20 May 2020, NIICE Commentary 4769
Tridivesh Singh Maini
In recent years, economic links between the United Kingdom (UK) and Japan have strengthened. Japanese Foreign Direct Investment (FDI) into the UK is estimated to be over USD 80 Billion in 2019 (1000 Japanese companies operate in the UK, making it the second most popular destination for Japanese businesses in Europe, after Germany). Bilateral trade between Japan and the UK was estimated to be USD 29 Billion in 2018. The UK has been seeking a Free Trade Agreement (FTA) with Japan, in the aftermath of Brexit. Through this FTA, it is estimated that bilateral trade will rise by USD 15 Billion from the current USD 29 Billion (the FTA will also help in raising the wages of British workers). While there has been strong support for an FTA between the two countries for some time, two factors are likely to give a stronger impetus to this development.
China Factor
The China factor is likely to influence both countries in pushing for this FTA. During the COVID-19 pandemic, the UK, like many other countries, has expressed its displeasure with China, stating that Beijing has suppressed crucial information regarding COVID-19. Senior British Conservative Politician, Michael Gove in a media interview stated that while the first coronavirus case in China, was established in December, “some of the reporting from China was not clear about the scale, the nature, the infectiousness of this”.
The British intelligence community (MI5 and MI6) has also recommended that the UK needs to seriously re-assess its economic linkages with China (in 2019, non-real estate related Chinese FDI into the UK was estimated to be well over USD 8 Billion). Given the recent tensions between the UK and China, there was a growing chorus towards reversing the British decision of allowing participation from the Chinese company Huawei in its 5G network. While this decision has not been reversed so far, a group of Conservative Party leaders is likely to push for downgrading of economic ties with China. Closer economic linkages with Japan via an FTA, in this light, will help. Like the UK, Japan too has been seeking to review its linkages with China. It has allocated over USD 2 Billion for its manufacturing companies to shift from China.
Post-Brexit Situation
Post Brexit, the UK needs to look at new trade and business opportunities. An FTA with Japan will give it the opportunity to become part of the Comprehensive Trans-Pacific Partnership (CPTPP), which equals 13 percent of the global Gross Domestic Product (GDP) as of 2018. Japan happens to be the largest trading partner of the CPTPP, and will be the TPP Chair in 2021.
A number of countries which are signatories to the TPP, such as Canada, Japan and Vietnam have benefited by being part of the CPTPP-11. In a post-Brexit scenario, the UK too could benefit from the potential business opportunities in the Indo-Pacific region. On its part, Japan has been seeking to expand membership of the TPP, so as to get new members on board - the list includes Thailand, Taiwan, Indonesia and the Philippines. This would help Japan reduce its dependence upon China, and create new supply chains (talks on getting new members on board will begin in August 2020). Moreover, the UK Trade Minister co-authored an opinion piece in the New Zealand Herald, titled ‘Why restoring and deepening global trade is vital in response to COVID-19 virus’, with trade ministers of Singapore, Australia and New Zealand (member states of the TPP). The common ground in opinions, perhaps, can help the UK gain membership of the TPP.
UK-Japan Moral Ground on Iran Issue
If one was to look beyond the economic sphere, the UK and Japan, while being vary of China, have not toed Washington’s line on crucial strategic issues in recent years. While the US stance vis-à-vis Iran has been harsh even in the midst of the pandemic (the US, rather than relaxing sanctions has imposed further sanctions on Iran), both Britain and Japan have assisted Iran in different ways. While the UK, along with Germany and France provided medical aid to Iran through the Special Purpose Vehicle (SPV) known as Instrument in Support of Trade Exchanges (INSTEX), Japan has also assured Iran that it will provide a flu drug and potential Avigan Coronavirus treatment free of cost to them (Japan has assured supply of Avigan to a total of over 40 countries, including Iran, Indonesia, Netherlands and Turkey) .
UK-Japan Relationship in a Post-COVID-19 World
The UK-Japan relationship is important from a number of standpoints. Firstly, the relations are likely to be important to counter China’s influence (as mentioned earlier, both the UK and Japan are keen to reduce their dependency on Beijing). Secondly, Britain has been seeking to enhance strategic linkages with the Indo-Pacific region. An important step was the opening of a new mission by Britain for the Association of Southeast Asian Nations (ASEAN) in Jakarta in January 2020, as ASEAN is one of the key stakeholders in the Indo-Pacific narrative. By becoming part of the CPTPP-11, it will strengthen its economic relations with many Indo-Pacific states.
Thirdly, newer economic and strategic partnerships are essential between countries promoting democracy, pluralism and trade to counter the growing economic insularity. With the US reluctant to do so, countries like the UK and Japan can play an important role.
In conclusion, Japan-UK ties are likely to strengthen in a post-COVID-19 world, and there are economic and strategic reasons for the same. Closer ties between both countries are important not just in a bilateral context, but in the Indo-Pacific region as well. Even on a global scale, both countries can play a crucial role in pushing a nuanced economic and geopolitical narrative.
