ECONOMY

Japan and the UK Sign Comprehensive EPA 

With the Japan-EU economic partnership agreement due to expire at the end of 2020 following Britain’s exit from the European Union, Japan and the EU have been working “at exceptional speed” this year on the establishment of a new comprehensive agreement. On October 23, the two sides successfully brought negotiations to a close, with the new high-level rules expected to lead to further promotion of trade and investment between the two countries. Mizuno Tetsu reports.

UK Secretary of State for International Trade Elizabeth Truss with Japan’s Foreign Minister Motegi Toshimitsu before last-minute negotiations in London on concluding a new bilateral trade deal, August 6, 2020. MINISTRY OF FOREIGN AFFAIRS VIA FLICKR, CC BY-ND 2.0

On October 23, 2020, the Japan-UK Comprehensive Economic Partnership Agreement (EPA) was signed by Foreign Minister Motegi Toshimitsu and UK Secretary of State for International Trade Elizabeth Truss. This new trade and investment framework between the UK and Japan replaces the Japan-EU EPA, which was concluded with the UK following its withdrawal from the EU.

The UK-EU withdrawal agreement was concluded on January 24, 2020, with effect from February 1. Japan-UK EPA negotiations commenced on June 9, reaching a broad agreement on September 11.

In respect of trade talks between the UK and the EU, on February 1, 2020 Foreign Minister Motegi said, “the impact of the UK’s withdrawal from the EU on Japanese businesses and the international economy will be minimized after the upcoming negotiations between the UK and the EU on their future relationship. Japan will continue to closely watch relevant developments and take necessary measures including providing information to Japanese businesses.” In other words, it is crucial for Japan that the supply chain between the UK and the EU is maintained, and it will have a significant impact on Japanese firms that see the UK as a gateway to the EU if trade talks between the UK and the EU flounder.

Later, at the Eighth Japan-UK Foreign Ministers’ Strategic Dialogue on February 8, 2020, the Ministers reaffirmed that the two countries will quickly establish a new bilateral economic partnership. On May 13, the UK unveiled its basic negotiation approach in a policy paper titled, “UK-Japan free trade agreement: the UK’s strategic approach.” On June 9, 2020, Foreign Minister Motegi and Secretary of State for International Trade Truss held a video teleconference talk and agreed to launch negotiations on the same day to establish the future economic partnership between Japan and the UK, and also confirmed that they would work together to quickly establish it, taking also into account the need to ensure the business continuity between Japan and the UK.

On September 11, only three months later, Motegi said, “We reached an agreement in principle on the Japan-UK Comprehensive EPA. Following the TPP11, the Japan-EU EPA, and the Japan-US Trade Agreement, Japan has led the promotion of a free and fair trade system and achieved this result. […] we have reached an agreement in principle at the exceptional speed of about three months. We aim for the agreement to enter into force on January 1, 2021 after we conduct the final work on the agreement based on today’s agreement in principle, conduct the signing, and receive approval from the Diet for the agreement.”

This was the UK’s first major trade agreement since leaving the EU.

UK International Trade Secretary Truss negotiated for a better deal for exports to Japan of British blue-vein cheeses such as Stilton. THE JAPAN JOURNAL

While the negotiations were undoubtedly conducted “at an exceptional speed,” a deal on cheese remained a point of contention to the end. A settlement was reached by effectively transferring part of the Japan-EU EPA’s low tariff import quota to the UK, although no new tariff quota would be established. In other words, this was a mechanism to apply low tariffs to UK cheese when imports from the EU are low.

The reason for this exceptional speed was the UK’s withdrawal from the EU. The Japan-UK EPA must enter into force on January 1, 2021 to avoid a gap in preferential tariffs during the “transition period” until the end of 2020 when the UK remains in the EU (in the case that withdrawal negotiations are still not concluded after January 1, 2021). Needless to say, the Japan-UK EPA was negotiated under the Japan-EU Economic Partnership Agreement (EPA), which came into force on February 1, 2019. 

At the press conference held on October 23 following the signing of the Agreement, Motegi emphasized the time limit for the agreement to take effect, saying, “It is aimed for the Japan-UK Comprehensive EPA to enter into force on January 1, 2021. Domestic processes such as the procedure in the Diet are being advanced to be in time for that.” Furthermore, he explained, “In terms of the significance, the end of the transition period following Brexit is the end of this year, and concluding the EPA by then is important in the sense of enabling continuance of the benefits Japan has acquired under the Japan-EU EPA and ensuring the continued business of Japanese companies.”

The Agreement in Brief

In brief, the Japan-UK EPA maintains access to the UK market under the Japan-EU EPA and further improves access to the UK market for certain items, such as rolling stock and automotive parts. The UK’s access to the Japanese market also essentially retains the content of the Japan-EU EPA. For example, the current 7.5% tariff on Japanese cars will be phased down to zero by February 2026, as with the Japan-EU EPA. The “Geographical Indications (GI)” that protect brands of specific growing regions also follow the Japan-EU EPA, protecting products such as sake, Scotch whisky, and Kobe beef.

