Japan / UK Trade: an overview

Japan / UK Trade: an overview

I’ve been monitoring the Japanese economy since deciding to move there in 2016 (we’re awaiting the end of Lockdown to make the move). These are a high-level view of my notes on the topic. They’re quite dry as I’m aiming to use these as a reference point rather than an feature article in their own right.

Note: The Coronavirus pandemic has played havoc with global trade, making analysis difficult (if not impossible) beyond immediate impacts.

Background

Japan has long seen the UK as a business-friendly route into the European Union and its predecessors. The country’s motor manufacturers have been seen as saviours of the UK’s car industry with signature plants in Swindon, Derby and Sunderland. Hitachi, Softbank and others have made significant investments, whether that’s to acquire UK companies or establish their own plants.

When the UK voted to leave the EU there was disbelief. In more extreme quarters it was seen as a betrayal of Japan’s investment and mutual commitment. In others it was viewed as a foolhardy move. The ongoing political wrangles over when and under what terms to break away left many confused and disappointed.

As this was playing out, the EU and Japan concluded a Free Trade Agreement, which the UK is benefiting from during its transition out of the bloc. When this falls away on 1st January 2021, the UK and Japan will trade on WTO terms, with corresponding tariffs and restrictions.

Trade growth is in decline

Growth in trade with the UK has been slowing since the Brexit referendum in 2016, with both imports and exports falling in 2019. Early signs from 2020 suggested it was continuing to fall as both economies cooled. The coronavirus triggered lockdowns in both countries has further cooled trade.

Trade between Japan and UK has been slowing and entered decline in 2019

Imports have shown strong seasonality and a high degree of correlation with overall import behaviour. Exports have been more erratic and out of sync with wider export markets.

Significant swings in exports to UK from Japan driven by Brexit related crisis

UK in context

In a wider context, the UK is a relatively small part of Japan’s export / import mix. It accounts for less than 2 percent of exports and 1 percent of imports.

UK accounts for less than 2 percent of Japan exports and 1 percent of imports

Politically stable, economic and social risks rising

The UK should be a stable political environment, although economically and socially there are uncertainties. It’s likely the Conservative Party will remain in power until at least 2024 due to the Parliamentary System. This should ensure a consistency in policy. Economically the country is likely to enter recession and there is potential for a breakup of the UK with Northern Ireland unifying with The Republic, and Scotland potentially seeking independence. There may also be anti-Asian sentiment arising from the Coronavirus pandemic.

PEST analysis of UK shows politically and technology stable, instability in economic and social quadrants

Impact of the Pandemic

The Ministry of Finance announced a fall of 20+ percent in exports in April. Further detail was released on May 28th from Statistics of Japan.

Impact of the coronavirus lockdown on Japanese trade with the UK.

Imports from the UK fell by about 14 percent in April. This was on the back of a small increase in March. There may be further falls in May and June triggered by a slowdown in production caused by stringent lockdown conditions. These started in late March 2020 (accounting for some of the fall in that month), and are being released slowly through to July.

Exports to the UK fell 42 percent in April. March had already seen a 12 percent fall, potentially triggered by lockdown starting at the end of the month. It’s worth noting there’s been a steady decline in exports since the start of the year.

For context, there were 24 percent fewer exports to, and a small 1 percent increase in imports from the European Union.

The UK still represents 1% of imports into Japan and has fallen from 2 percent to 1 percent of exports.

Trade Negotiations

Negotiations on a “Free Trade Agreement” started in June 2020. Objectives from this are to reduce tariffs on cars to zero, open up financial services and improve the free flow of data. There has also been some discussion of opening up Japan’s market to UK agricultural products.

Japan’s stance has been non-committal. They wish to conclude negotiations as soon as possible and protect “existing investments” in the UK. On the UK side there has been press proposing the deal can be completed by the end of the year.

Commentary

The UK has been seen as a step-off point for investments into the EU market. Companies such as Hitachi, Sony and Nissan made significant investments in the expectation the UK would remain at the heart of Europe.

Now that has gone, Japan is re-evaluating the future of investment in the UK. There are significant exports still being made to the country, which Japan will want to protect. There is strong evidence to suggest many of these exports are ultimately bound for the EU, with ports inside the bloc seeing an increase as an export destination.

Language and cultural issues are likely to play a big part in the negotiations. The UK’s eager to get a deal and may not understand the complexities of negotiating with an economy larger and more powerful than itself. Commentary in the Japanese press on the EU/UK negotiations has not been complimentary.

Where next?

The UK’s economy is expected to enter recession in 2020. It is unlikely to recover to pre-lockdown levels this year.

Updates

2020/06/09 Japan and the UK formally started trade negotiations. Japan’s press release / UK’s press release

2020/05/28 Ministry of Finance published updated statistics on global trade. The section “Impact of Pandemic” was added.

2020/05/13 UK Government has published a positioning paper on its strategy for trade negotiations. Financial Services and a pitch to join CPTPP are the focus points.

About Ross A Hall

A business researcher and writer, I help companies find new markets, form strategies and build successful businesses.

Find out more about my work.

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