Developments in UK trade negotiations. The UK-Japan Comprehensive Economic Partnership

At the end of the Brexit transition period on 31 December 2020, all of the bilateral trade agreements which are applicable to the UK benefits by virtue of its membership of the EU will cease to apply to the UK with potentially significant impact on trade between the UK and the respective partner countries.

In preparation for definitively leaving the EU internal market, the UK has been negotiating and concluding numerous replacement agreements.  The most significant by far would be the agreement on the future relationship with the EU, but there are very many more. Some are already concluded, some are on track for conclusion and others are at various stages of preparation.

A complete list of the UK agreements (updated from time to time) is available here.

So far the new agreements are “continuity” agreements, meaning that they seek to reproduce the effect of the agreements between the EU and the partner countries.  As such, they are based on a “cut and paste” of the corresponding EU agreement with the term “European Union” being replaced by “United Kingdom” and a host of other consequential technical adjustments, for example, to maintain alignment of the timetables for the phasing in of tariff reductions and adjusting the governance arrangements.

The latest and most significant agreement is that about to be concluded with Japan for a Comprehensive Economic Partnership (the “UK-Japan CEPA”). It follows the EU-Japan Economic Partnership Agreement (“EU-Japan EPA”) very closely and includes a protocol based on the earlier EU-Japan mutual recognition agreement.

The UK will be able to benefit from most of the tariff rate quotas (“TRQs”) that were included in the EU-Japan EPA, but only to the extent that they are not used by the EU. Apparently, the TRQs of interest to the UK are not currently fully filled so UK exports should not be significantly constrained compared to the current situation.

A number of proclaimed enhancements compared to the EU-Japan EPA are in fact the establishment of mechanisms to further cooperation in the future.  Thus, for financial services, the UK-Japan CEPA creates an annual dialogue between HM Treasury, UK financial regulators and the Japanese FSA that will explore ways to further reduce regulatory friction – thereby opening up the possibility of greater market access than is available to the EU.

We draw attention to two noteworthy features of the UK-Japan CEPA.

Rules of Origin

Trade Agreements that do not establish customs unions reserve preferential duty treatment to goods recognised as originating in the partner country according to detailed rules laid down in each agreement. These rules do, however, normally allow raw materials and components from the importing country which are incorporated into a products in the partner country to be counted towards satisfying the origin requirements (so-called “bilateral cumulation”).

This system is necessary to prevent the partner country becoming a conduit for goods from other countries to evade the otherwise applicable duties. It does, however, greatly complicate taking advantage of the preferential tariff treatment since it necessitates proving origin and obtaining certificates. As a consequence, for example, less than half of Canadian imports into the EU take advantage of the preferences and in the other direction the take up is even less.  It seems that many importers find the payment of the duty less burdensome than the paperwork.

Brexit significantly impacts the use of preferences negotiated between the EU and other countries since EU-origin is now restricted to 27 EU Member States rather than 28. For example, a machine made in the EU incorporating components imported from the UK would have automatically been recognised as of EU origin and entitled to the relevant tariff preference when imported into Japan before Brexit, but this will not be the case afterwards.

Many of the EU’s trade agreements with developing countries have also allowed so-called diagonal cumulation whereby raw materials and components from countries with similar agreements are allowed to be counted towards satisfying origin requirements. Thus, fruit produced in one partner country can be canned in another with sugar from a third and benefit from preferences in the EU as if made entirely from raw materials and components from the exporting country. This furthers the development objectives of these agreements and is sometimes said to promote “South-South trade”.  The same approach to cumulation of origin is not taken in in the EU’s trade agreements with developed countries such as Canada and Japan.

The UK has provided for diagonal cumulation with the EU in its continuity trade agreements with most countries, presuming that there will be a free trade agreement between the EU and the UK. This can be considered as providing an advantage to the EU since it provides EU components in UK assembled goods an advantage not given to other countries. The EU does not reciprocate.

The EU-Japan EPA provides a striking example of this policy.  Thus a motor vehicle made in the UK largely from components imported from the EU will be treated by Japan as entitled to the tariff preferences in Japan whereas a similar export from the EU of a car made largely from components imported from the UK would not. The UK will give similar treatment to motor vehicles from Japan made largely from components imported from the EU, but the EU would not.  The UK-Japan CEPA provides that Japan will endeavour to negotiate parallel provisions in the EU-Japan EPA. The EU has, however, so far refused to contemplate diagonal cumulation in the EU-UK future relationship, arguing that this is only possible where origin rules are identical in all agreements.

UK accession to the Comprehensive and Progressive Trans-Pacific Partnership Agreement

The UK has stated its intention to accede to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”) and Japan has expressed its support for the UK’s quick accession to the CPTPP in a side-letter to the UK-Japan CEPA.

The CPTPP is an important agreement currently covering 11 States bordering the Pacific.  It is open to accession by States outside that region, but this requires there first to be negotiations with each existing Member individually prior to formal accession to CPTPP. Like the overlapping, but less ambitious Regional Comprehensive Economic Partnership Agreement (“RCEP”), the CPTPP has an important harmonising and coordinating effect on bilateral trade agreements and could facilitate their conclusion and harmonious implementation. One notable harmonising effect is with regard to rules of origin.

We will comment more on the CPTPP and RCEP in the coming weeks.