Asia House Advisory assesses the trade landscape for the UK in the Asia-Pacific following Foreign Secretary Dominic Raab’s trip to the region.
On 12 February, UK Foreign Secretary Dominic Raab concluded a four-country Asia-Pacific tour, his first overseas trip since the UK left the European Union (EU) on 31 January. Within a week Raab visited Australia, Japan, Singapore and Malaysia to promote ambitious comprehensive free trade deals and build deeper economic relations. The tour reflects the importance the UK is placing on Asia for its post-Brexit trade strategy.
Australia – described as a ‘natural ally’ by Raab – was the first stop on his tour, where he met with Australian Foreign Minister Marise Payne on 6 February. Raab and Payne reaffirmed their commitment to launch negotiations on a “comprehensive and ambitious” bilateral free trade agreement as soon as possible.
Securing a Free Trade Agreement (FTA) with Australia is seen as one of the most straightforward and quickest processes by the UK, particularly in comparison to a deal with EU. The UK has an historical, cultural and institutionally close partnership with Australia and a strong trade and investment relationship. Approximately 15,000 UK businesses export goods to Australia, according to UK government data. British car makers and small and medium sized businesses could certainly benefit from lower tariffs arising from a deal.
While Australia is also keen to build deeper ties with the UK – its eighth-largest trading partner – it is important to set the expectations straight on both sides. A UK-Australia FTA would not replace the benefits of the EU, as former Australian Prime Minister Malcolm Turnbull noted in January this year.
First, trade with Australia is a very small percentage of total UK trade, as well as its trade flows across the Asia-Pacific region. According to Natalie Black, Her Majesty’s Trade Commissioner for Asia-Pacific, UK Government, annual UK trade across the Asia-Pacific region is worth more than £113.2 billion, excluding China. In 2019, trade between UK and Australia was worth £18.3 billion.
Second, the free movement of people between the two countries – something that the UK has previously called for – is not in Australia’s interest. In January, Australian Trade Minister Simon Birmingham rejected a UK offer that included visa-free work and travel because of fears it could lead to brain drain of highly trained workers to the UK and an influx of unskilled British workers to Australia.
In addition, Australia is currently negotiating a trade deal with the EU. Although Payne reaffirmed last week that the talks with the EU would not hinder any progress on a deal with the UK, this might decrease the UK’s political and economic clout and delay the process, given the time-consuming nature of trade negotiations.
Securing a comprehensive economic partnership agreement (EPA) is a priority for the UK and highly beneficial for Japan. Raab met his Japanese counterpart Toshimitsu Motegi on 8 February, after which they reiterated their aspiration for rapid conclusion of a bilateral EPA by the end of the year. The aim is to have the new deal effective from 1 January 2021.
In 2019, the two-way goods and services trade between Japan and the UK was worth more than £30 billion. The UK was the second-largest trade partner in the EU block for Japan after Germany, with exports totalling US$14 billion in 2018. While Japan accounts for only about two per cent of UK exports, it is one of the UK’s largest foreign investors. For Japan, the UK is its second-largest investment location following the US. According to the Japan External Trade Organization (JETRO), there are nearly 1,000 Japanese companies based in the UK in sectors such as autos, pharmaceuticals and banking.
The current UK-Japan trade and investment flows benefit from the Japan-EU EPA, which came into effect on 1 February 2019. Under the Japan-EU EPA, the UK has started reducing tariffs towards 0 per cent, including those on the Japanese automotive sector, processed food, agricultural products, beer, wine and whisky exports. These reductions will cease at the end of the transition period on 31 December 2020.
Failure to secure a bilateral EPA would have a negative impact on businesses and potentially alter trade flows and supply chains. The key issue on the negotiating agenda is likely to be auto tariffs. The auto industry is one of the UK’s fastest growing industries, creating some 820,000 jobs and producing the country’s biggest export product. According to the Society of Motor Manufacturers and Traders, UK car exports to Japan increased by 26 per cent during 2018. Big Japanese automakers, namely Nissan, Honda and Toyota, are playing an important role in the UK economy and the development of the automotive sector.
Any future agreement between the UK and Japan is very likely to be based on the Japan-EU EPA. Whether there is time to secure an even more ambitious deal and better terms remains to be seen. Both parties are keen to avoid any disruption to UK-Japan trade and investment going forward.
Where the UK is ready to make concessions to secure the deal with Japan will also be crucial. Japan, for instance, has indicated that it is seeking the UK to lift import restrictions on Japanese food and other products, which were imposed by the EU after the Fukushima nuclear disaster in 2011. While the EU eased its import regulations on Japanese produce, Japanese seafood is still subject to EU inspections and certificates of origin.
Singapore and Malaysia
In the final part of his Asia-Pacific trip, Raab travelled to Singapore on 10 February and Malaysia on 11 February to meet the UK’s key trade partners in the Association of Southeast Asian Nations (ASEAN).
In both countries, Raab’s visit focused on strengthening the partnerships in areas such as climate change, technology, and trade. In 2018, UK-Singapore trade was worth £12.7 billion, while UK-Malaysia trade, investment and business relations are worth more than £5 billion.
Both Singapore and Malaysia are seen as being highly desirable partners to conclude the first wave of post-Brexit trade agreements. While the new trade deals with Singapore and Malaysia are highly likely to be based on the EU’s FTAs with the two ASEAN countries, a digital economy partnership with Singapore and science, innovation and education tie-ins with Malaysia could open up new opportunities for all involved.
After 47 years of EU membership, the UK is now seeking independent trade relations with its global partners. Until 31 December 2020, the end of the agreed transition period, the UK will remain in the EU customs union and single market and continue to benefit from the EU-wide preferential trade agreements with countries such as Japan and Singapore. The 1 January 2021, however, will mark a new era for the UK.
Approximately half of UK trade is with the EU, with UK exports and imports accounting for 45 per cent and 53 per cent respectively in 2018. As such, securing a final deal and a new trade agreement with the EU before 31 December 2020 is at the top of the UK’s trade priority list. However, simultaneously, the UK government, with its Global Britain campaign, is seeking to diversify its trade relations and looking for new partnerships to forge and old ones to revive. As Raab’s tour indicates, the Asia-Pacific will be a key focus area for the UK’s post-Brexit trading relations.
The Asia Pacific is a region of abundant economic and trade opportunities for the UK as it forges its new role in the world. Undoubtedly, the UK has strong economic ties with many non-EU countries to build upon. However, finding a balance between the UK’s high ambitions for the trade conditions it wants to secure, equally challenging foreign demands, and the time-consuming nature of trade negotiations, will be a tough task for the UK in a relatively short timeframe.
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