Post-Brexit trade with Japan in jeopardy while uncertainty persists

Nissan has said it will no longer be producing its new X Trail car at its Sunderland plant in north-east England. They will instead be produced in Japan. Although no current jobs are scheduled to be lost, the region was looking forward to benefiting from an extra 740 jobs that the new car would create.

Nissan explained that Brexit was only one factor among several, accounting for the decision. A shrinking car market in Europe and China, as well as new regulations on diesel, have hit the sector hard. Plus, Japan has just signed a trade deal with the EU which will see tariffs on its car exports reduced to zero over the next seven years.

Nonetheless, it’s hard not to see this as a product of Brexit uncertainty and could well be the start of others leaving British shores. It reflects concerns among many international businesses in the UK about the prospect of a no-deal Brexit.

Nissan’s presence in the UK is driven by its bottom line. It set up its Sunderland plant following tax breaks and other financial incentives offered to Japanese companies by Prime Minister Margaret Thatcher in 1984. A big part of the appeal was the fact that the UK offered a “gateway” to the rest of Europe, with access to the EU single market and a readily available pool of labour.

Today, more than 1,000 Japanese firms jointly employ around 160,000 people in the UK, in sectors including financial services, manufacturing and pharmaceuticals. And the three Japanese car giants – Honda, Nissan and Toyota – comprise almost half of UK car production.

Japanese investment in the UK, amounting to £46 billion to date, is part of a valuable trading partnership. UK exports to Japan in 2016 amounted to £12.5 billion, split evenly between goods and services, and comprising sectors like vehicles, power generating equipment, financial services, food and drink, and pharmaceuticals. In the same year, the UK’s imports of Japanese goods and services reached £11.5 billion, notably in automobiles, automobile parts and power engines. Today, more than 450 UK firms operate in Japan and they sit at the forefront of innovation in sectors like life sciences and energy, exploiting the opportunities presented by Japan’s acute ageing population and its dearth of resources.

Deal or no deal

A managed departure based on Theresa May’s withdrawal agreement would provide Japanese and UK firms with a transition period of 21 months, during which negotiations for a longer-term agreement could be set in train. In contrast, a no-deal Brexit, requiring the UK immediately to trade according to World Trade Organisation rules, would mean that British products have only weeks to enjoy their tariff-free entry into the Japanese market.

Meanwhile, high-profile Japanese firms have repeatedly warned that a no-deal Brexit could lead to them halting production in the UK and diverting investments elsewhere. Johan van Zyl, head of Toyota Motor Europe, said that tariff-free sales to Europe are crucial for the future of its plant, which employs 2,500 people in Derbyshire and from which 90% of the 150,000 cars produced each year are exported to the rest of the continent. Nissan’s chief made similar warnings in 2016. More surprisingly, the Japanese prime minister, Shinzo Abe, along with leaders from Japan’s business lobby, Keidanren, also voiced fears that a hard Brexit could be a “huge negative” for Japanese companies in the UK and re-emphasised the UK’s principal value as a gateway to Europe.

Concerns around a no-deal Brexit centre on the impact of reintroducing border controls, and the re-imposition of those recently removed tariff and non-tariff barriers, as well as a loss of access to valuable European labour. Large Japanese banks have also expressed concerns about the possible loss of the “EU passport”, which enables banks based in London to operate freely across the continent’s financial markets.

Not every sector would lose out and more positive noises come from industries where the UK would remain competitive, particularly where it has notable R&D expertise and skills. Japan’s SoftBank purchase of software design firm Arm Holdings after the referendum in 2016 is a case in point. Abe has also spoken of Japan negotiating a new trade deal with the UK and he invited the UK to join the Trans-Pacific Partnership trade bloc.

The sticking point for all of these agreements is that to date the British government has been unable to present a clear picture of what the immediate future will look like. In 1984, Thatcher stood firmly against her chancellor, who was keen to make changes to corporation tax that would damage Nissan’s interests. She recognised that damaging relations with this major employer could jeopardise future inward investment. The same could well be true today.