Brexit: a dose of reality?

05/09/2016

The intervention takes the form of a 15-page message to the United Kingdom and the European Union, representing the output of the so-called "Hagiuda Task Force", named after its chairman, Koichi Hagiuda, a Deputy Chief Cabinet Secretary (a ministerial post).

The task force was set up after the EU referendum on 23 June to examine the Japanese government's response to Brexit, pulling together relevant ministries and agencies for that purpose.

In the one-page summary, it tells us that: "Japan shares basic values and enjoys strong partnerships with the United Kingdom (UK) and the European Union (EU) in various fields including politics, the economy and security". It adds that: "We expect to continue cooperating and collaborating closely for international peace, stability and prosperity".

In a somewhat tendentious statement, given Japan's less than stellar record in opening its own markets to international trade, it then declares: "It is in the interests of the world including Asia that an open Europe be upheld. Japan will continue to share with the UK and the EU the responsibility to lead the free trade system".

In this regard, the Japanese say that they will be sending a "strong message" by reaching agreement in principle on the Japan-EU EPA (Economic Partnership Agreement) within this year.

These talks were in fact kicked off in May 2011 at the 20th Japan-EU Summit, and are now in their 16th round. If there is an agreement in principle this year, the talks will already have taken five years, and there will still be many years to go before a deal is finalised.

Notwithstanding this, the Japanese want to tell us that, "uncertainty is a major concern for an economy", and they thus hope that "predictability is secured" whereby all stakeholders, not just the negotiating parties, have a clear idea of the post-Brexit landscape.

For country, therefore, which itself has been unable to conclude a deal with the EU over half a decade of talks, it wants Brexit negotiations to be conducted through an "uninterrupted and transparent process". Furthermore, it wants a provisional period and, if there need to be institutional changes, the granting of time for the transition and publicising of such changes.

Given that there are a "considerable number of Japanese businesses operating in the UK", this is nevertheless fair enough. And to safeguard their interests, the Japanese Government has conveyed a "variety of requests" made by these businesses in relation to Brexit.

In brief, they are asking for the maintenance of trade in goods with no burdens of customs duties and procedures; unfettered investment; maintenance of an environment in which services and financial transactions across Europe can be provided and carried out smoothly; and harmonised regulations and standards between the UK and the EU.

A country which itself has a notoriously restrictive immigration policy also wants access to workforces with the necessary skills, in the rest of the EU.

With that comes the iron fist in the silken glove. The Government of Japan "trusts" that the UK and the EU, by heeding such requests to the fullest extent and responding to them in a cooperative manner, will maintain the current business environment or alleviate the impacts of any radical changes, so as to remain an attractive destination for doing business.

This has been widely interpreted as a none-too-subtle threat that, unless these points are conceded, Japanese firms will pull out of the UK and start relocating in other EU countries. This becomes explicit in the text, where reference is made to financial services and the need to relocate operations from the UK to existing establishments in the EU.

To conclude, the Japanese tell us that they are willing to cooperate so that the process of negotiations for the UK's withdrawal would "move forward smoothly without causing major disturbance to the world economy".

When it comes to detail, one of the things that stands out is a concern to maintain the current location of the European Medicines Agency (EMA) and the certification system for medicines between the UK and the EU.

This is something we raised last month and is one of the many vital but unresolved issues which are going to have to be dealt-with in the Brexit talks.

Rightly, Japanese companies are concerned about the relocation of EU agencies currently located within the UK. Many Japanese pharmaceutical companies are operating in London, due to the EMA's location in London. If the EMA were to transfer to other EU Member States, the appeal of London as an environment for the development of pharmaceuticals would be lost.

This could possibly lead to a shift in the flow of R&D funds and personnel to Continental Europe. And it is also another trigger that could force Japanese companies to reconsider their business activities.

Another thing mentioned by the Japanese is the need to maintain the framework of mutual recognition on Authorised Economic Operators (AEOs). This is something absolutely vital to British interests as well, but something we would lose if we dropped into the WTO option or failed to conclude a comprehensive trade agreement.

Altogether, the Japanese Government is pushing us in the direction of the so-called "soft Brexit", with something close to the EEA option (with or without Efta membership).

It is also something to which Theresa May seems sympathetic, apparently ruling out a "points-based immigration system", recently advocated by Foreign Secretary Johnson in a letter to the Prime minister.

Johnson has also "privately warned" Theresa May that she must reject calls for Britain to stay in the single market and veto any Brexit deal that requires the country to pay into EU budgets. On the matter of the Single Market, Johnson is also joined by Lord Lawson, who is still banging the drum about accepting that we should be outside it.

Against that, though, we have the Japanese Government – and doubtless others – telling us that firms have invested actively to the UK, which was seen to be a gateway to Europe, and have established value-chains across Europe.

This Government "strongly requests" that the UK will "consider this fact seriously and respond in a responsible manner to minimise any harmful effects on these businesses", immediately disclosing measures to eliminate any harmful effects on businesses already investing in the UK and the EU.

As to the UK reaction, according to the Japan Times, an unnnamed British official said such reports are welcome. "It's not unhelpful to also have some of our trading partners setting out some of the issues they are looking at and the types of concerns or issues that they would want to be addressed", he said. "This is all more information that helps to inform our thinking on what is the right deal for Britain".

Certainly, this is a report that Mrs May can hardly ignore, and in the coming months she will most likely see many more like it. The madness of Redwood and his friends may soon be nothing more than a very short footnote in a very long history of how we finally extracted ourselves from the EU.