EU and Japan sign free trade agreement

BACKGROUND

Japan is the world’s third largest economy outside of the EU in terms of GDP, yet only EU's seventh largest trading partner. It has a population of over 127 million inhabitants with a very high purchasing power and it is consequently considered a key market for European Union exporters, services providers and investors, cf. the explanatory memorandum of the Economic Partnership Agreement.

On 29 November 2012, the Council authorised the Commission to enter into negotiations for a free trade agreement with Japan. The Free Trade Agreement between the EU and Japan was retitled the Economic Partnership Agreement ("EPA") at the time of the conclusion of the agreement in principle on 6 July 2017.

Those principles are now stipulated in the provisions of a signed version of the EPA - a free trade agreement that not only regulates trade barriers but also provides grounds for a long-lasting partnership.

CONTENT AND KEY ELEMENTS OF THE EPA

The objectives of the EPA are to liberalise and facilitate bilateral trade and investment opportunities, as well as to promote a closer economic relationship between the EU and Japan. This is primarily reached by removing technical and regulatory trade barriers, which includes inter alia: 

Tariff barriers:

• Elimination of custom duties: Tariffs on more than 90 % of the EU's export to Japan will be eliminated when the EPA enters into force. According to the EU Commission, this will annually save EU exporters around one billion euro in customs duties. In addition, the EPA eliminates or reduces duties levied on agricultural products. This objective has been high on the EU's agenda as Japan is the EU's fourth biggest market for agriculture exports. EU estimates that over time 85 % of EU agri-food products will be allowed to enter Japan entirely duty-free corresponding to 87 % of 2017 agri-food exports by value.

Non-tariff barriers:

• Motor vehicles: Japan and EU will fully align their respective requirements to the same international standards on product safety and the protection of the environment.
• Technical barriers to trade: The EPA ensures mutual commitment to standards and technical regulations based in international standards to the greatest possible extent.
• State-owned enterprises: The EPA ensures that Japanese state-owned enterprises will no longer be allowed to treat EU companies, services or products differently to their Japanese counterparts when buying and selling on commercial markets.
• Investment: The EPA creates a more business-friendly climate to promote investment between EU and Japan which includes prohibitions of performance requirements, e.g. to hire a given number of its nationals.
• Corporate governance: The EPA is the first EU trade agreement containing a specific chapter on corporate governance. It is based on the G20/OECD's Principles on Corporate Governance and reflects both EU and Japan's best practices and rules.
• Competition: The EPA contains principles regarding competition aspects that shall be implemented in a transparent and non-discriminatory manner.
• State-to-state dispute settlement mechanism: The EPA contains articles on dispute settlement in order to avoid and solve disputes with an effective, efficient and transparent mechanism.
• Anti-fraud: The EPA includes an article on mutual assistance in the fight against fraud and is a condition for the EU to grant tariff preferences to any third country. The aim is to prevent abuse of preferential tariff treatment.

The EU and Japan will also establish a joint committee comprising representatives from both parties. The joint committee has several tasks including monitoring and reviewing the implementation and operation of the EPA and seeks to solve any problems that may arise. Furthermore, specialised committees will be established under the auspices of the joint committee, e.g. the committee on trade in goods, government procurement, regulatory cooperation etc. 

See the full text of the Japan and EU Economic Partnership Agreement here

HOW WILL THE EPA IMPACT DANISH COMPANIES?

The EPA holds great potential for Danish companies that are already exporting to Japan or contemplating to do so. In 2017, Danish companies exported goods and services worth around DKK 22 billion to Japan, in particular within the sectors of meat and pharmaceuticals.

The EU Commission estimates that the EPA will increase EU GDP by 0.6 to 0.8 % and that EU total exports to Japan will increase by 33 %. In Denmark this will correspond to an increase in export sales of DKK 7.3 billion according to the Danish Chamber of Commerce.  

As a result thereof, if your company is doing business in Japan, or plan to do so, you should keep a keen eye on the EPA and the possibilities it provides. 

NEXT STEPS…

The EPA is expected to enter into force at the beginning of 2019. 

It should be noted, that the EPA does not include investment protection standards and investment protection dispute resolution. The reason is that those negotiations are still ongoing and was not completed at the time of the conclusion of the EPA negotiations. EU and Japan have committed to complete the investment protection negotiations as soon as possible. The investment protection will form a separate bilateral investment agreement.

KROMANN REUMERT'S INTERNATIONAL TRADE TEAM

Kromann Reumert's International Trade Team is available with advice and assistance if your company is interested in commencing or re-engaging in business in Japan or other countries. We can also provide advise if you are a Japanese company looking to do business in Denmark. In addition, we have been involved in incorporating companies and joint ventures in Japan, and we have extensive experience within M&A processes involving Japanese clients and counterparties.