By Troy Stangarone
South Korea isn’t the only country that Japan feels has broken its trust. After years of investment in the United Kingdom based on the understanding that it would be a stable platform to export into the European Union, Asian investors find those investments now at risk from the United Kingdom’s decision to leave the economic bloc and its inability to manage the process. As countries deal with this change, South Korea has taken a decidedly more trade friendly approach than Japan.
With the United Kingdom set to leave the European Union, London needs to put in place new trade arrangements replace those that it will lose once it leaves the world’s largest common market. To achieve this, the United Kingdom has sought to roll over many of European Union’s trade agreements so that deals with those countries remain in place once the United Kingdom leaves the European Union.
Without these roll over agreements, the trade between the United Kingdom and its European Union FTA partners would return to same terms that countries default to under the WTO. As a member of the European Union the United Kingdom cannot negotiate separate trade deals until it formally withdraws. The roll over agreements allow the United Kingdom and its trading partners to maintain the benefits of the FTAs that currently exist with the European Union. To date, the United Kingdom has signed 13 agreements to roll over trade deals with other countries or economic blocs such as Central America. Its agreements with South Korea and Switzerland being the most significant.
While the United Kingdom has sought to roll over its agreements with Japan and South Korea, both are relatively modest trade partners for the United Kingdom. Aside from China, the United Kingdom does a relatively small amount of trade with countries in East Asia. South Korea only accounts for 1.1 percent of the United Kingdom’s total trade. Japan was only the United Kingdom’s 14th largest export destination in 2018 with $8.4 billion in exports, while South Korea was its 15th largest export destination with $7.8 billion in exports. This contrasts with its $65 billion in exports to the United States or $46.7 billion in exports to Germany.
The United Kingdom imports relatively more from East Asia than it exports. However, the United Kingdom was still only the 16th largest export destination for South Korea and the 12th largest export destination for Japan. In 2018, it imported $12.9 billion worth of goods from Japan and $5.2 billion from South Korea. If China is excluded, the only two countries that exported more to the United Kingdom than South Korea from East Asia were Vietnam, which only exported a small amount more, and India which exported $9.7 billion.
In approaching their future trading relations with the United Kingdom, South Korea and Japan have taken different approaches. South Korea has agreed to a two year roll over deal that will allow the two sides to negotiate a more permanent trade agreement once the United Kingdom has left the European Union.
In contrast to South Korea, Japan is refusing to sign a roll over trade agreement in the belief that it can negotiate better terms with the United Kingdom on its own than it received in negotiating with the European Union as a whole. Despite the fact that Japanese firms will face increased barriers in the British market until a new deal is reached.
With the United Kingdom leaving the European Union, Japan’s move is what London is likely to see once it is no longer a part of the European Union – countries looking to gain more favorable trade deals with the United Kingdom than they would have gained with the European Union as a whole. London will simply have less leverage on its own than it did as part of a larger bloc.
In the case of Japan, it is speculated that it will seek to reach an agreement that leaves the United Kingdom with less access to the Japanese market than it enjoys now. While that would be a disappointing outcome for the United Kingdom, and counterintuitive to Japan’s desire to be a leader on free trade, London may not have the leverage to object. It is unlikely to secure a favorable deal from the United States and with the potential of a no-deal Brexit to sour relations between London and Brussels, it may face difficulty in securing a new deal with the European Union. Taking lesser access to the world’s third largest economy may just be a price it has to pay as Tokyo will be in a stronger position to manage a loss of trade from Brexit.
In contrast, by agreeing to a two year extension, South Korean firms are unlikely to see disruption in the British market while a new deal is being negotiated. It is unclear what objectives Seoul has for its future talks with London, but it will be interesting to see if it seeks to limit access to its domestic market in the same fashion as Japan or expand market access in the United Kingdom.
Troy Stangarone is the Senior Director and Fellow at the Korea Economic Institute of America. The views expressed here are the author’s alone.
Photo from Graeme Maclean’s photostream on flickr Creative Commons.