Most importantly, more advanced, high-level rules than those of the Japan-EU EPA have been prescribed in some sectors, such as e-commerce and financial services. An agreement that includes newly established advanced rules for the post-Coronavirus world or the international trade regime following the inauguration of the Trump Administration are highly significant. Motegi said, “I believe that cooperation between Japan and the United Kingdom will be a first step in leading rule-making in the international community including for e-commerce and financial services.”

It is expected that high-level rules will lead to the further promotion of trade and investment between the UK and Japan. Motegi continued, “[…] we agreed on more advanced, high-level rules than the Japan-EU EPA, including on e-commerce, so it is expected that this will lead to further promotion of trade and investment between Japan and the United Kingdom.”

In terms of rules, more advanced, high-level rules than the Japan-EU EPA were newly stipulated in fields such as e-commerce, financial services, competition policies, and gender. In particular, in regard to e-commerce which both Japan and the United Kingdom have a strong interest in, more high-level stipulations than the Japan-EU EPA will be adopted such as prohibition of restrictions on cross-border transfer of information, prohibition of demands to install computer-related equipment, the addition of algorithms as being subject to the prohibition on demands to disclose source code, and prohibition of demands to disclose encryption information. 

“Due to the agreement in principle today, we will diligently advance work such as coordination of the text and legal scrubbing,” Motegi said.

Business Expansion of Japanese Companies

The “Follow-up on the Growth Strategy,” approved by the Cabinet on July 17, 2020 in response to the current spread of the novel coronavirus, places emphasis on ensuring the active and stable overseas business expansion of Japanese companies. One objective is to build an international economic system that is resilient to risk by strengthening global supply chains. The other is the formation of rules, reform of dispute resolution procedures, and strengthening of reporting and transparency in new areas such as e-commerce and investment facilitation that help revitalize international trade and investment. Needless to say, this is why Japan is keen to press ahead with WTO reform. Some 1,000 Japanese companies have established a presence in the UK as a gateway to the EU, creating around 180,000 jobs and forming a centralized sales and R&D base for their European operations. It goes without saying that doing business in the UK is highly significant for Japanese companies. In this respect, the Japan-UK EPA Agreement too is of broader practical significance. The Japan-UK EPA, which outlines new rules for trade and commerce, is a concrete first step.

Outline of the Japan-UK EPA Agreement

Trade in goods

Access to UK market for Japanese products

Overall, tariffs and the tariff elimination period catch up to the same as those of the Japan-EU EPA (so-called “catch-up”)

Industrial products 

100% tariff elimination

  • Immediate elimination as obtained under the Japan-EU EPA
  • Ensure in addition the immediate elimination of rolling stock, automotive parts, etc. 

Agricultural, forestry, and fishery products

  • Maintain the content of the Japan-EU EPA that eliminates tariffs on items of major export interest
  • Ongoing removal of import restrictions (Japanese wine) and protection of agricultural products and liquor GIs, and immediate elimination of tariffs on all alcoholic beverages

Access to Japanese market for UK products

Overall, tariffs and the tariff elimination period catch up to the same as those of the Japan-EU EPA (so-called “catch-up”)

Agricultural, forestry, and fishery products

Within the scope of the Japan-EU EPA

  • No new tariff-rate quotas were set*
  • For items with safeguards under the Japan-EU EPA, take the same safeguards as those under the Japan-EU EPA

*A mechanism has been established to allow Japan-EU EPA tariff-rate quotas to be used only in cases where they remain unused

Industrial products

Removal of 100% of tariffs (as well as the immediate elimination of those immediately eliminated by the Japan-EU EPA)

Rule areas

Rule of origin 

  • Provides that EU-origin and EU-produced materials shall be considered origin and produced materials under this Agreement
  • Product-specific rules for some items, such as machine tools, textiles, and automotive parts, are more relaxed than those of the Japan-EU EPA

E-commerce and financial services 

  • Prohibits restrictions on the cross-border transfer of information, prohibits demands for the installation of computer-related equipment, prohibits demands to disclose encryption information, etc. Addition of algorithms to prohibit demands to disclose source code.
  • Provides for a prohibition on demands for the installation of computer-related equipment in financial services

Competition policy 

  • Consumer protection provisions have been added while retaining the content of the Japan-EU EPA 
  • Gender (trade and women) 
  • Provision for, among other things, recognizing the importance of expanding opportunities for women’s equitable participation in the domestic and global economy

TPP11

The Japan-UK EPA Agreement is an important basis for further strengthening the favorable relationship between Japan and the UK. The UK has expressed interest in joining TPP11, and Japan naturally welcomes this. On October 23, Motegi said, “In my meeting with Secretary of State for International Trade Truss, I stated that Japan welcomes the United Kingdom’s interest in joining the TPP. Japan will be the Chair of the TPP Commission next year, and I stated that if the United Kingdom wants to join the TPP, then we would like to provide cooperation in various ways such as providing information.” Secretary of State for International Trade Truss stated that the United Kingdom has strong interest in joining the TPP. She also explained that various procedures and coordination are being advanced within the United Kingdom towards that.” At the video teleconference talk on June 9 where it was agreed to begin EPA negotiations, Secretary Truss reiterated the UK’s interest in TPP 11, and Minister Motegi stated that Japan welcomed the UK’s interest and would continue to provide necessary support. The UK and the EU are global and strategic partners for Japan which share fundamental values such as freedom, democracy, market economy, human rights, and the rule of law.

