Overview
On 23 October 2020, the Japan-UK Comprehensive Economic Partnership Agreement (JUK Agreement) was signed in Tokyo by Japan’s Foreign Minister Toshimitsu Motegi and UK International Trade Secretary Liz Truss. This is the first new international trade agreement the UK has concluded with a major economy since officially leaving the European Union (EU) in January 2020.
The UK-Japan negotiations were conducted with remarkable speed. There was enormous pressure from business leaders on both sides to have a deal in place before the end of the so-called “Withdrawal Agreement” period on 31 December 2020, i.e. the period following the UK’s formal departure from the EU, during which the UK has continued to be treated as an EU Member State (including continued coverage under existing EU trade agreements). The EU had concluded a comprehensive free trade agreement with Japan in 2018 which entered into force in February 2019 (the Japan-EU Economic Partnership Agreement (Japan-EU EPA)). Both the UK and Japan were keen to at least replicate its terms in a UK-Japan deal by late 2020, to ensure continuity. Time therefore was of the essence. On 9 June this year, Ms. Truss and Mr. Motegi met by videoconference and affirmed each other’s intention to engage in formal negotiations. On 7 August, they met again in person, this time in London, to confirm further intensification of the negotiations. Just over three months after launch of formal negotiations, on 11 September, the JUK Agreement was agreed in principle.
Negotiations were able to proceed at this breakneck speed precisely given the “cut and paste” nature of the exercise. In essence, Japan and the UK were essentially seeking to agree on the extent to which the Japan-EU EPA would simply be reproduced as a stand-alone Japan-UK agreement, and / or to what extent (in the highly limited negotiating time available to the parties) these existing terms might be improved, expanded or amended.
In the end, apart from incremental innovations, the JUK Agreement largely reproduces existing provisions from the Japan-EU EPA. Thus, arguably its greatest accomplishment (and the only one that might reasonably have been expected, given time constraints) is to preserve the status quo of UK-Japan international trading arrangements, at least for the time being.
In considering to what extent the JUK Agreement differs from the Japan-EU EPA, it is worth looking more closely at provisions relating to trade in goods and rules of origin, as these are key elements in any free trade agreement. Rules on trade in goods address trade facilitation and market access, including preferential tariff rates and tariff rate quotas. Rules of origin define which goods may qualify as originating in a party to the agreement, for the purpose of such preferential treatment.
With regard to the market access liberalization for goods, the benefits of the JUK Agreement do not go much beyond what already had been achieved by the Japan-EU EPA. Overall, the level of tariff-free access to each other’s goods markets remains more or less the same as that already laid out in the Japan-EU deal.
That said, Japan won a few notable concessions from the UK regarding trade in goods, compared with its deal with the EU. For example, tariffs on Japanese railway cars and car parts entering the UK will be removed at once, as opposed to the 13 year phase-out provided for such tariffs under the Japan-EU EPA. This will certainly benefit UK-based Japanese manufacturers such as Nissan and Hitachi who can import parts from Japan on zero tariff for construction of railway cars in the UK. Japanese car manufacturers will also benefit. Since Japan’s exports to the UK predominantly comprise cars, car parts and other machinery, Japanese car manufacturers view favorably the new additional elements to the JUK Agreement.
In other respects, tariff reduction mirrors the existing negotiated time-frame in the Japan-EU EPA: for example, under the JUK Agreement, exports of Japanese cars into the UK (as opposed to car parts) will be tariff-free in February 2026, just as in the Japan-EU EPA. Although the JUK Agreement is expected to come into force in early 2021, the tariff-reduction rates applicable to Japanese cars under the JUK Agreement will immediately ‘catch up’ with the tariff-reduction rates under the Japan-EU EPA. This means that the tariff-reduction rates under the JUK Agreement will apply as if they had been in force since the day of entry into force of the Japan-EU EPA, i.e., 1 February 2019.
With regard to Rules of Origin, the UK arguably achieved a victory, and potentially a significant one: extended cumulation. In the context of bilateral trade between Japan and the UK, production carried out in the EU or materials originating in the EU may still be taken into account for the purpose of determining whether the product is originating in Japan or the UK. This is important from a UK perspective: given the integration of its supply chains with EU-based manufacturing, very few goods are entirely “made in the UK.” Indeed, one of the main recommendations raised by UK business relating to rules of origin was to recognize existing supply chains and ensure continuity for UK industries that currently qualify for preferential treatment through the Japan-EU EPA.
