Japan recently released a rather extraordinary memo on the Ministry of Foreign Affairs website. It provides clear, frank and specific recommendations to both the UK and the European Union (EU) on the topic of the impending separation of the UK from the EU.
It also sets out in concrete terms the scale of the problem ahead. Officials can argue that “Brexit means Brexit.” At some point, however, companies need to see what, exactly, this will entail. What are the likely procedures that will be followed? Under what timelines? With what mechanisms for company input, if any?
Some progress has been made in assessing the difficulties that will be faced for financial services companies under different scenarios associated with British withdrawal from the EU. But until the Japanese memo appeared, many other issues of importance for firms, like figuring out what to do about quarantine policies for plant products, had stayed under the radar.
The remarkably direct language of this memo has therefore provided a helpful reminder of what is at stake for firms. The open publication of such a document is quite unusual.
Japanese officials have been working on the Japan-EU Economic Partnership Agreement (EPA) and are eager to conclude negotiations before the end of 2016. Brexit is likely to significantly impact Japanese companies. The memo notes that nearly half of all Japanese investment in the EU in 2015 went to the UK and the bulk of Japanese companies have a presence in the UK.
The most important request by Japanese companies is for greater clarity and predictability on the process of Brexit negotiations. The memo recommends clear arrangements, including an extendable transition period, a possible interim agreement, and a careful eye to minimizing harmful effects on businesses already invested in the UK and EU.
The bulk of the memo outlines in rather substantial detail, specific policy objectives that Japan would like to see both sides implement. The document will not be the last word on the topic, of course, but helps remind officials of the range of issues that have to be considered including such things as what happens with joint research and development budgets and projects.
Many things are interesting in this policy document, but perhaps most important is that the Japanese government is putting out policy details that are far more advanced than many of the statements made by officials thus far in the UK (or the EU) on the topic of Brexit. While much of the Brexit debate appears to have remained at the “30,000 foot level,” the Japanese have gotten down to the details that are going to be critically important in negotiations.
For example, Japan is recommending not only duty-free trade between the UK and EU, but also maintaining the framework of mutual recognition on Authorized Economic Operators (AEOs). The AEO scheme helps facilitate trade between the UK and the EU. If this system is abandoned post-Brexit, many of the supply chains that have been built over time may suffer new time delays at border crossings. These delays add cost and may force a re-evaluation of production networks.
Equally important for companies will be Japan’s recommendations to continue the current system of quarantine for plants and animals. The creation of new systems for quarantine (and, indeed, a host of potentially new UK-specific procedures) could make operations very difficult for firms.
The Japanese would like to see the introduction of cumulation in rules of origin between the UK and EU, especially for automobiles and auto parts. This is particularly important for allowing UK-content products to enjoy the benefits of EU FTAs. Without cumulation, many companies will be unable to use the same supply chains and will have to shift up production to be entirely based in the EU, or change production to be entirely based in the UK and wait for the UK to replicate the same FTAs as the EU.
Much of the focus of Brexit talks in the UK thus far has been on the topic of passporting for financial services. The Japanese also note the importance of allowing financial services to continue to move freely. But the Japanese go beyond just financial services to highlight other services and the need to address some tax policies and licenses.
Data flows and the protection of information will also matter to companies and sorting out potential UK-specific rules on these issues and a range of intellectual property rights concerns will be important to firms.
Japan also notes the importance to harmonizing standards across a wide range of areas, such as CE marks, REACH, RoHS, GMP, food safety, and certification bodies. Efforts to change these procedures will dramatically affect the ability of firms to remain competitive in both UK and EU markets.
The movement of people within the UK is also important as Japanese companies currently need foreign staff, particularly in banking and power plants and in many agricultural and manufacturing industries.
In many of these areas, if the UK ultimately establishes independent standards or regulations, it will be important for the government to carefully consider the economic impact, including an increase in burdensome procedures and a lack of clarity and confusion over process.
In the end, the memo is helpful because it provides clear and practical pointers of the challenges ahead. While the overall message of the memo is that Brexit ought to be as “soft” as possible, Japan has perhaps highlighted the importance of moving beyond mere wishful thinking.
Actual policies will have to be formulated to address the widest possible range of economic activities in both the UK and the EU. These policies will impact not only British or European firms, but also foreign firms.
What happens in the UK will not just stay in the UK. The Japanese memo is a helpful reminder that domestic level change can—and will—have international consequences.
***This Talking Trade blog has been written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***