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Press Release

Digital trade to further UK and Japan economic integration

21/12/2021
By Andrew Hood and Mariko Yamamoto, Fieldfisher LLP and Bob Savic, ApacEuroTrade LLP

The recent unveiling of Japan’s US$490 billion fiscal stimulus package coincided with the announcement by the United Kingdom government for a new international export strategy. This is committed to boosting exports up to an annual £1 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 ground-breaking digital free trade agreement in force earlier this year, 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-plus year old relations with the EU, Japan committed itself into what will soon officially become the world’s largest free trade bloc, the Regional Comprehensive Economic Partnership.
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 favouring Japan by around $4 to $5 billion a year. Shared values on political governance and the promotion of global institutions based on transparency and rule of law are cementing these longstanding economic ties.

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. Japan, being the world’s third largest economy and among this region’s most developed, has played a key role in that effort. 

Another major regional trade grouping, the Comprehensive and Progressive Trans Pacific Partnership (CPTPP) bolstered Tokyo’s position as an economic magnet for the UK, which Japan co-founded with the United States, 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 into the CPTPP.


Twinning global financial centres

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 over £3 billion. The largest share, valued at around £580 million, was in financial services. Recent ongoing cooperation between the City of London and Tokyo’s city authorities bolster their prospects, 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 centre 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 practising transparency regarding the licensing of new financial service providers.  Moreover, it requires both 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 localisation 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 utilising the UK as a centre 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 sizeable 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 roll out of local 5G networks, data centres and drone deliveries across local communities, in addition to the large-scale provision of digital health services. In some regards, Kishida’s emphasis on digitisation 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, cyber-security and digital health, 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 will strengthen its ongoing Technology Growth Programme by extending the government’s overseas business networks, such as in Japan, to more effectively connect British businesses 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 it has agreed 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 ground-breaking provisions on such services.  At the outset of the deal’s agreement, the government characterised 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 9th December 2021, is now claimed by Johnson 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 localisation.  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 digitisation of its economy. 

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.

 

About Fieldfisher
Fieldfisher is a European law firm built around its people. We are a full-service firm with market-leading practices in energy and natural resources, technology, financial services and life sciences.

Our network of more than 1,700 expert people spans 25 offices in 11 countries, including our US and China locations, acting alongside our international partner firms, enabling us to advise clients around the world with seamless efficiency and dedication across time zones and disciplines.

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For more information about our firm, please see: About | Fieldfisher
 

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