On 6 July 2017, the European Union (“EU”) and Japan agreed in principle on a future bilateral trade agreement (“Economic Partnership Agreement”). Negotiations started in 2013 and are not concluded yet, but both sides have promised to iron out the details within months. The political agreement reached, as well as its timing (a day before the beginning of a G20 Summit), is mainly symbolic, sending out a signal to other world leaders that both the EU and Japan stand for “open and fair trade”.

According to the European Commission (“Commission”), the Economic Partnership Agreement follows the highest standards of labor, environmental and consumer protection and has a dedicated chapter on sustainable development. It is also the first trade agreement ever to include a specific commitment to the Paris climate agreement.

What’s in the deal?

Put in simple terms, the core of the Economic Partnership Agreement aims to increase the flow of European food to Japan and of Japanese cars to Europe.

As such, the Agreement scraps duties on many cheeses, such as Gouda and Cheddar, as well as on wine exports. It further allows the EU to increase its beef exports to Japan substantially, while on pork there is duty-free trade in processed meat and almost duty-free trade for fresh meat. In addition, it ensures the IP protection in Japan of more than 200 high-quality European agricultural products (so called Geographical Indications).

On the Japanese side, car makers get better access to the EU market: the tariffs on Japanese cars exported to the EU will be eliminated within seven years. There will also be an instantaneous tariff elimination for 92% of Japanese car components.

Furthermore, the Agreement opens up services markets, in particular financial services, e-commerce, telecommunications and transport. It also facilitates EU companies’ access to the large procurement markets of Japan, and removes hurdles to procurement in the economically important railway sector at national level, which could benefit EU train makers such as Siemens and Alstom. The Agreement reflects the delicate balance of interests that has been behind the negotiations all along, and does its best to protect such a sensitive economic sector of the EU as the automotive industry, and a few others, with transition periods before markets are opened. Indeed, for some even this transition period may be considered too short.

What’s not in the deal?

The Economic Partnership Agreement does not regulate data flows. However, EU Commission President Juncker and Japan’s Prime Minister Abe agreed to add a ‘review clause’ to revisit the topic at a later stage.

Instead, an ‘adequacy decision’ will complement the Economic Partnership Agreement. Such an adequacy decision will be a data transfer deal, similar to the existing EU-US Privacy Shield Agreement. The Commission would deliver it by early 2018. As such, the review clause is in fact a safeguard for the Japanese  and an instrument of pressure for the Commission to deliver the “adequacy decision”, as Japan could revoke or review the trade deal in case data flows between the two blocks are not properly authorized  by the Commission.

Another thorny topic, and thus excluded from the Agreement, is investment protection, and in particular investment dispute resolution. Both sides cannot agree on the form of dispute resolution to be included in the trade agreement: Japan wants to stick to the old system, while the EU is trying to introduce a new system staffed by public as opposed to private sector officials. In fact, it is to be recalled that following a recent decision of the Court of Justice of the EU, which underlined the role of National Parliaments in investment related matters, Commission Vice President Katainen has even suggested dropping investment from all major trade deals in an effort to ease their ratification.

What does it mean for Brexit?

Several commentators from the United Kingdom (“UK”) have stated that the latest EU-Japan trade deal would be easy to use as a template by the UK for a similar agreement. This stems from the position of the UK Department of International Trade to replicate “all existing EU free-trade agreements” by maintaining the same trading terms it has currently with third countries. Especially since the UK government maintains that leaving the bloc would make it easier to conclude free trade agreements (“FTAs”), without the straining red tape imposed by Brussels.

By striking this FTA with Japan, President Tusk was keen on sending a message to the UK, by showing how the “EU is more and more engaged globally” and how leaving the customs union would be damaging on the UK economy. Indeed, this particular deal benefits the UK in numerous ways, especially in regards to the car industry, with several Japanese manufacturing plants currently in its territory (Nissan, Toyota and Honda). However, if the UK was to leave the customs union, as currently planned, British manufacturers would find it hard to benefit from reduced tariffs, as numerous manufacturers rely on components produced in the EU territory, which would render compliance with the rules of origin difficult.

Furthermore, it has to be noted that Japan made big compromises in order to reach a FTA with the EU. It is unlikely that Japan will want to replicate the FTA agreement, especially for its key industries, with the UK, a smaller economy.

What’s next?

Based on the Agreement in principle, the remaining technical issues will be resolved by negotiators from both the EU and Japan, in order to conclude a final text of the agreement by the end of the year. Then, the Commission will submit it for the approval of EU Member States and the European Parliament.