Japan’s plea for clarity on Brexit

Posted on September 5, 2016

An employee wearing a British Union flag badge welds a frame component for a Brompton folding bicycle inside the Brompton Bicycle Ltd. factory in London, U.K., on Friday, May 13, 2016. The Brompton was created in 1975 by Andrew Ritchie, a Cambridge-trained engineer. Photographer: Simon Dawson/Bloomberg©Bloomberg

After the initial shock of Britain’s vote to leave the EU, businesses and consumers appear to be regaining their composure. In the aftermath of the referendum, indicators of economic activity plunged to their lowest levels since the global financial crisis.

With a new government in place and a fresh injection of monetary stimulus, both manufacturing and the services sectors have bounced back. Retail spending and house prices have held up. Although the weaker pound will feed inflation and eat into household budgets, it now looks more likely Britain will escape the Brexit-induced recession that many had feared.

    This resilience is a great relief, but it is little guide to the long-term health of the economy. The UK’s ability to prosper outside the EU depends primarily on whether companies see it as a stable environment to do business and can be confident of a return on their investments. The strong warning delivered by Japan’s government, detailing the concerns of Japanese businesses operating in the UK, shows how challenging it will be for Theresa May, prime minister, to provide such reassurance.

    The point Tokyo most wants to impress on the UK and EU is the need to lessen the uncertainty. Japanese businesses dread the prospect of endless behind-the-scenes negotiations, leading to unpleasant last-minute surprises. Their plea is for clarity on the process and time for the transition. This is eminently reasonable but, given the EU’s record of eleventh-hour backroom deals, somewhat optimistic.

    The substance of the Japanese memo, however, is a clear and rigorous exposition of the concerns that businesses have about Brexit, and the questions ministers will have to answer to give companies confidence to invest.

    It is no surprise that tariffs on trade in goods come high on the list. They are a particular concern for manufacturers whose supply chains stretch across the EU, which could face levies on both the parts and raw materials they import and on the finished goods they export.

    Yet this is just the first in a catalogue of concerns. Manufacturers worry that their products will no longer meet the EU’s rules of origin, subjecting them to more onerous customs procedures and excluding them from free-trade agreements between the EU and other countries. Service providers ask whether a licence issued in the UK will still be valid elsewhere in the EU. IT businesses fear cross-border data transfers will become difficult if the UK adopts its own rules on data protection. Banks worry about the “passporting” of financial services and the gradual divergence of regulatory regimes.

    All employers worry about impending controls on immigration, and what this will mean for hiring and for existing staff, be they high-skilled professionals or construction workers.

    This is the issue on which Mrs May has been most forthcoming as she begins to sketch out the parameters for negotiations with Brussels, ruling out the adoption of a points-based immigration system some Brexit supporters advocate. Yet it is far from clear that her preferred approach would be “softer”, or any more compatible with continued access to the single market.

    It is to be hoped that she will recognise the real needs of employers facing a period of unprecedented uncertainty. Japan’s “requests” to the UK and EU, which amount to a plea to maintain the fullest market access possible, may be little more than a wishlist. But the questions it has raised are as pressing for UK businesses as they are for foreign investors; and they will require answers. The Japanese memo serves to articulate the scale and complexity of the task that lies ahead.

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