Trade deals between the EU and Japan only get you so far

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AKIRA SHIMIZU of Keidanren, Japan’s main business lobby, has a theory about Brexit. The first one, he says, came in 1534 with Henry VIII’s decision to break from the Catholic church. This rupture sparked a period of free-thinking innovation that culminated in James Watt’s invention of the steam engine 250 years later and the advent of the Industrial Revolution. With luck, chuckles Mr Shimizu, Brexit the Sequel will spur a somewhat quicker reinvention of Britain’s economic model.

But even Mr Shimizu thinks Britain may face “five to six” years of pain after it leaves the European Union, and more if it fails properly to adapt to the change. Britain accounts for nearly half of Japanese investment in the EU, so Japanese firms have more to lose than most from a messy divorce. Japan’s car plants in Britain rely on complex supply chains that span Europe; its London-based banks use “passporting” rules to operate across the EU. If Britain leaves the single market, some of this business may move across the English Channel—or leave Europe entirely.

Unusually for a country where diplomacy tends to be oiled by discretion, government departments and business groups have issued a series of increasingly alarmed communiqués as they observe the Brexit talks stalling. Predictability is the watchword. Japan’s officials express relief that Theresa May, the prime minister, has finally accepted that EU rules will continue to apply for a few years after Britain leaves the club in 2019, giving companies time to prepare. Recent meetings between Mrs May and Shinzo Abe, her Japanese counterpart, have helped soothe nerves in Tokyo. But Japan remains bemused at Mrs May’s persistent refusal to accept that Britain faces a trade-off between its access to European markets, and its ability to write its own rules.

Yet Japan’s concerns run deeper than fretting about an intra-European spat. In the 19th century American gunboats forced the Japanese shogunate to open its markets to foreigners. Today it is Japan, where exports have been driving growth, that fears the world is losing its taste for trade. To its dismay, Donald Trump’s first big decision in office was to withdraw from the 12-country Trans-Pacific Partnership, a jumbo trade agreement (Mr Abe still hopes to lead the 11 remaining countries to conclude a somewhat shrunken deal). In Tokyo your columnist sat on a panel assessing the dangers of a protectionist-inspired global recession. To the many traumas inflicted by Brexit, then, add this: a fear among Britain’s friends that its withdrawal from the deepest trading bloc the world has ever known makes it harder to advance the case for open markets.

Enter Europe. Trade talks between the EU and Japan opened in 2013, soon got bogged down but reached a preliminary agreement in July; the two sides hope to conclude the deal by the end of the year. There are still a few wrinkles, especially on the eternally vexed question of legal redress for aggrieved investors. But the deal should bring quick advantage to both sides, opening European markets to Japanese car firms, which have been outstripped since South Korea signed a trade deal with the EU in 2010, and Japanese markets to European food exporters. Together the EU and Japan account for one-third of global GDP. The deal will be the largest each side has ever finalised. Mrs May hopes to copy and paste its provisions once Britain leaves the EU.

Impressive stuff. But both the EU and Japan make yet grander claims for their agreement, hoping it can shape the rules of globalisation by enshrining high product standards that will become global. Beyond cuts in tariffs, the agreement includes chapters on antitrust, corporate governance and sustainable development. And a deal suits the diplomatic priorities of both sides. For the EU it balances out the “protective” measures advanced by, among others, Emmanuel Macron, France’s new president. This week the club agreed on new anti-dumping rules to cover subsidised Chinese steel and the like. For the Japanese, the partnership is a way of making the case for trade when walls are going up all over the world. “We weren’t confident enough to do this on our own,” says one former trade official.

No match for Rocket Man

Where might this friendship lead next? Mr Abe, who faces a re-election battle later this month, has long sought a more assertive global role for Japan, and the EU is an obvious partner. Yet this strategy has its limits. A Belgian minister once described Europe as an economic giant but a political dwarf and military worm; the description fits Japan all too neatly. The two sides’ “Strategic Partnership Agreement”, negotiated alongside the economic one, contains little to thrill the soul. True, the EU has begun a conversation on defence co-operation, and Mr Abe wants to remove the pacifist clause from Japan’s constitution. But such moves are hardly equal to the threats posed by Kim Jong Un’s nukes and rockets, or China’s muscle-flexing in the South China Sea. It is no coincidence that the most high-profile joint security effort between the EU and Japan involves keeping shipping lanes free for trade, notably to counter pirates off the Somali coast. (Britain may prove a more interesting security partner for Japan; the two sides are stepping up defence and counter-terrorism co-operation.)

And that is why America remains the indispensable partner for European countries and Japan alike. When Russia annexed Crimea and invaded Ukraine, America and Europe co-ordinated sanctions in response. Mr Trump may not be doing much to support Japan, but its decades-old alliance with America is still its best hedge against the rise of China. European and Japanese interests do not always make a comfortable fit; Europe covets Chinese investment, for example, while Mr Abe has been courting Vladimir Putin, despite a long-standing territorial squabble between Japan and Russia. So, while Japan and Europe may bang the drum for trade, when the rhythms of war start to pound they must still look elsewhere.