The UK acted on this recommendation and delivered it successfully. Pursuant to the provisions on extended cumulation, UK goods which currently meet the origin thresholds under the Japan-EU EPA (because of counting of inputs from across the EU) should be able to continue benefitting from preferential tariff treatment post-Brexit. Excluding cumulation of EU inputs in the determination of what constitutes a “UK product” would likely have significantly diminished the benefits of the Agreement to UK manufacturing, as far fewer goods would have qualified.
Of course, this is not a “victory” in the sense of marking a significant improvement over existing Japan-EU EPA requirements: to the contrary, as in other areas, the negotiation ultimately resulted in more or less a maintenance of the status quo, in terms of UK access to Japanese markets. Moreover, this outcome does not account for any difficulties UK manufacturers likely will suffer in coming years as its supply chains with continental Europe weaken, as the UK pursues the political goal of “regulatory autonomy” from the EU.
Moreover, while the rule of ‘extended cumulation’ is beneficial in theory, it will give rise to significant implementation issues in practice. Notably, verifying exporter claims with regard to the EU origin of products under the JUK Agreement will pose a challenge to importing customs authorities. The JUK Agreement foresees a verification mechanism applicable to/in Japan and the UK only. In the absence of an effective verification tool extending to EU origin inputs, the importing authority, whether in Japan or in the UK, may require detailed information relating to production or cost to be provided at the time of importation. Such information by its own nature is commercially sensitive. Many businesses may be reluctant to disclose it. Thus, the benefits extended cumulation may in practice provide either Japanese or UK manufacturers remain to be tested.
Beyond its provisions on trade in goods, the JUK Agreement includes other noteworthy rules-based innovations going beyond the Japan-EU EPA, notably relating to competition. First, the JUK Agreement recognizes the importance of consumer protection as part of competition policy, which is not included in the Japan-EU EPA. This approach appears very much driven by the UK. Japanese competition law traditionally concerns itself with undertakings (i.e., business operators), rather than consumers. It will be interesting to see how the competition authorities of Japan and the UK cooperate on matters relating to consumer protection.
Further, there is a new obligation, which is not found in the Japan-EU EPA, for Japan and the UK to make publicly available on an official website a list of state-owned enterprises no later than six months after the date of entry into force of the JUK Agreement. This corresponds to the current competition landscape in the EU where the European Commission has recently adopted a White Paper dealing with the potentially distortive effects caused by foreign subsidies (i.e., a financial contribution by a government or any public body of a non-EU State).
There is also an innovative chapter in the JUK Agreement (not found in Japan EU EPA) entitled “Trade and Women’s Economic Empowerment." It highlights the importance of enhancing opportunities for women within the territories to participate equitably in the domestic and global economy. It further recognizes the benefit of sharing their diverse experiences in reducing the systematic barriers which prevent women from participating in the domestic and global economy. Going forward, it is hoped that there will be a platform where Japan and the UK can engage in a meaningful dialogue to promote those objectives.
Other provisions which go beyond the Japan-EU EPA are found in relation to digital trade and e-commerce. Under the JUK Agreement, the cross-border transfer of information by electronic means is not prohibited. The JUK Agreement also introduces a ban on requiring a Japanese/UK business to locate its computing facilities in the other party’s territory. Requiring a business of the other party to disclose encrypted information is also prohibited.
Thus, overall, the JUK Agreement appears to have been a largely successful exercise in maintaining the Japan-UK status quo in terms of the existing benefits of the Japan-EU EPA, regardless of the UK’s effective departure from the EU at the end of 2020.
What remains to be seen is the more complex issue of how the UK’s longer-term economic relations with Japan evolve in light of the UK’s decision to leave the EU. That in turn will largely depend on the terms of access the UK is able to negotiate with the EU itself.
Indeed, while celebrating the parties’ agreement, Japan itself has stressed that its assessment of the UK as a trade and investment partner will substantially depend on whether the UK can play its traditional role, for Japanese businesses, as a point of entry into the EU.
