EU and Japan formally sign economic partnership agreement

On 17 July 2018, the EU-Japan Economic Partnership Agreement (EPA) was formally signed during the EU-Japan summit in Tokyo.  The EPA – the largest free trade agreement ever negotiated by the EU – has been years in the making and took significant time and effort to get to this stage. You can read more about the steps to date in our earlier post here.

The EPA aims to remove trade barriers between the EU and Japan, making it easier for firms to sell goods and services between the two economies. It will create the world's largest open trade zone, covering nearly a third of global GDP, almost 40 percent of world trade and more than 600 million people.

The partnership also goes beyond trade, with wider social and political implications.  Given its scope of coverage, the EPA may encourage the development of global trade rules consistent with EU and Japanese standards.  The EPA also sends a powerful signal that two of the world's largest economies explicitly reject trade protectionism.

The EPA and its Impact on Trade Between the EU and Japan

Removal of tariffs

One of the key elements of the EPA is the elimination of a number of customs duties – estimated to cover 90% of all existing tariffs between the EU and Japan on entry into force of the EPA.  After 10 years, Japan will have eliminated 97% of its tariff lines on EU goods and the EU 99% of tariff lines on Japanese goods.

For the EU, the EPA is projected to eliminate €1 billion worth of tariffs paid annually by companies exporting goods to Japan, with an increase in GDP of €33 billion by 2035. This will make it cheaper and easier for EU companies to trade with the world's fourth largest economy.  Japan's elimination of customs duties is expected to benefit EU exports in, among other things, electrical machinery, pharmaceuticals, motor vehicles, transport equipment, textiles and clothing.

Food, beverages and agricultural produce are also key goods sectors likely to benefit from the EPA. The export of wine is currently the EU's second biggest agricultural export to Japan by value. The tariffs on wine, which currently stand at 15%, are to be removed. Tariffs on a number of cheeses (which attract 29.8% on export from the EU to Japan) are also to be removed totally, along with all tariffs on fish produce imported into Japan.

On the Japanese side, the EPA is expected to increase Japan's real GDP by approximately 5 trillion yen, and stimulate the Japanese economy by creating around 290,000 new jobs.  Once in force, the EPA will benefit Japan's automotive manufacturers significantly.  More than 90% of tariffs on automotive parts will be removed immediately and the current 10% import duty on passenger vehicles will be phased out over eight years. Japanese agricultural and beverage industries will also find themselves more able to compete in the EU, with import tariffs on beef, soy sauce, sake, shochu and green tea lifted immediately.

Elimination of non-tariff barriers

A number of overseas firms struggle to penetrate the Japanese market due to the rules and regulations that Japan requires of importers, which typically differ from international standards. The EPA, however, puts more focus on international standards – which should reduce the cost of compliance for EU firms exporting to Japan.  These standards will also preserve certain geographical indications or origin, which will protect a number of EU and Japanese products in respective markets.

Three industries that are likely to benefit from the elimination of non-tariff barriers are:

1. the motor vehicle industry, through the elimination of testing or certification upon export and recognition of the same international standards on safety and environmental protection. EU exporters, for example, will be subject to the same regulations in the EU and Japan and products will not need to be tested again when exported to Japan.
2. the pharmaceutical industry, through the expansion of the coverage of the Mutual Recognition Agreement for conformity assessment procedures.
3. the food and beverage industry, by requiring EU food producers only to comply with international standards for food labelling rather than compliance with the higher Japanese standard thereby reducing the cost of compliance for EU exporters.

Liberalisation of services

The EPA includes provisions aimed at liberalising trade in services, in particular as regards:

1. postal and courier services (e.g. by aligning rules on border procedures, licences and the independence of the regulators);
2. telecommunication services (e.g. by enabling any supplier from one party to access and use telecommunication services in the territory of the other party, as well as laying down the ground rules concerning the conditions under which suppliers from one party are allowed to provide their services in the territory of the other party);
3. international maritime transport services (e.g. by providing for obligations to maintain non-discriminatory access to transport and auxiliary services as well as access to ports and port services); and
4. financial services (e.g. by strengthening regulatory cooperation through regular information exchange and consultation on forthcoming regulatory initiatives, and by committing to relying on each other's regulatory and supervisory framework where possible).

