Worldwide: Japan And EU Sign The Economic Partnership Agreement – One Of The Largest Bilateral Trade Partnerships To Date

On July 17, 2018, Japan and the European Union (EU) have signed an Economic Partnership Agreement (EPA) which will remove EU import duties on Japanese cars as well as the vast majority of tariffs on imports of European meat, wine, and dairy products. If approved by the Japanese Diet and European Parliament and put into force, the agreement will open up huge market opportunities for both sides:

  • Creation of a free trade zone covering 600 million people and a third of global GDP.
  • Reduction or elimination of customs duties and tariffs that affect Japanese and EU companies.
  • Providing 127 million consumers in the Japanese market with more open access to key EU agricultural exports, and protection to over 200 traditional European regional food and drink products in Japan.
  • Increase in EU export opportunities in a range of other sectors, including the ability for European companies to bid for public contracts in many Japanese cities.

"It could help boost Japan's gross domestic product by about 45 billion dollars, and create nearly 300,000 jobs."

Hiroshige Seko,
Minister of Economy, Trade and Industry
"Seko praises Japan-EU free trade deal"
from NHK WORLD-JAPAN

What will change for Japanese and EU companies?

Trade negotiations between the EU and Japan have been conducted since March 2013. At the EU-Japan summit on July 6, 2017, both parties reached an agreement in principle on the main elements of a free trade deal. Its key elements include the following:

  • Duty-free export of motor cars: Japan's main area of interest was the elimination of high tariffs ranging from 10% to 14% on industrial products like motorcars and electrical machinery. According to a survey by the Japan External Trade Organization (JETRO) in 2017, distributed to Japanese companies that run their businesses in Europe, more than 50% of the companies responded that they expect the profit impact of the EPA to be positively significant. Respondents in the manufacturing, electric/electronics, and  transport machinery (cars and motorcycles) industries, as well as chemical/oil producers, all showed strong interest in utilizing the EPA for imports from Japan.
  • Temporary movement of company personnel: The agreement includes the most advanced provisions on movement of people for business purposes that the EU has agreed to so far. They cover all traditional categories, such as intra-corporate transferees, business visitors for investment purposes, contractual service suppliers, and independent professionals, as well as newer categories, such as short-term business visitors and investors. This will, in turn, support investment in both directions.
  • Elimination of customs duties: Tariffs on 75% of Japan's exports to the EU, and more than 90% of the EU's exports to Japan will be eliminated following the entry into force of the economic partnership.
  • Agriculture and food products (in particular, meat, wine, and cheese): At present, duties on food from the EU are high, ranging from 15% on wine to 30% to 40% on cheese. With annual exports worth over EUR 5.7 billion, Japan is already the EU's fourth biggest market for agricultural exports. Over time, around 85% of EU agri-food products (in tariff lines) will be allowed to enter Japan entirely duty-free.
  • Geographical indications: The EPA recognizes the special status and offers protection on the Japanese market to more than 200 European agricultural products from a specific geographical region, known as Geographical Indications (GIs) – for instance, Roquefort and Aceto Balsamico di Modena.
  • Forestry: Most tariffs on wood products will be dropped immediately, with some less important tariff lines being scrapped after 10 years.
  • Financial services: The agreement contains specific definitions, exceptions, and disciplines on new financial services, self-regulating organizations, payment and clearing systems, and transparency.

The EU-Japan negotiations also addressed many non-tariff measures that had constituted a concern for EU companies, as some Japanese technical requirements and certification procedures often make it difficult to export safe European products to Japan. The agreement will go a long way in facilitating the access of EU companies to the highly regulated Japanese market, especially with regard to motor vehicles. The EPA ensures that both Japan and the EU will fully align themselves to the same international standards on product safety and the protection of the environment, meaning that European cars will be subject to the same requirements in the EU and Japan, and will not need to be tested and certified again when exported to Japan. With Japan now committing itself to international car standards, EU exports of cars to Japan will be significantly simplified.

"Together we are making, by signing this agreement, a statement about free and fair trade, we are showing that we are stronger and better off when we work together."

Jean-Claude Juncker,
President of the European Commission
"EU, Japan sign major trade deal in 'message against protectionism'"
from Agence France-Presse

Additionally, it is remarkable that the EPA will be a specific chapter on corporate governance, based on the G20/OECD's Principles on Corporate Governance and reflecting Japan's and the EU's best practices and rules in this area. Both Japan and the EU commit themselves to adhere to key principles and objectives, such as transparency and disclosure of information on publicly listed companies, accountability of the management towards shareholders, responsible decision-making based on an objective and independent standpoint, effective and fair exercise of shareholders' rights and transparency and fairness in takeover transactions.

And what is next?

After today's approval, the EPA will be sent to the National Diet for its approval. In the EU, the European Parliament must approve the agreement, which it is expected to vote on in autumn 2018. The aim is for the EPA to enter into force before the end of 2019. If a deal is entered into force before the Brexit date on March 29, 2019, the EPA could automatically apply to Britain during a post-March 2019 transition period of around two years. At a time when protectionist pressures are growing, the trade agreement between Japan and the EU sends a clear signal that two of the world's largest economies reject protectionism and are open for business and for trade on the basis of fair rules and high standards. 

"Right now, concerns are rising over protectionism all around the world. We are sending out a message emphasizing the importance of a trade system based on free and fair rules."

Shinzo Abe,
Prime Minister of Japan
"Japan and the European Union complete trade deal accounting
for 30 percent of world's GDP"
from The Japan Times

There is a good chance that the EPA will expand and deepen trade and economic relations between the two partners. Japan and Europe are regions with a high per capita income, highly developed industrial and service industries, and discerning consumer markets. Both parties are committed to similar areas of future development, such as digitization, interconnectivity, robotics, mobility, life science, and energy efficiency.

On June 26, 2018, the European Council also adopted a decision on the signing and provisional application of an EU-Japan Strategic Partnership Agreement (SPA). Both the EPA and SPA will enhance the two parties' relations in many ways. On one hand, the EPA focuses on economic aspects such as elimination and reduction of customs duties and establishing rules to promote free trade. On the other hand, the SPA will provide the legal framework for cooperation between Japan and the EU to find solutions to common challenges, such as climate change, cybersecurity, energy security, disaster management and migration. It will also contribute to boosting economic growth, creating employment, and strengthening business competitiveness in both Japan and the EU.

The potential for positive synergies and network effects is, therefore, significant.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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