UK-Japan Free Trade Deal Announced – Lexology

Credit: Original article can be found here

On 11 September the UK Government announced that it had reached agreement in principle with Japan on a free trade agreement to replace the EU-Japan Economic Partnership Agreement (“JEEPA”) after the end of the transition period. There is no text of the agreement yet and the UK Government has not released many details. The UK negotiating objectives were published in May 2020 and the UK’s achievements can to some extent be measured against that. JEEPA has been in force since 1 January 2019 and it appears that the UK-Japan agreement largely replicates JEEPA albeit with some specific adaptations.

As a member of the EU, the UK was already party to some 40 agreements with some 70 “third countries” and post-Brexit the UK has been negotiating continuity or “roll over” agreements with many of these countries. The UK will give effect to the continuity agreements after 31 December 2020 under the Taxation (Cross-Border Trade) Act 2018 and new powers contained in the Trade Bill now before the UK Parliament (see here for our briefing on the Trade Bill). In debate the UK Government acknowledged that the Japan agreement would be an exception in going beyond simple continuity. Rather than agree to a simple continuity agreement, some of the larger of these economies and notably Canada, Korea and Turkey have preferred to wait until the end of the transition period before trying to finalise new agreements with the UK.

To have reached agreement with Japan before the end of the transition period is rightly being claimed as a major success. However, the UK announcements about the perceived benefits to the UK economy of this new agreement are by reference to the situation before JEEPA was in place. The incremental benefits to be obtained from the new agreement as renegotiated by the UK are quite limited at an estimated 0.07% of UK GDP. Failure to reach agreement with Japan would indeed have been quite damaging. However, this has to be seen in proportion: UK trade with Japan represents only about 2.5% of UK external trade1, versus the nearly 50% represented by trade with the EU until now.

This agreement, like the proposed agreements with New Zealand and Australia, is also being presented as a stepping stone towards the UK joining the new Trans-Pacific Partnership (CPTPP), the successor to the TPP which was rejected by the incoming Trump administration. The UK Government advocates a tilt towards Asia in its trade strategy. However, CPTPP countries represent only about 13% of global trade.

The UK public negotiating objectives for the free trade agreement with Japan highlighted market access for goods including customs and trade facilitation as well as addressing technical barriers to trade and sanitary and phytosanitary measures (SPS). Negotiating objectives also included transparency provisions and provisions on trade in services including issues related to business mobility, digital and e-commerce, telecommunications and financial services and investment. The objectives also aimed for robust provisions on intellectual property and, as in JEEPA, provisions on competition law, subsidies, procurement and state-owned enterprises. The objectives also aimed for reaffirming commitments to international environment and labour standards. All this was to be underpinned with provisions on trade remedies, dispute settlement and specific provisions for SMEs.

The UK Government’s announcement indicates that the new agreement will cover all of these areas. On trade in goods, the objective will be continued elimination of tariffs, eventually rising to 99% with the remaining 1% being partly liberalised e.g. through tariff reductions and tariff rate quotas (TRQs). On top of the achievements of JEEPA, the UK Government has indicated that the UK-Japan agreement will have new and more liberal rules of origin for coats, knitwear and biscuits; reduced UK tariffs on car and railway parts from Japan and TRQs for UK agricultural exports which will supposedly be more generous than under the EU regime (although it appears that the mechanism here for 10 out of 25 products covered in JEEPA will be for the UK to be able to access any leftover EU TRQs, which would seem to put UK exporters in a second tier position).

Regarding services, JEEPA was regarded already as something of a pacesetter with its provisions on a range of sectors including financial services, postal and express delivery services, professional services and telecommunications as well as digital trade. The UK Government has announced greater transparency and streamlined application processes for UK financial firms seeking licenses to operate in Japan as well as an annual financial services dialogue between the two administrations and regulators. Commitments on digital trade and data, including a ban on data localisation, and on improved mobility for business people and family members are also supposed to go beyond JEEPA.

On intellectual property the UK has obtained important protections for a wide range of additional UK geographical indications of origin and new provisions on online infringement of intellectual property rights such as film and music piracy.

The provisions on government procurement are said to extend the existing commitments under the WTO Government Procurement Agreement to a larger number of public entities and sectors.

Subsidies and the UK-Japan Agreement

The chapters in the UK-Japan Agreement on competition and subsidies policy and state-owned enterprises appear likely to replicate the provisions in JEEPA.

The main operative provisions of the JEEPA subsidies chapter require subsidies to be notified if they exceed a very low threshold of 450,000 special drawing rights (‘SDR’: currently about UK £491,000 or US $637,000) per beneficiary for a period of three consecutive years; and for consultations on these subsidies which could have “significant negative effects”.

JEEPA also contains specific prohibitions on unlimited debt guarantees and on subsidies to ailing or insolvent businesses without a restructuring plan (i.e. operating aid); and contains an anti-diversion clause. The UK Government has confirmed that the UK-Japan Agreement will address these two forms of prohibited subsidies in addition to those already prohibited by the WTO.

Some commentators have suggested that these subsidies provisions conflict with the UK’s ambition to have total freedom over state aid after the end of the transition period, a major driver behind the provisions on Northern Ireland in the UK Internal Market Bill recently introduced in parliament (see our briefing on the UK Internal Market Bill).

Clause 43 of the UK Internal Market Bill purports to give the UK Government power unilaterally to interpret, disapply or modify the effect the state aid article, Article 10, in the Northern Ireland Protocol annexed to the UK EU Withdrawal Agreement; Clause 44 stipulates that the power and responsibility to notify state aid to the EU under the Protocol is reserved to the Secretary of State. These Clauses are said by the EU Commission, and most commentators, to be contrary to the Withdrawal Agreement and international law, as indeed the UK Government recognises (again, see our briefing on the UK Internal Market Bill).

Under Article 10 of the Northern Ireland Protocol, the EU state aid rules apply to the UK in respect of measures which affect that trade between Northern Ireland and the EU. The EU rules and the Northern Ireland Protocol both feature enforcement mechanisms and are much more constraining than the JEEPA subsidies provisions.

Under JEEPA the parties can use the machinery of the WTO Subsidies Agreement (ASCM Agreement) but otherwise subsidies are not subject to the dispute settlement provisions of JEEPA under Chapter 21. The sole remedy for disputes in this area is consultations about subsidies which could have a significant negative effect. The culmination of the consultation process is that if the requesting Party, after the consultations, still considers that the subsidy has or could have a significant negative effect on its trade or investment interests, the requested Party shall “accord sympathetic consideration to the concerns of the requesting Party. Any solution shall be considered feasible and acceptable by the requested Party.”

Certainly, there isn’t anything in the JEEPA subsidies chapter which specifically cuts across Article 10 or Clauses 43 and 44 of the Bill: If the UK hypothetically wished to apply Clause 43 to Japan it would need to extend its scope in order to apply it specifically to the UK-Japan Agreement but it is difficult to see Japan accepting this, in view of Japan’s strong commitment to the rules-based international trading system.