trade Secretary Dominic Raab arrived in Tokyo from a previous stop in Australia to discuss a bilateral FTA. The stakes are high: In 2018, the two countries’ bilateral trade was worth £29.5 billion ($38.4 billion).

Raab appears to be in a rush. In an interview with Reuters he said, “The aspiration will be to do it by the end of the year. We can certainly begin [talks] earlier than spring.”

According to a joint statement released after a meeting between Raab and his Japanese opposite number Toshimitsu Motegi, “In line with our commitment to free trade, we will work quickly to make the new partnership as ambitious, high standard and mutually beneficial as the Japan-EU EPA.”

Motegi confirmed preparations are under way. ‘We agreed that we will start and conclude the negotiations as early as possible,” he said, Reuters reported.

However, Raab’s timetable looks highly ambitious given that FTAs typically take years to conclude. Example? Talks on the EPA started in 2013; it was signed in 2018; and it entered force into in 2019.

Further complicating Raab’s task, the outline of the UK’s future trade relationship with the EU is still up in the air.

In his comments, Motegi did not offer a concrete timetable. And while it is early days – and Raab and his team subsequently traveled to Malaysia and Singapore – there has been radio silence on follow-up since Raab’s departure.

A Japanese Ministry of Finance official told an Asia Times source in Tokyo that he knew “nothing on that at the moment,” while staffers of the Ministry of Foreign Affairs said they are currently preoccupied with coronavirus fallout and US relations. Meanwhile, the Japanese media is silent on the matter – “oddly so,” the source said.

“My gut feeling is that Japan wants to see what happens with the Brexit deal before committing,” the source stated.

Stumbling blocks

Prime Minister Shinzo Abe has shifted Japan’s customary trade stance. Once a bastion of protectionism, Japan Inc has changed course, and is far from reticent in signing FTAs: It has 61. According to the Foreign Ministry, Japan has current agreements with ASEAN (10 nations), Australia, Brunei, Chile, the EU (27 nations) India, Indonesia, Malaysia, Mexico, Mongolia, Peru Philippines, Singapore, Switzerland,Thailand and the CPATPP (11 countries).

One sore spot in Japan-UK negotiations may be auto tariffs – a critical issue for Japan, which has deep concerns about US tariffs and may lean on the UK to slice or eliminate them. The inner workings of the dispute-settlement mechanism that underwrites the deal are another potential stumbling block. Moreover, according to Reuters, Motegi requested Raab lift EU import restrictions on Japanese foodstuffs imposed after the Fukushima nuclear incident in 2011.

And there may be lingering ill will.

While Japan and the UK enjoy cordial cultural, diplomatic and economic relations, Abe has been uncharacteristically blunt on Brexit. “We truly hope that a no-deal Brexit will be avoided and, in fact, that is the wish of the whole world,” he told then-Prime Minister Teresa May in 2019. Yet a no-deal Brexit is a card Johnson continues to flourish.

For Japan, the issues raised by Brexit extend beyond trade to investment.

Brexit potentially means that Japanese investors in the British Isles, such as carmaker Nissan, will no longer be able to use them as a customs-free bridgehead into the EU – the intention of many when they set up shop in the UK. Nor will Japanese plants in the EU necessarily be able to freely export in the opposite direction, potentially impacting supply chains.

Tokyo’s Ministry of Foreign Affairs has a 15-page document on its website outlining Brexit concerns.

The document notes that Japanese businesses operating in Europe have created  440,000 jobs and “… a considerable number of these firms are concentrated in the UK. Nearly half of Japanese direct investment intended for the EU in 2015 flowed to the UK….In light of the fact that a number of Japanese businesses, invited by the government in some cases, have invested actively to the UK, which was seen to be a gateway to Europe, and have established value-chains across Europe, we strongly request that the UK will consider this fact seriously and respond in a responsible manner to minimize any harmful effects on these businesses.”

The MOFA statement contains three-and-a-half pages of requests to the UK – but only half a page of requests to the EU.

Since the Raab-Motegi talks, the DIT has posted nothing on their outcome; the British Embassy and British Chamber of Commerce in Tokyo were unable to offer Asia Times any further information.

However, sources in Seoul were more forthcoming.

Korea model

G11 Korea does not boast the same global heft as G3 Japan, but is a trade-reliant economy, manufacturing powerhouse and home to major global brands. Korea-UK annual trade was £12.8 billion ($16.6 billion) in the four quarters up to the end of Q3 2019.

Seoul is one of the world’s nimblest players when it comes to signing FTAs:

South Korea has free trade agreements with 58 nations in toto. These include with trade blocs ASEAN (10 nations) EFTA, (four nations)  and the EU (27 nations); with G1 and G2 economies the US and China; and a range of countries including Australia, Canada, Chile, Colombia, India,  New Zealand, Panama, Pakistan, Peru, Singapore, Turkey and Vietnam.

And Seoul is not finished yet: It plans to sign agreements with 12 more countries by 2022, granting South Korean exporters preferential access to countries that, combined, account for 90% of global GDP, Trade Minister Yoo Myung-hee said in November.

London and Seoul both moved swiftly after Brexit became a reality. In 2016, the year of the referendum, the capitals agreed to form a Trade Working Group (TWG) to formalize  discussions on a “Continuity FTA.” The TWG was established in 2017.

After “intensive and frequent” discussions, an agreement was signed in August 2019 in London, Carruthers of the British Embassy in Seoul said. “This was the first bilateral Continuity FTA in Asia.”

Though based on the framework of the extant Korea-EU FTA, there are some changes, notably in tariff rate quotas and rules of origin provisions, Carruthers said.

The agreement offers predictability for business in the near future.

“What we have now is fit for purpose: It offers certainty to British and Korean companies that we have an agreement that can enter into force at the end of the transition period,” Carruthers said. “We need to be alert to risks as well as opportunities, but we are in a good place.”

British business representatives are not quite as bullish.

Policy Director of the British Chamber of Commerce in Korea Lee Eun-ha told Asia Times it was a “skeleton FTA:” The text of the Continuity FTA is considerably slimmer than the original EU-South Korean FTA. The chamber has distributed a 17-page document (in English and Korean) detailing the differences between the two agreements.

Even so, both Lee and Sean Blakely, the CEO of the chamber, agree that the Continuity FTA delivers important breathing room.

But that will not last indefinitely. London and Seoul have agreed that the Continuity FTA will be subject to renegotiations – set to start within two years of December 31 and to conclude within four years. The end result will be a bespoke bilateral FTA.

And with Britain’s economic exit from the EU having been delayed, Korean investors are suffering headaches Blakely said, citing meetings with his local colleagues: Like their Japanese counterparts, they cannot predict the state of duties across the English Channel after December 31.