UK-Japan CEPA – Lexology

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I. Overview

On 23 October 2020, Japan and the United Kingdom formally entered into the terms of a new Comprehensive Economic Partnership Agreement (UK-Japan CEPA) to take effect from 1 January 2021. This was the first post-Brexit trade agreement concluded by the United Kingdom with a major trading partner. The United Kingdom was under pressure to conclude this agreement with Japan ahead of the year-end expiration of the Brexit transition period, following which the United Kingdom would no longer enjoy favorable trade terms with the world’s third largest economy1 under the European Union’s Economic Partnership Agreement (EU-Japan EPA). With several complex trade negotiations looming, including potential free trade agreements with the United States and the European Union, the United Kingdom was under added pressure to demonstrate its ability to obtain favorable trade terms independent of Brussels. After release of the full text of the agreement concurrent with its signing, there is general consensus that while the UK-Japan CEPA is substantially similar to the EU-Japan EPA, there are several differences which the UK has used to demonstrate to the world that it can achieve its post-Brexit trade ambitions. Japan’s Foreign Minister, Toshimitsu Motegi, has also spoken favorably of the agreement, claiming it is “more advanced and of a higher level” than the EU-Japan EPA. Nevertheless, critics remain skeptical that the following enhancements in favor of the United Kingdom are substantive enough to provide clear support to the notion that the United Kingdom’s bargaining power has increased post-Brexit.

In their summaries of the UK-Japan CEPA, both the United Kingdom and Japanese governments have highlighted certain enhancements of the EU-Japan EPA, including:

(i) digital and data provisions meant to speed-up the cross-border transfer of data while respecting personal data rights of United Kingdom and Japanese data subjects;

(ii) improved market access for certain industries through a mutual streamlining of licensing procedures and reduction or elimination of tariffs and quota modifications, and;

(iii) enhanced intellectual property protections and geographical indication allowances.

The United Kingdom’s Department for International Trade has stated that it expects the benefits of this agreement to enhance trade between the countries to the tune of approximately 15.2 billion British Pounds and increase British GDP by 0.07% (approximately 1.5 billion British Pounds) by eliminating tariffs on 99% of its exports to Japan. Nevertheless, critics question whether this is an improvement over the substantive terms of the EU-Japan EPA.

Whether the negotiation of these enhancements truly reflects a new strength for the UK remains to be seen, especially given the recent election outcomes in the United States, where President-Elect Joe Biden has placed certain conditions on the conclusion of a UK-US free trade agreement involving the broader Brexit agreement that the United Kingdom is currently negotiating with Brussels. Japanese businesses are also eagerly watching the outcome of the United Kingdom – European Union negotiations and hope for a “softer” approach that would maintain the status quo and not force the Japanese to make difficult decisions about whether to relocate their European operations and assets from the United Kingdom.

Nevertheless, the successful negotiation of the UK-Japan CEPA signals a promising step forward in the United Kingdom’s quest to join the Comprehensive Progressive Agreement for Trans-Pacific Partnership (CPTPP), just as Western democracies and like-minded Asian allies are determined to counter the China’s increasing influence in the region. The CPTPP is seen as the “gold standard” of free trade deals in Asia, and reduces tariffs on 99.9% of products covered under the agreement. Accession to the CPTPP would create significant market access opportunities for the United Kingdom in the Asia. Further, Tokyo anticipates that the UK-Japan CEPA will be a positive but informal step towards possibly joining the so-called “Five Eyes” intelligence community as its sixth member (of which the United Kingdom is already a member) as an additional counter to China’s global ambitions.

II. Summary of Key Terms

a. Digital Trade

Both British Trade Secretary Liz Truss and Motegi have heralded the inclusion of a chapter on digital trade in the UK-Japan CEPA, which sets the agreement apart from the EU-Japan EPA. This chapter is meant to provide clear rules on the cross-border transfer of data and grant greater protection of trade secrets related to algorithms and encryption. The chapter includes high levels of data protection on cross-border transfers of personal data between the United Kingdom and Japan and minimizes unwarranted data localization requirements, which would otherwise require personal data to be stored in the jurisdiction where it was collected. It is hoped these principles will help Japanese and British companies avoid extra costs associated with establishing physical servers in each jurisdiction for data processing.

