UK, Japan eye economic integration through digital trade 



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The unveiling of Japan’s US$490 billion fiscal stimulus package in November coincided with the announcement by the UK Department of International Trade of a new export strategy. This is committed to boosting exports to an annual £1 trillion ($1.35 trillion) by 2030, from the current yearly £600 billion. 

While the two policy measures were wholly separate events, their similar timing and scale of ambition alongside a groundbreaking UK-Japan digital free trade agreement sets the foundations for a closer merging of their economies over the coming decade.

Opposites attract

The UK and Japan are not only located at different ends of a vast Eurasian supercontinent, but their future ties with respective surrounding regional economic groupings have substantially diverged in recent years. As the UK broke off its 40-year-plus relations with the European Union, Japan committed itself to what is to be the world’s largest free-trade bloc, the Regional Comprehensive Economic Partnership (RCEP). 

Even so, what they have in common has far outweighed their differences. As island nations, their economies have maintained close linkages over several decades. Japan is one of the UK’s largest sources of overseas capital, with the level of direct investment currently exceeding $90 billion, while the UK has around $5 billion invested there.  

The two countries are also major trade partners, with pre-pandemic bilateral goods trade averaging around $24 billion a year, albeit favoring Japan by around $4 billion to $5 billion a year. These long-standing economic ties have been cemented by shared values on political governance and the promotion of global institutions based on transparency and rule of law.

One may argue that over recent years, the UK has gravitated more toward Japan than the other way around. Driven by Brexit, Britain’s policymakers have been steering the country’s economic future into the Indo-Pacific region. Japan, being the world’s third-largest economy and among this region’s most developed, has played a key role in that effort.  

Tokyo’s position as an economic magnet for the UK was bolstered by another major regional trade grouping, the Comprehensive and Progressive Trans Pacific Partnership (CPTPP), which Japan co-founded, to then become a main sponsor of its successful conclusion with 10 other Asia-Pacific economies. Tokyo is now a principal supporter of Britain’s entry to the CPTPP.

Twinning global financial centers

Prime Minister Fumio Kishida’s unexpectedly large 2021 fiscal stimulus opens potential major opportunities for the UK’s services sector, one of the world’s largest, having exported £52 billion in 2019. In that year, Britain’s exports of services to Japan reached a high of more than £3 billion.

The largest share, valued at around £580 million, was in financial services. Their prospects are bolstered by recent ongoing cooperation between the City of London and Tokyo’s city authorities, as well as by their bilateral free-trade agreement, referred to as the Comprehensive Economic Partnership Agreement (CEPA).  

With Tokyo looking to expand its role as a major international financial center and other Japanese cities also revamping their financial sectors, UK finance players are set to be in a beneficial position to support these developments.

Significantly, CEPA enables mutual regulatory equivalence of each country’s financial services standards and even sets a platform for their regulators to work closely on services regulation through its comprehensive annex on financial cooperation. CEPA’s annual dialogue will further facilitate a forum for authorities to coordinate regulatory development and address market access and other emerging issues.

Although CEPA mostly replicates the EU-Japan agreement, it does enhance commitments on cooperation in the introduction of new types of financial services and in practicing transparency regarding the licensing of new financial service providers. 

Moreover, it requires the two parties to discuss regulatory matters before any possible removal of mutual equivalence, thereby ensuring greater stability in their long term financial services relations.

There are also additional provisions, relative to the EU-Japan accord, on the transfer of financial information between financial-services providers, alongside a prohibition on data localization in respect of financial data unless necessary for supervision and regulatory reasons.

On the other hand, CEPA’s benefits are limited in respect of Japanese financial-services firms utilizing the UK as a center for accessing the Single Market given the loss of its EU passporting rights under the EU-UK arrangements governing post-Brexit relations, other than a few limited financial-services commitments.  

Expanding and securing digital trade

While the bulk of Japan’s spending package will be paid out in the form of financial assistance to households and businesses, a sizable portion of the spending will be allocated toward achieving a “growth strategy.” Examples include investment in green innovation and the promotion of hydrogen and electric charging for all new motor vehicles by 2035.

The government will also invest in digital cities involving the rollout of local 5G (fifth-generation telecommunication) networks, data centers and drone deliveries across local communities, in addition to the large-scale provision of digital health services. 

In some regards, Kishida’s emphasis on digitization is driven by the need to upgrade Japan’s relatively underdeveloped digital services sector, in both public and private spheres of the economy.  

Given Britain’s expertise in artificial intelligence, green technology, cybersecurity and digital health care, UK digital providers would be in a strategic position to support this growth agenda. To benefit from Japan’s growth strategy, there should be added impetus from UK Prime Minister Boris Johnson’s new export strategy, which seeks to enhance the digital and technology reach of UK exporters overseas. 

To meet this goal, the UK’s ongoing Tech for Growth Program will be beefed up by extending the government’s overseas business networks, such as in Japan, to connect British businesses more effectively in accessing promising opportunities there. The government will also launch a Trade in Services Council to deepen access to international markets for services exporters, particularly for digital commerce and e-commerce providers.

In order to ascertain the success of the government’s new export strategy, some of the key performance metrics will measure the level of UK trade with countries with which it has a new free-trade agreement, as a proportion of overall trade. It will also look at the predicted GDP impact of each concluded FTA and assess the number of market access barriers reported and resolved through its Digital Market Access Service.

On each metric, CEPA is expected to become a standard bearer of success in bilateral digital trade in light of its groundbreaking provisions on such services. 

At the outset of the deal’s agreement, the government characterized it as benefiting from “cutting-edge digital and data provisions that go far beyond the EU-Japan deal” (it should be noted that the UK’s in-principle Digital Economic Agreement with Singapore, announced on December 9, is now claimed by Johnson’s government to be “the world’s most comprehensive digital trade deal”).

For instance, CEPA’s provisions prohibit restrictions on cross-border data transfer, as well as data localization. Other digital data provisions ensure a commitment not to impose customs duties on transfers of electronic data, source code protection, the application of e-signatures and maintenance of principles for net neutrality. 

From CEPA to CPTPP

UK digital service providers therefore stand to benefit from trading with Japan based on enhanced regulatory certainty that CEPA provides on e-commerce and data mobility. This will be especially useful now that significant opportunities are set to arise from the Kishida government’s spending plans on its new growth strategy and for the digitization of its economy.  

Clearly, the UK will not be the sole beneficiary of an enhanced digital trade relationship with Japan, as many of CEPA’s digital provisions, alongside further benefits, are also contained in the CPTPP. However, in light of Britain’s advanced digital services sector, CEPA will afford an early and significant boost toward the integration of the two economies, shortening the wide geographic divide into a mere computer-screen click away. 

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