EU – Japan EPA presented to the European Council, ratification begins

On 18 April 2018 the European Commission (the "Commission") presented the finalised text of the EU-Japan Economic Partnership Agreement ("EPA") to the European Council and thereby took the first step in the EPA's ratification process at the EU level.  Getting to this point took significant time and effort: the first of 18 rounds of negotiations began in early 2013, dozens of meetings were held within the EU itself, and the consolidated text was not finalised until (almost five years later in) December 2017.  While the time required to negotiate the text of the EPA is consistent with that taken by another recent EU agreement (the EU-Canada Comprehensive Economic and Trade Agreement ("CETA") took a little over 5 years), both parties to the EPA appear keen to kick the ratification process into high gear.  If the parties' plans come to fruition, the EPA will enter into force by 29 March 2019 and potentially will do so even before the formal conclusion of CETA, the text of which was finalised years earlier than that of the EPA.

Policy, Politics and Perceived Problems are Propelling the Parties

The parties' desire to move quickly into and through the ratification process has its origins in policy, politics, and corporate Japan's perceptions of potential problems.  Both the EU and Japan favour a policy of increased cross border trade as, amongst other things, a means of economic growth.  In the case of Japan, increased international trade is seen as a key policy element to growth and one of the core ideas of Abenomics which is "a consistent advocate of free trade".  For its part the Commission has, in speeches and publications about the EPA, trumpeted it as "a powerful signal that cooperation, not protectionism, is the way to tackle global challenges" and a demonstration of its "strong continued commitment to open, fair and rules-based trade at a time when others are questioning it".

The length of different electoral/appointment cycles, too, may be playing a role.  The term of the current Commission will end in late 2019 and the Commission has publicly linked the targeted date for the EPA's entry into force as being chosen to occur before it ends.[1]  Japan's government, for its part, may not regard electoral cycle pressure as driving it to hurry ratification of the EPA: the lower house general election is not scheduled to occur until late 2021 and the current government has a supermajority therein[2].  The Japanese government is not, however, deaf to the concerns of its business community.

Research by JETRO (the Japan External Trade Organization) indicates both that (1) a little over half of respondent companies planned on using the EU-Japan EPA, and (2) the greatest business risk Japanese companies in the UK and EU identified was that arising from Brexit.  Other recent research by JETRO indicates that amongst Japanese-affiliated UK based manufacturers, about 60% have indicated that – even in a situation where no tariffs apply between the UK and EU, but where customs procedures do again apply following Brexit – such companies would need a transitional period of more than one year after the withdrawal date.  It is therefore unsurprising that media reports cite diplomatic sources as saying that (1) the parties are aiming for a July 2018 signing summit, (2) Japan wishes for the EPA to roll-over to apply to the UK after Brexit, and (3) the parties are aiming for the EPA to be in force by the time Britain leaves the EU in March 2019.

Ambitious Timelines for Ratification and Entry into Force

A timeline this ambitious would likely prove impossible to meet if approval of the nearly 40 national and regional EU parliaments was required for ratification.  To obviate the need for such approval, and in the light of the clarification provided to the parties by Opinion 2/15 of the European Court of Justice ("ECJ") (concerning the EU-Singapore Free Trade Agreement's nature and ratification requirements), Japan and the Commission have sought to remove from the EPA those elements which would be "mixed" competence items.  Such mixed competence items would require both EU and national/regional parliamentary approval.  Most prominently, negotiators have not included in the EPA an investment dispute settlement mechanism nor have they included investment protection standards; instead the parties have agreed to deal with those issues separately and at a later date.  As a result, EU negotiators expect that the EU ratification process will involve only the approval of the European Council (composed of the leaders of the EU member states) and the European Parliament.

The EPA and Brexit

Japan has expressed its desire for the EPA, once in force, to apply to the UK after Brexit. This may not be straightforward. The published text of the EPA provides that it applies, in respect of the EU, to territories in which the Treaty on the European Union ("TEU") and the Treaty on the Functioning of the European Union ("TFEU") are applied.[3] This drafting of the territorial scope mirrors that of some other agreements such as the EU-SADC[4] EPA. Unlike the EU-SADC EPA, however, EU Member States are not independent parties to the EU-Japan agreement and they will not sign the agreement themselves. Whether, and how, these third country agreements will apply to the UK after Brexit (and the expiry of the planned transition period) continues to be unclear. One obvious solution would have been to make specific provision in the agreement itself, but this does not appear to have happened.

Remaining Challenges

The EPA is progressing without an investment dispute settlement mechanism or investment protection standards. While the parties have agreed to negotiate both points separately going forward (and as described further in our previous article) they continue to have divergent approaches to investor-state dispute settlement.  The Commission is continuing strongly to push its proposed investment court system ("ICS") rather than utilising standard investor state dispute settlement through binding arbitration, which approach appears to be favoured by Japan.  The recent publication by the Council of directives authorising the Commission to negotiate a convention establishing a multilateral investment court (in respect of which see our article, here) may not offer much hope for a breakthrough: these initiatives will likely place a greater financial burden on developed states like Japan. This may be unattractive to Japanese negotiators in circumstances where Japanese investors very seldom bring investment claims and Japan itself has never faced such a claim. Belgium's request for an opinion from the ECJ on the compatibility of the ICS provisions in CETA with EU law[5] may also have implications for (and therefore further slow) Japan-EU negotiations in this area.

[1]        European Commission – Press release dated 8 December 2017 (http://europa.eu/rapid/press-release_IP-17-5142_en.htm)

[2]        That said, there remains the possibility – as has happened frequently before – that parliament could be dissolved prior to the scheduled date resulting in an early election.

[3]        http://trade.ec.europa.eu/doclib/docs/2017/december/tradoc_156423.pdf Chapter 1, Article 1.3 (Territorial Application), paragraph 1

[4]        Southern African Development Community

[5]        European Parliament Briefing 'International Agreements in Progress' dated January 2017, pages 9 to 10

For more information, please contact Andrew Cannon, Partner, Colin Trehearne, Associate, or your usual Herbert Smith Freehills contact.