With the promotion of FinTech innovation in mind, this chapter also grants improved market access in Japan for Fintech businesses and a streamlined licensing process. These changes will permit British FinTech champions such as Revolut and Transferwise to facilitate transfers of their technologies and services to the Japanese market. To give added assurance to these and other technology firms, the chapter also includes robust protections for algorithms used in artificial intelligence and encryption technologies by prohibiting regulatory authorities in each country from forcing technology companies to disclose these high-value technologies. Notably, this protection is not contained in the current EU-Japan EPA and the United Kingdom has highlighted this protection as a key distinguishing factor from Japan’s European deal. Financial services currently makes up the largest segment of UK service exports to Japan.

b. Market Access

Both sides have touted increased market access through the reduction or removal of tariffs as a key pillar of the agreement. The United Kingdom has agreed to gradually reduce tariffs on Japanese automobiles in phases to zero by 2026 and immediately eliminate tariffs on locomotives and auto parts. However, these provisions are largely identical to those contained in the EU-Japan EPA and are not a key differentiator.

Japan in turn has agreed to modify quotas for certain agricultural exports from the United Kingdom including cheese, but only to the extent that there are remaining agricultural quotas available to the European Union under the EU-Japan EPA. Further, most of the reduced or eliminated agricultural quotas apply only to less popular products such as animal hides, bird eggs and high-proof alcohols, all of which are not exported to Japan from the United Kingdom in significant volumes. All other agricultural products will be subject to the same limitations as currently provided for in the EU-Japan EPA.

In the last 15-20 years, the UK’s automotive industry has been formed disproportionately (up to 50%) from Japanese car manufacturers such as Honda, Toyota and Nissan operating in the UK. Consequently, the recent relocation of significant plants (in response to supply chain profitability concerns) is damaging to domestic production, skills and employment. The UK-Japan CEPA has done little to resolve this problem. There have been minor gains, such as the acceleration of zero-rate tariffs on electrical control units often used in cars, but Japanese brands are still unable to sell cars (containing Japanese parts but manufactured in the UK) into the EU as Japanese-origin without formal agreement from the EU – something the EU could easily withhold whilst UK-EU negotiations are ongoing.

Beyond reductions in tariffs and quota modifications, Japan and the United Kingdom have generally agreed to improve market access by reducing regulatory and licensing burdens on each other’s enterprises in the e-commerce and FinTech industries, among others. The tangible economic benefits of easing these regulations are difficult to quantify, but both sides agree that it will reduce barriers to entry.

c. Intellectual Property & Geographical Designation Protections

The UK-Japan CEPA contains comparable intellectual property protections to those contained in the EU-Japan EPA, although protection terms for certain intellectual property items exceed those provided under the European agreement. For instance, the default term for protection of design patents is set at twenty-five years under the UK-Japan CEPA in contrast with twenty years under the EU-Japan EPA. Limited five-year extensions for medical invention patents are also included in the UK-Japan CEPA but not in the EU-Japan EPA.

The agreement also permits the United Kingdom to apply for up to seventy further geographical indications for its products, in addition to the seven currently provided to the United Kingdom under the EU-Japan EPA. These geographical indications are used to protect products originating from designated areas in the United Kingdom and Japan from undue replication. Examples of products which will receive such designation include Scotch whiskey, Kobe beef and other local delicacies. The EU-Japan EPA also provides for these geographical designations; however, the United Kingdom will now be permitted to make use of more of them.

III. Business Implications

One major concern for Japanese businesses in the negotiation of the UK-Japan CEPA was the effect of Brexit on Japanese operations in London. Japanese firms operating in the European Union have traditionally used the United Kingdom as a pro-business conduit to the rest of the continent and structured their European operations accordingly. In the event of a no-deal Brexit, Japanese businesses operating in Europe would be forced to rethink their operations as the attractiveness of London as a European hub would fade. Japanese exporters could also begin to turn away from the United Kingdom if it could not reach a deal with the European Union.

