By Philip Sutter, Director, Strategic Analysis
On July 6, 2017, negotiators for the Japan-European Union Economic Partnership Agreement (JEEPA) announced, at the EU-Japan Summit, that they’ve reached a “political agreement in principal”. This does not mean the negotiations have concluded, but it’s a big step forward to put in place what may be the largest ever EU free trade agreement.
The two Parties began free trade talks in March 2013 and have thus far had 18 rounds of negotiation. The European Union (EU) and Japan together comprise more than one-third of the world’s gross domestic product. If finalized, this agreement is bound to greatly impact global trade.
Provisions of the agreement
Several areas of the agreement require further adjustment and definition. The current text is available to the respective parliaments, as it has been throughout the negotiations. The complete text will not be published to the public until JEEPA is confirmed, but summaries of the provisions are available.
Both sides intend to move as quickly as possible, targeting a conclusion of negotiations by mid-2018 and an entry into force by early 2019. Based on the various delays associated with the Comprehensive Economic and Trade Partnership (CETA) between the European Union and Canada, it’s important to temper timing forecasts. Steps following the negotiations include publishing of the text and translation into all official languages (including legal review). For CETA, these steps took about two years to complete.
Upon entry into force and through a duty staging period, JEEPA will significantly reduce duty for both Parties. Japan will eliminate 91% of current import duties on 86% of tariff lines from the EU. By the end of the fifteen-year staging period, 99% of import duties on 97% of tariff lines will be cut. The remaining 1% will be subject to quota restrictions.
The EU will remove 75% of current import duties on 96% of tariff lines from Japan upon entry into force. By the end of the staging period, nearly 100% of import duties on 99% of tariff lines can be avoided for qualified goods.
The EU is expected to largely benefit from agricultural imports to Japan (e.g., beef and cheese incur duty rates into Japan at nearly 40%) and the elimination of Japanese non-tariff barriers that have discouraged exports. Meanwhile, Japan will make gains by importing vehicles to the EU. Vehicle tariffs will be staged out after seven years while duty on automobile parts will be taken out in varying stages over the first seven years.
JEEPA has 16 chapters. The most sensitive portions that require additional dialogue include investment arbitration, regulatory cooperation, and rules for cross-border data flows. However, the two sides have achieved total alignment on standards for the automotive industry and made progress in sanitary and phytosanitary rules. The EU has maintained regulatory carve-outs on new technologies such as autonomous driving vehicles. The agreement will preserve both Parties’ intellectual property rights for trademarks, patents, designs, and trade secrets. The Parties will expand the coverage of the mutual recognition agreement on good manufacturing practice to new pharmaceutical products.
Japan and the EU have agreed to strong compliance provisions. This includes safeguard clauses allow a Party to suspend duty preference to the other Party in cases of significant and unexpected increases of imports that threaten a domestic industry.
As with other recent EU agreements, JEEPA will likely be deemed a “mixed agreement”. This means that certain provisions may be put into force provisionally, but others will need the unanimous full ratification of all EU national and regional parliaments. This arrangement could put the entire agreement at risk if any of those parliaments vote against full ratification. A final determination of whether JEEPA is a mixed agreement will be made once negotiations are completed.
Rules of origin
The JEEPA product-specific rules of origin will have thresholds based on not-to-exceed levels of non-originating materials (NOM). Therefore, the qualification process need only consider NOM against the value of the good, all other costs and amounts are not considered in the calculation.
Examples of some of the rules of origin in key industries are:
- Automobiles – Up to 55% NOM (first three years), up to 50% NOM (next three years, and up to 45% NOM thereafter.
- Auto Parts – Up to 60% NOM (first three years) and up to 50% NOM thereafter. There are also certain alternative rules that may apply.
- Footwear – Up to 50% NOM.
- Leather – Up to 45% NOM.
- Textiles – Requires double substantial transformation.
- Agriculture – Various limits of NOM, with some concessions to the EU for processed products containing non-EU content.
The agreement will allow for potential diagonal cumulation. This means that if Japan and the EU have a common third party free trade partner, they can agree to exclude that content from the tally of NOM for products to be qualified. For example, both Parties have prospective free trade agreements with Canada. In that case, Canadian-qualifying content could be excluded from NOM. Either Party may refuse to permit this without a need for justification.
With Brexit looming in the background, it remains to be seen what the status of the United Kingdom (UK) will be vis à vis trade agreements, like JEEPA and CETA, after its final exit from the EU, possibly as soon as March 2019. Some in the UK hope to maintain the same trading terms with these third countries. However, the staunch negotiation position of the EU is that a non-member of the EU that does not have the same obligations should not enjoy the same benefits of a member.
One thing for sure is that the global trading position of the major economic powers continues to be in flux. The EU, for one, is moving steadily ahead on negotiating and putting new trade agreements into force. As these agreements come into force, the international trade community must remain nimble and conduct its due diligence to be fully prepared to benefit from them.