On July 6 2017 the European Union and Japan announced having reached an 'agreement in principle' on a future economic and partnership agreement. The final agreement, which both parties aim to conclude before the end of 2017, is expected to boost EU-Japan trade by cutting red tape and scrapping duties.

Trade relationship

Japan is the European Union's second largest trading partner in Asia (after China), and sixth largest trading partner overall. In 2016 EU exports to Japan amounted to approximately €58 billion in goods and €28 billion in services. Trade flows between the European Union and Japan consist mainly of motor vehicles, machinery, medical instruments, pharmaceuticals and chemicals. Before the agreement in principle, the European Union and Japan had concluded:

  • a mutual recognition agreement for conformity assessment procedures in the fields of telecommunications terminal equipment and radio equipment, electrical products, laboratory practices for chemicals and manufacturing practices for pharmaceutical products;
  • an agreement on cooperation on anti-competitive activities aimed at allowing the effective enforcement of their respective competition rules through promoting cooperation and coordination between their competition authorities;
  • an agreement on cooperation and mutual administrative assistance to improve cooperation between their customs authorities with a view to facilitating trade flow and increasing the efficiency of customs controls; and
  • a science and technology agreement aimed at encouraging, developing and facilitating cooperative activities in science and technology between the European Union and Japan.

Economic and partnership agreement

In the words of the EU commissioner for trade, "the scale of [the economic and partnership agreement] ambition, and the combined economic size [of both parties], would make it one of the biggest the world has ever seen". In the same vein as other agreements concluded recently by the European Union, the economic and partnership agreement is intended to go beyond traditional trade issues and cover fields as diverse as corporate governance, competition, sustainable development, data protection and cooperation on agriculture, forestry, fisheries and food. It should also boost EU-Japan trade in goods and services through a number of concessions.

Elimination of customs duties Japan will eliminate tariffs on 97% of its imports from the European Union once the economic and partnership agreement is fully implemented (in tariff lines), with the remaining tariff lines being subject to partial liberalisation through tariff quotas or tariff reductions (eg, for certain agricultural products such as soft cheese, whey and potato starch). Japan's elimination of customs duties is expected to primarily benefit EU exports in the fields of agriculture and food products, electrical machinery, pharmaceuticals, medical devices, motor vehicles, transport equipment, textiles and clothing, and forestry products. The European Union will eliminate tariffs on almost 100% of its imports from Japan once the economic and partnership agreement is fully implemented. The disparity in terms of levels of liberalisation between the European Union and Japan is justified by Japan's commitments to eliminate non-tariff barriers on imports from the European Union, notably through total alignment with international standards in the automobile sector.

Elimination of non-tariff barriers The negotiations focused on eliminating the main non-tariff barriers identified by both EU and Japanese traders. Examples of non-tariff barriers that should be eliminated currently include those applicable to:

  • motor vehicles – through the recognition of the same international standards on product safety and environmental protection, which means that vehicles should be subject to the same requirements in the European Union and Japan and should not require testing or certification on export;
  • food additives – through the adoption of similar guidelines concerning the transparency and standard processing times for approval processes; and
  • pharmaceutical products – through the expansion of the coverage of the mutual recognition agreement for conformity assessment procedures.

Liberalisation of services The economic and partnership agreement should include provisions aimed at liberalising trade in services, particularly:

  • postal and courier services (eg, by aligning rules on border procedures, licences and the independence of regulators);
  • telecoms services (eg, by enabling any supplier from one party to access and use telecoms services in the territory of the other party, as well as laying down the ground rules concerning the conditions under which suppliers from one party are allowed to provide their services in the territory of the other party);
  • international maritime transport services (eg, by providing for obligations to maintain non-discriminatory access to transport and auxiliary services, as well as access to ports and port services); and
  • financial services (eg, by strengthening regulatory cooperation through regular information exchange and consultation on forthcoming regulatory initiatives, and by committing to relying on each other's regulatory and supervisory framework where possible).

Public procurement The economic and partnership agreement should build on the existing mutual obligations based on the World Trade Organisation Government Procurement Agreement and add a new set of disciplines concerning, for example:

  • the electronic publication of notices through a single point of access;
  • the fair treatment of EU construction businesses under the Japanese construction business evaluation system;
  • the recognition of test reports; and
  • the possibility of using environmental standards as a selection criteria.

In terms of market access, EU companies will also be able to participate on an equal footing with Japanese companies in bids for procurement tenders in the so-called 'Japanese core cities' (48 cities of around 300,000 to 500,000 inhabitants).

Agreement in principle

The agreement in principle does not mean that the negotiating process is completely finalised. Some of the agreement's chapters still require fine-tuning and some issues are still open and remain to be settled before the actual finalisation of the negotiations (eg, on investment or regulatory cooperation). Although the agreement in principle should provide a clear idea of the type of concessions that both the European Union and Japan are willing to make, traders cannot yet rely on its provisions and should therefore wait for the publication of the economic and partnership agreement.

Once the European Union and Japan reach a final agreement (which they aim to do before the end of 2017), and depending on what it actually covers, the European Commission will decide whether to propose the economic and partnership agreement as an EU-only agreement (ie, one that covers only policy areas that the European Union is responsible for) or a mixed agreement (ie, one that covers areas that both the European Union and its member states are responsible for). An EU-only agreement would need to be approved by:

  • the governments of the member states; and
  • the European Parliament.

Conversely, a mixed agreement would need to be approved by:

  • the governments of the members states;
  • the European Parliament; and
  • the national – and possibly regional – parliaments.

In that regard, it is important to bear in mind the EU courts' recent clarification as to what constitutes an EU-only agreement as opposed to a mixed agreement,(1) as well as the potential difficulties associated with the approval of mixed agreements by national and regional parliaments (eg, in the framework of the EU-Canada Comprehensive Economic and Trade Agreement).(2)

Further, the United Kingdom will formally be a party to the economic and partnership agreement (provided that it is concluded before the end of the Article 50 Treaty on the Functioning of the European Union procedure). However, this will likely no longer be the case once the United Kingdom leaves the European Union. Informed sources have indicated that the economic and partnership agreement is unlikely to include specific provisions regarding how to address the United Kingdom's departure from the European Union (and consequent withdrawal from the economic and partnership agreement) (for further details please see "Brexit – United Kingdom's access to European Union's preferential trade partners").

Prepare and take action

EU businesses importing from and exporting to Japan (and vice versa) should prepare for the entry into force of the economic and partnership agreement. This requires assessing the exact effect of the agreement on their operations (on the basis of the provisions of the agreement in principle) and identifying potential opportunities and challenges. In addition, UK-based businesses and Japanese businesses trading primarily with the United Kingdom should also identify the potential consequences of the United Kingdom's likely withdrawal from the economic and partnership agreement on its departure from the European Union, and consider mitigating actions to remove or reduce any associated disruption.

For further information on this topic please contact Lode Van Den Hende or Jérémie Charles at Herbert Smith Freehills LLP by telephone (+32 2 511 74 50) or email (lode.vandenhende@hsf.com or jeremie.charles@hsf.com). The Herbert Smith Freehills LLP website can be accessed at www.herbertsmithfreehills.com.

Endnotes

(1) For further details see here.

(2) For further details see here.

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