Public procurement

The EPA will build on the existing mutual obligations deriving from the WTO Government Procurement Agreement and add a new set of disciplines concerning, for instance: (i) the electronic publication of notices through a single point of access, (ii) the fair treatment of EU construction businesses under the Japanese construction business evaluation system, (iii) the recognition of test reports, or (iv) the possibility of using environmental standards as a selection criteria.

In terms of market access, EU companies will also be able to participate on an equal footing with Japanese companies in bids for procurement tenders in the so called Japanese "core cities" (48 cities of around 300,000 to 500,000 inhabitants).

Data protection

With regard to data protection, the EU and Japan concluded negotiations on reciprocal adequacy on 17 July 2018. This parallel agreement (explained further in our "latest thinking" briefing here), which will complement the EPA, states that Japan and the EU will recognise each other's data protection systems as "equivalent". This is the first time that such a reciprocal agreement has been reached between the European Commission and a third country, and it is hoped that it will facilitate the free and safe flow of data between the EU and Japan.

Other

The new EPA also establishes rules and principles in relation to a number of other matters.  Among other things, the EPA contains rules on corporate governance, rules of origin, geographical indications, state-owned enterprises, customs and trade facilitation, regulatory cooperation, and trade and sustainable development.  Moreover, the agreement is underpinned by a state-to-state dispute settlement mechanism concerning the interpretation and application of the treaty (although certain EPA provisions are carved out from this system).

The Wider Implications of the EPA

Like other free trade agreements concluded recently by the EU (such as with South Korea and Canada), the EPA sends a strong message that the EU and Japan reject trade protectionism.

The EU has made clear that it believes that openness to trade is the "best tool" to shape globalisation and promote growth and higher levels of employment, with Commissioner for Trade, Cecilia Malmström opining that "The EU and Japan share a common vision for an open and rules-based world economy that guarantees the highest standards..." and "together with our Japanese partners we are sending a strong signal to the world that we still believe in open trade and that protectionism is never the answer".

The EPA also marks a shift in Japanese trade policy, which has traditionally focused on America and Asia rather than looking to Europe. At the signing ceremony, Prime Minister Shinzo Abe implicitly criticised the current global trends encouraged by countries such as the US, stating that "In a world where protectionism is expanding, Japan and the EU will lead the world as standard-bearers of free trade".

Remaining Challenges

The EPA now awaits approval by the Japanese Diet and the EU (with no separate ratification by the Member States currently foreseen). Both sides are keen to expedite the process which could see the EPA enter into force in early 2019.

The currently foreseen transition period between the UK and EU – which is conditional upon both sides agreeing a final withdrawal treaty – will see the UK continue to apply existing EU trade deals with other countries, such as the EU-Japan FTA, during a transition period from 29 March 2019 to 31 December 2020.  Thereafter the UK will no longer be bound by such treaties, but during this period the UK will be able to negotiate its own trade deals to apply from 1 January 2021, and the UK and Japan have indicated that they will "work quickly to establish a new economic partnership between Japan and the UK based on the final terms of the EPA" (the UK Secretary of State for International Trade in a Written Statement dated 11 June 2018).

As mentioned above, the EPA contains a mechanism for resolving disputes between the contracting parties to the treaty.  However, the EPA does not include investment protection standards or a separate method for resolving investor-state disputes arising out of the EPA. In parallel to ratification, talks continue between Japan and the EU on the process for handling investment protection standards and investment protection dispute resolution, which is expected to be addressed through a separate EU-Japan investment agreement.

The EU is continuing to push for this agreement to provide for a new Investment Court System (ICS) in which judges will be appointed by the two parties to the agreement. The European Commission has made it clear in a factsheet published in July 2017 that, in its view, the "old" system of Investor-State Dispute Settlement (ISDS) tribunal arrangements is "dead."

Whether Japan will agree to the ICS remains unclear.  Japan was willing to exclude ISDS arrangements from its 2015 trade agreement with Australia.  However, that agreement simply allowed disputes to be heard by national courts pending any future agreement.  Where possible, Japan appears to favour standard ISDS through binding arbitration, and the EU's new and untested ICS mechanism may therefore remain unappealing to Japanese negotiators.

For more information, please contact Christopher Hunt, Partner, Lode Van Den Hende, Partner, Andrew Cannon, Partner, Ben Jolley, Senior Associate, Jennifer Paterson, Senior Associate, Matthew Harnett, Associate, or your usual Herbert Smith Freehills contact.