If the United Kingdom and the European Union are unable to come to terms on a post-Brexit trade deal, World Trade Organization rules would become the default for trade relations between the European continent and the British Isles. This would place the United Kingdom at a significant trade disadvantage in comparison with other trading partners who have struck deals with the European Union, including Japan, and would result in a major headache for Japanese businesses which base their European operations in the United Kingdom. It therefore appears that Japan was motivated to have the United Kingdom and European Union maintain the status quo in their negotiations for a post-Brexit deal. Japan accomplished this by largely mirroring the substance and effect of the EU-Japan EPA in the UK-Japan CEPA and conceding only meagre gains to the United Kingdom, perhaps limiting its ability to pursue a more divergent approach in its negotiations with Brussels.

The UK-Japan CEPA contains a new chapter on Trade and Women’s Economic Empowerment, and a dedicated Working Group. This provision was not included in the EU-Japan EPA and is designed to demonstrate a shared ambition to support and enhance the role of female employees and business leaders in the global economy.

IV. Impact on other Free Trade Agreements

As can be seen from the above, the concessions gained by the United Kingdom from Japan in comparison to those under the EU-Japan EPA are relatively limited. The UK-Japan CEPA largely mirrors its European counterpart, which appears to be intentional in light of Japan’s expressed desire to maintain the status quo even after the United Kingdom formally exits the umbrella of the EU-Japan EPA. In addition, the UK-Japan CEPA would avoid a default to World Trade Organization rules and the resulting increased tariffs thereunder.

The chart below provides a high-level overview of the major differences between key free-trade agreements that Japan is signatory to, including some that the United Kingdom desires to join in the near future. As may be seen, concessions made under the UK-Japan CEPA compared to those under other agreements are marginal at best and do not portend a significant increase in negotiating power for the United Kingdom post-Brexit.

As the United Kingdom now focuses squarely on (i) its negotiations with the European Union for a post-Brexit trade deal, (ii) potential free trade agreements with the United States and other key allies, and (iii) potential accession to the CPTPP, it is not evident that UK-Japan CEPA provided concessions that the United Kingdom otherwise would not have obtained as a member of the European Union, thereby limiting any boost to its negotiating power vis-à-vis Brussels. With the EU-Japan EPA already in place, the negotiation of the UK-Japan CEPA was seen as a bellwether for the United Kingdom’s trade negotiation credentials in a post-Brexit landscape. Nonetheless, the returns for the United Kingdom appear to be limited and it is unlikely that the United Kingdom will be able to significantly leverage the result of the UK-Japan CEPA in its negotiations with Brussels.

With this limited success in the UK-Japan CEPA, the United Kingdom has been counting on the negotiation of a favorable free trade agreement with the United States to further improve its negotiating position with Brussels. However, this hope has been complicated by the recent American presidential election, which pitted Brexit-friendly Donald Trump against a more Euro-centric Joe Biden. While Donald Trump has been open to negotiating a free trade agreement with the United Kingdom containing few conditions, Joe Biden is on the record stating that any free trade agreement with the United Kingdom is contingent upon observance of the terms of the Good Friday Agreement, which would prohibit the imposition of a hard border between Northern Ireland and the Republic of Ireland. With Joe Biden’s victory in hand, this condition appears to have blunted the threat of implementing a hard border in the UK-EU trade negotiations. It remains to be seen just how significant an impact the new administration in Washington will have, but it likely dampens expectations that the United Kingdom will be able to secure major concessions from the European Union.

V. Conclusion

Although there exist only a few clear advantages for the United Kingdom under the UK-Japan CEPA when compared with the EU-Japan EPA, the conclusion of this agreement is a critical step towards British accession to the CPTPP, which would result in access to eleven markets in Asia and along the Pacific Rim where the United Kingdom currently only has limited access. Any future accession negotiations will likely take several years to complete, but the conclusion of the UK-Japan CEPA is an important first step and should burnish British trade credentials among the ten other CPTPP member nations.

Japan also has secured an important trade deal with a long-time ally and fortified itself against the potential of a no-deal Brexit. Japan along with other allies in the region are in the nascent stages of building a coalition to assist its national security. Tokyo sees admission to the so-called “Five Eyes” intelligence community, which includes the United States, the United Kingdom, Canada, Australia and New Zealand, as key to strengthening this coalition and Japan’s intelligence gathering capabilities. While not directly related to this objective, amicable conclusion of the UK-Japan CEPA should help Japan persuade the United Kingdom to endorse its inclusion in this like-minded intelligence community as the “Sixth Eye”.

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