Brexit: a deal we can do without

29/10/2020

Since the signing of the UK-Japan trade deal almost a week ago, I've been keeping half an eye out for a decent evaluation of it, ever since it became news on 11 September.

Although hailed as a breakthrough for the UK, as the first major post-Brexit trade deal, and claimed as an "historic moment" by International Trade Secretary Liz Truss, we've not actually seen much analysis in the UK media and, of the recent offerings, one of the best is from the Chinese news agency Xinhua, copied out in journals such as the Khmer Times.

This tells us that the deal "contains more strategic significance than economic meaning", mainly to the benefit of Japan which has further advanced its long-term international economic strategy, expanded its network of economic and trade partners around the world, especially in Europe, and strengthened its ties with European countries in terms of economic and trade rules.

For the UK, the payoff is largely symbolic, the speed of the negotiations with Japan demonstrated its ability to negotiate independently after Brexit, amounting to a propaganda coup to keep the faithful happy as the EU talks stall.

What should not escape attention though is that the deal is very small beer (or saki). Japan is currently only the 11th largest export market for the UK, with Japanese exports to Britain in 2019 standing about 1.5132 trillion yen ($14.44 billion), while British exports to Japan amounted to 887.5 billion yen ($8.47 billion).

In terms of trade volume, therefore, the agreement is not that significant and the economic benefits are expected to be relatively limited. By comparison, UK exports to Ireland over the same period were $49.7 billion. One Ireland, effectively, is worth nearly six Japans, more so as we have a substantial surplus.

This is especially relevant in view of the recent report in the Financial Times, which has Labour challenging Liz Truss over the benefits to UK of the deal, citing a government study which indicates that Japanese exporters will be main beneficiaries.

Truss is being asked by Emily Thornberry, shadow trade secretary, to explain why her deal with Tokyo appears to massively benefit Japanese exporters when compared with much lower increased UK exports to Japan. This is after a government impact assessment indicated that of the £15.66 billion projected boost to bilateral trade - compared with no trade deal - 83 percent would go to Japanese exporters.

At best, the deal will boost UK gross domestic product by just 0.07 percent, a fraction of the trade that could be lost with the EU when the UK has to contend with what the FT says are "new trade barriers … erected on 1 January when Britain leaves the customs union and single market".

As an aside, these are not "new" trade barriers. Simply, as I pointed out three years ago, with the UK moving outside the "walled city", it gets caught by the pre-existing barriers which apply to third countries.

This does not gainsay the point, though, that the Japan deal will do very little to offset the loss of business from EU Member States and, if there are more like it, we will be in serious trouble.

Thus, Thornberry has written to Truss looking for an explanation of why the deal appears even more weighted towards Japanese exporters than it was when the government produced an initial "scoping study" in May.

"For every extra million pounds in exports that British businesses are projected to gain from this agreement, Japanese businesses will gain £5 million, and that gap in the projected benefits has increased by a quarter from May's scoping study to last week's impact assessment",” Thornberry says in the letter.

Truss, and her team, on the other hand, argue that Japanese manufacturing was always going to benefit from a trade deal, while the British government's own models underestimated the benefits to the UK's "strong" services sector.

The imbalance, therefore, in part, reflects poor economic modelling, with one aide to Truss suggesting that Prof. Tony Venables of the University of Oxford would update the model "to reflect the modern economy". Nevertheless, Truss has so far failed to produce economic modelling showing how the UK-Japan deal is superior to the EU-Japan deal it replaces.

Where the current deal apparently scores over the very similar EU-Japan deal – on which the UK currently relies – is in the inclusion of digital trade, although a review of the actual agreement suggests that the areas of agreement are thin, and do not point to any immediate gains for the UK.

There is also the possibility that signing of the FTA could help ease the way to the UK joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, something which Japan supports. Also, Britain has a deep market relationship with India and Africa, two markets with great growth potential. Japan may consider using the FTA as a springboard to accelerate the development of Indian and African markets,

Such matters, of course, are for the future, and there are not necessarily any bankable gains to be had from these ventures, especially if the Japan deal is any guide.

Rather than addressing these points, however, we see the bulk of the UK media – in its never-ending pursuit of trivia – chasing after Truss's department for wrongly claiming that soy sauce used by cooks in Channel 4's The Great British Bake Off would be cheaper "thanks to our trade deal with Japan".

Truss was urged to retract the claim - made on her department's official Twitter feed – after it was pointed out that soy sauce was currently imported tariff-free under the terms of the EU-Japan trade deal. Eventually, the DIT "clarified" its claim, saying it was referring to the prospect of a 6 percent tariff if Britain had traded with Japan under WTO terms after TransEnd.

The cumulative media coverage in one day on this one issue, though, seems to have exceeded the entire amount devoted to reporting on and analysing the entire UK-Japan deal to date. But then, this was brought to us by a media which, yesterday was gulled by a fake news story on the re-opening of Woolworths, perpetrated by a 17-year-old sixth-form student from York.

Dozens of legacy media websites, including Mail Online and the Daily Mirror, ran prominent articles asserting that Woolworths was reopening based, on nothing more than a typo-strewn Twitter account with fewer than 1,000 followers.

One can thus hardly expect any serious commentary on a complex trade deal, that takes careful study if one is to get past the gushing claims of the Department of International Trade.

Perhaps, one should employ a five-year-old to do the evaluation, and get her daddy to post on Twitter, whence one might expect it to be on the front page of the Daily Express the next day. Alternatively, a Tory MP might be a good substitute.

On the face of it though, the Japan-UK deal is one we cannot afford, and if this is the best that Liz Truss's department has to offer, we would be better off if its work was scaled down. Certainly, on present form, we are nowhere near taking up the slack which we are about to lose from our loosening of ties with the EU.

But who cares? Our soy sauce will not cost us any more.

Also published on Turbulent Times.