It was the Abe Administration that paved the way for the success of the Japan-EU EPA and TPP11.

For example, on September 27, 2019, then Prime Minister Abe Shinzo and Jean-Claude Juncker, President of the European Commission, signed a document entitled “the Partnership on Sustainable Connectivity and Quality Infrastructure between Japan and the European Union.”

Foreign Minister Motegi Toshimitsu meets with his British counterpart Dominic Raab in London, August 5, prior to a working dinner. The two sides agreed on the need for an early conclusion of the EPA negotiations, with Motegi keen to point out the need to minimize any adverse impact of the UK’s withdrawal from the EU on the companies of the two countries. MINISTRY OF FOREIGN AFFAIRS VIA FLICKR, CC BY-ND 2.0

The Japan-EU EPA document includes the following essence, such as “the importance of mobilizing levers and tools to spur private investment,” “cooperate on enhancing digital connectivity,” “interconnection of transport corridors and enhancement of safety and security of transport,” “support sustainable energy connectivity building,” “expand international people-to-people exchanges between institutions in higher education and research sectors,” and “cooperation in the framework of the Connectivity Partnership.” This clearly contains a strong message against protectionism and developing our own rules.

Additionally, on September 2, 2020, then Prime Minister Abe held a summit telephone talk with UK Prime Minister Boris Johnson. One purpose of this talk was to explain Abe’s resignation and to take the opportunity to share the view that Japan and the UK should play a leading role in responding to COVID-19, promoting free trade, and building a post Coronavirus international order. Following the inauguration of the Trump administration, President Trump strongly promoted “America First” and withdrew from the Paris Agreement and the TPP, widening trade friction between the United States and China through protectionist trade measures. Moreover, China’s development of an independent foreign policy is impacting the values, social order, free trade, and security to which the international community has attached great importance. Having secured his election as the next President of the United States and having made a public commitment to enact different policies from those of President Trump, Joe Biden is already attracting the attention and keen expectations of the world. However, it will take a considerable amount of time to return to the path before Trump or to find an even better direction.

Japan’s basic position is the “establishment of a rule-based, free and fair economic order.” Our foremost policy is to engage in economic partnership negotiations without falling into protectionism, even amid the enormous impact of the world economy, and to continue to aim to build a free and fair rule-based economic order, leading to sustainable growth of the world economy. Japan is committed to its approach of steadfast diplomacy based on universal values such as liberalism, democracy, basic human rights, the rule of law, and the market economy. From this position, Japan led the way in the Japan-EU EPA and the TPP11 and has now successfully concluded the Japan-UK EPA.

RCEP

Japan has also been leading the way in accelerating negotiations on the Regional Comprehensive Economic Partnership (RCEP). The RCEP began with the ASEAN proposal in 2012, with a view to reaching an agreement at the end of 2020. On November 15, RCEP reached a broad agreement at an online summit meeting of the fifteen countries participating in the negotiations, excluding India. As the largest democracy among the countries participating in the negotiations, India was a very important participant for the RCEP. However, last fall it was announced that India would not take part in negotiations in 2020 due to concerns over low-priced products flooding its market. RCEP continues to be negotiated by sixteen countries comprising ASEAN plus Japan, China, South Korea, Australia, New Zealand and India. If the RCEP becomes a reality, it is expected that the participating countries will have almost half the world’s population at 3.57 billion people, and a total GDP of $25.4 trillion (2017 data), which would exceed 30% of the world’s GDP. India’s decision not to participate would deal a hard blow, with the loss of its population of 1.33 billion and GDP of $2.6 trillion. The growing influence of China is a cause for concern. At the RCEP Intersessional Ministerial Meeting held on October 14, 2020, the ministers confirmed the ongoing tasks for solutions to the remaining issues and the countries participating in the negotiations affirmed anew that the RCEP remains open for India.

To date, Japan has nineteen FTA/EPAs in force or signed. Agreements in force or signed are with Singapore, Mexico, Malaysia, Chile, Thailand, Indonesia, Brunei, ASEAN, Philippines, Switzerland, Vietnam, India, Peru, Australia, Mongolia, TPP12 (signed), TPP11, EU, and the UK. Agreements under negotiation are RCEP, Turkey, Colombia, Japan-China-ROK. Agreements for which negotiations are suspended are GCC, Korea, and Canada.

At this point in time, Biden, who has gained the support of the Rust Belt that supported Trump in the Presidential Election four years ago, is unlikely to consider a return to the TPP, but there is no telling what the future holds. Japan will in any case steadfastly maintain its basic stance of  “establishment of a rule-based, free and fair economic order” and will continue to tenaciously pursue dialogue in all negotiations.

MIZUNO Tetsu is a freelance writer.

Note: This article first appeared in the November/December 2020 issue of the Japan Journal.

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