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Analysis

EU-Japan pact is bad omen for Britain

Automotive sector illustrates scope of Brexit quandary

by Joergen Oerstroem Moeller in Singapore

Thu 13 Jul 2017

The free trade agreement between the European Union and Japan, announced on 6 July before the G20 summit began, is good news for global free trade. The EU estimates the accord will save it €1bn in customs duties annually and boost exports to Japan to more than €100bn per year from €80bn.

For Britain, it is bad news and an omen of what lies ahead after the country's exit from the EU. The Japan-EU deal illustrates how far-reaching free trade agreements take a great deal of time to negotiate, in this case more than four years and 18 rounds of talks between experienced delegates. Some key issues, like those concerning investor tribunals, are still to be settled. Consider, too, that large economies find it easier to collaborate for a mutually beneficial outcome than smaller economies.

The other 27 EU member states, with a collective GDP five times greater than Britain's, will be able to absorb Japanese competition in certain sectors more easily than the UK. British negotiators will find it difficult to achieve access to the Japanese market on similar terms, since the UK's smaller economy makes a less compelling case in Japan for dismantling barriers.

The uncertain future of the UK automotive sector makes clear the scope of the problem. It generates £72bn per year and accounts for 12% of goods exported, with close to 60% going to the EU. 1.7m cars are produced annually, of which 858,000 are from Japanese manufacturers Nissan, Toyota and Honda.

For as long as Britain remains in the single market, UK-made cars will continue to avoid customs duties and border controls. Only in an absolute best-case scenario will such favourable conditions still apply after Brexit. Conversely, under the new free trade agreement, Japanese cars will enter the EU without the 10% custom duty. The result will be a complete reversal in competitive positions in the EU market for cars produced in the UK and Japan.

Car manufacturers in Britain already, long before last week's announcements, asked the government to guarantee they would not suffer from Brexit. The underlying threat is that they might choose to pause investments in UK assets, and may move a considerable part of, if not all, production out of Britain and into the EU.

This is not an empty threat. Investment in Britain's automotive sector fell to £1.7bn in 2016 from £2.5bn in 2015 and continued to fall in the first six months of 2017. Although there is no definitive proof that this is due to Brexit, equivocation over future export rules can only create deeper uncertainty in the UK. If one takes the EU-Japan pact as a template, Britain will have no settled free trade agreements with any major country until at least 2024.

Joergen Oerstroem Moeller is Senior Research Fellow, ISEAS Yusof Ishak Institute, and a former State Secretary at the Danish Foreign Ministry.

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