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International relations

Third of Japan companies fear Brexit will hurt business: survey

Respondents cite new procedures and paperwork among negatives of breakup

Despite a free trade agreement between the U.K. and EU, numerous administrative roadblocks remain that are worrying Japanese companies in Britain.   © AFP/Jiji

LONDON -- A third of Japanese companies with bases in the U.K. say that Brexit will have a negative impact on business, despite last year's U.K.-EU free trade agreement, according to a survey conducted by Nikkei.

The survey also found 1 in 10 businesses will shrink their U.K. presence as a result of the breakup, while none said it would expand in Britain.

The Nikkei survey was conducted between Jan. 21 and 31. It was sent to 81 Japanese businesses with a base in the U.K. across different industries, such as financial services, professional services, retail and manufacturing. Of these, 43 companies responded.

Roughly one-third of respondents said Brexit has either a "significantly negative" or "somewhat negative" impact.

Although the U.K. and the EU agreed on an FTA with zero tariffs and zero quotas, a number of administrative hurdles have come between the two because the U.K. is no longer a member of the customs union or single market.

Many businesses mentioned the introduction of new procedures and paperwork, along with associated administrative labor and costs, as having a negative impact.

One food business that cited a significant negative impact said there were new customs paperwork and costs, product labels had to be changed, and animal-derived products now needed a certificate. This added to a lack of clarity over the handling of alcohol products and delays in the movement of goods.

Given that the FTA was agreed upon on Dec. 24 -- only a week before the new trading relationship was implemented and systems were brought in on Jan. 1 -- the lack of time to prepare was cited by many throughout the survey as a problem.

One chemical manufacturer said, "The rules of origin regulations are complicated, and there was not enough time for businesses to prepare once the deal was agreed."

"Neither the government nor the private sector had enough time to prepare," particularly the customs authorities, said a statement from one food company.

Others mentioned having to move certain functions to the EU or setting up new entities to ensure continuity of business. One chemical manufacturer said it had to move its EU goods registration to its EU group company, complicating procedures.

However, one logistics company saw Brexit as a positive business opportunity, based on new demand for assistance in customs processes and the movement of goods.

The biggest worry for Japanese businesses was the uncertainty of the British economy -- an issue cited by 65% of respondents. "We are concerned Brexit will hinder the U.K.'s recovery from the economic impact of the coronavirus, as well as the medium to long term growth of the U.K. economy," one trading company said.

Companies were asked for their top three Brexit-related issues. Adapting to new laws and regulations was the second-most cited, while half said the delay and confusion in the movement of goods were a worry. Despite the FTA, the new regulations and customs processes since the new year have been causing delays in the movement of goods at the border.

Mitsui & Co. said while it was good that tariff-free trade was generally protected there were concerns that goods like cars that have many components from outside the U.K. and EU may no longer fulfill tariff-free conditions.

Japanese businesses are big investors in the U.K. Some were invited by the British government to invest in the country as a gateway to Europe. Nearly 1,000 Japanese companies are now based in the U.K., providing more than 180,000 jobs, according to the Japanese Embassy. Aside from the U.S., Japan is the U.K.'s biggest non-European investor.

For 84% of respondents, Brexit will not alter the scale of their U.K. base. One insurance company said, "From a human resource perspective, the U.K. is the center of our European operations and at the moment there is no impact on that."

However, none of the businesses said it would expand its British base as a result of Brexit. Four companies in the financial services sector said they would shrink their business. "We have had to decrease the size of our U.K. operations and establish a new base in Europe for our EU business," said one. Financial services were not included in the FTA, and Brexit lost companies the ability to serve EU clients from the U.K. under the single passport system.

To ensure continuity for their EU clients, many financial companies in the U.K. established or expanded their bases in the EU to continue their EU-facing business, at a cost to their U.K. base. Accounting company EY's Financial Services Brexit tracker estimates that over 1.2 trillion pounds' worth of assets had been announced for transfer from the U.K. to the EU by October 2020.

The British government is hoping to reach an agreement on financial services access to the EU by March.

Overall, over half of respondents rated the FTA highly or somewhat highly, mainly due to avoiding a no-deal Brexit and tariffs. Toyota valued the FTA for minimizing the negative impact on its European operations. Brexit itself will have a somewhat negative impact, however, due to tariffs on certain types of cars, and they will look to revise their supply chains and increase British-made components.

Opinion was divided on the British government's approach to businesses in Brexit planning. About 21% of businesses were either "somewhat dissatisfied" or "dissatisfied," while 19% were either "somewhat satisfied" or "satisfied." This compared to a satisfaction rating of 44% when it came to the Japanese government's response to businesses.

One manufacture said, "There was a long period of uncertainty with the exit date being pushed back three times." Another pointed out they would not have had to spend so much effort on planning for a no-deal Brexit had the deal been agreed upon sooner.

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