With the status of the UK’s Brexit negotiations with Europe having hit new lows, Friday’s announcement of a free trade deal with Japan should have been more significant than the lackluster media it received.
- Trade between the UK and Japan only accounts for 0.07% of UK GDP, in absolute terms that represents £15 billion to the UK economy.
- Perhaps most significant for the global financial community are the digital and data provisions of the UK-Japan trade deal.
- Financial institutions spend 4% of their turnover on third-party due diligence checks – a figure that will surely rise if data localization becomes more widespread.
UK-Japan trade deal
The UK-Japan deal is the first after Brexit began earlier this year and is important for both countries as they try to shore up their financial centers in a fracturing geopolitical environment. Coming at a time when Abe’s resignation and Suga’s election to prime minister are also shifting political goalposts, why isn’t this deal making headlines as a significant trade agreement for London, Tokyo and the dynamics of the global financial community?
For the UK, and particularly for the City of London, this deal is important. The financial centers of London and Tokyo already have strong trade links. While much has been made of the fact that trade between the UK and Japan only accounts for 0.07% of UK GDP, in absolute terms that represents £15 billion to the UK economy. Crucially, the deal will ensure the UK has a smooth transition from the EU-Japan FTA post Brexit.
UK-Japan trade exports
Perhaps more significantly, it signals how the UK government is thinking about the City as a global financial center, doubling down on its long-standing strength as a bridge between East and West. 28% of the UK’s trade exports to Japan are in financial services. Threatening these would be bad news for the UK economy, but given the global economic context the hope will be that this deal creates fertile soil for significant growth.
Japan’s mature financial markets are huge, with financial services contributing 27 trillion Yen ($250bn) to its annual economy. While markets are an important engine for its economy, the Japanese financial ecosystem remains relatively isolated, with other regional finance centers growing faster. Regional tensions and a fractured geopolitical environment make the UK-Japan deal important to Tokyo’s standing as a global financial center. Warren Buffett’s move into Japan’s five biggest trading houses, could be seen as an important first step towards more outside investment in Japan’s financial markets infrastructure. Smooth trading relationships with London in a post Brexit landscape will grease the wheels.
Digital and data provisions of the trade deal
Perhaps most significant for the global financial community are the digital and data provisions of the trade deal. While these may seem esoteric, they have far reaching consequences. Data localization initiatives have been emerging in several countries under nationalistic impulses to protect or kick-start modern data economies – this is a challenge for financial services regulatory compliance and transparency. Most notably in Asia, India and China are pushing forward tough data localization requirements. The onus to onshore data and its associated infrastructure, processing and analytics make it costly and inefficient for financial services firms to build businesses there.
Even more worryingly, for the global financial community, data localization laws are effectively a green light for financial crime. Fractured global rules around data sharing hugely increase the challenge for financial institutions in managing the fight against financial crime, which is completely reliant on sharing data to combat complex criminal networks. To put it in context, data localization laws can have the effect of restricting financial institutions from sharing data even within the same firm, greatly increasing the chances of fraud, money laundering, and proceeds from crime going undetected.
Financial institutions spend 4% of their turnover on third-party due diligence checks – a figure that will surely rise if data localization becomes more widespread. This isn’t just a cost of business issue. It has real world impact as criminal gangs find it easier to launder the proceeds of modern slavery, drug trafficking and complex fraud.
The treaty’s ban on data localization is a major step forward for Shinzo Abe’s “Data Free Flow with Trust” initiative, that was launched at the last G20. As Abe steps down and Suga takes on his mantel, this deal will form a legacy to Abe’s vision. But Financial institutions, whether in London, Tokyo, New York, Singapore, Shanghai or anywhere else, will hope others join in shaping a more open global data economy. I hope the headlines start to remind us of that this deal will support growth and shore up our defenses against financial crime.