Japan-EU trade agreement – 1/3 of global GDP Included

Negotiations were finalized in Dec 2017 and the legal revisions and translations of the texts have been completed. The signing ceremony was meant to have happened last week in Brussels, but was pushed back and changed to Tokyo after unexpected flooding in Japan.

Talks originally began in 2013 and were intensified in the wake of the Brexit vote.  While early bargaining was fairly straightforward, the final stretch was complicated.  Negotiators wanted to push for provisional entry into force (EIF) by May 2019, before Brexit, so as to include the UK in the deal.  This meant accelerating compromises on complex issues like agriculture and standards.

The EU and Japan have been building up a formal set of economic cooperation agreements since 1987.  (Appendix 1). Today, the EU is the third largest trading partner of Japan, while Japan is the 7th largest trading partner of the EU.

Both sides see significant economic potential for deeper cooperation, in terms of job creation and export revenue. However, absent free trade agreement (FTA), exporters still faced some substantial import duties and difficulties in compliance, particularly with standards. This prompted the establishment of JEEPA, the first FTA between the two parties.

The commitment between the two to get this through is obvious. A large part of JEEPA negotiations was focused on regulatory issues or non-trade measures. Chapters are dedicated to addressing newer challenges of global trade like e-commerce, capital movements, intellectual property and corporate governance.

Parallel to JEEPA, the Strategic Partnership Agreement (SPA) has also been negotiated to further align the two parties politically. It will provide a legally binding framework for cooperation on a “broad range of areas of mutual interest”. These include cyber-crime, climate change, and even aging population. Negotiations concluded in April.

JEEPA was strategically timed to send a powerful signal for economic cooperation amongst the world’s largest economies at a time when others are heading towards protectionism.

JEEPA will be the world’s largest open economic area, making up 30% of global output and 40% of global trade value. Even though average tariffs between the two parties are already considered low, tariffs on sensitive industries (e.g. Japanese automobile, European food products) will be cut. There are real, measurable economic benefits for businesses.

Like the CPTPP, JEEPA has a dedicated chapter on helping SMEs grow, acknowledging their importance and the difficulties they sometimes face in global trade. Greater information sharing and transparency – with regards to Japanese regulations – are promised.

Private companies may also benefit from more opportunities with government projects. Chapter 10 on government procurement promises to make it easier for firms to bid for projects in transportation, healthcare and utilities.  

The greatest challenge will be for EU and Japan to come to a consensus on dispute settlement, even though it will not slow down the adoption of JEEPA. Both parties decided to separate issues on dispute settlement from JEEPA in order to speed up adoption.

JEEPA aims to establish global trade standards which are “in line with [their] high standards and [their] shared values of democracy and rule of law”. Both parties have a similar level of development and stance towards environmental protection but cannot agree on the appropriate mechanism to best protect investors.  

The EU is pursuing an Investment Court System (ICS) while Japan prefers the investor-state dispute settlement (ISDS) mechanism, which the EU has declared as “dead” to them in a JEEPA factsheet. It remains to be seen which way this will be resolved.

Most of the chapters in JEEPA are not ground breaking but there are some new regulations and standards. One of the main goals of JEEPA is to “shape global trade rules,” meaning that that third countries which trade with Japan and the EU may be affected.  Businesses must be aware of, and comply with, changing regulations and standards.

One additional element of the agreement is the alignment of data privacy rules between Japan and the EU.  As a result of the signing ceremony yesterday, Japanese companies that follow Japan's domestic privacy standards will be granted "equivalence" to EU firms inside Europe.  Japan is the largest country to receive such certification. 

The agreement itself--unlike the CPTPP--does not guarantee data flows.  Given the increasing importance of information to firms of all sizes now and into the future, this is a critically important gap that cannot be addressed merely by alignment of data privacy regulations.  

The European Union agreement with Singapore, which has been stalled for several years over domestic EU problems around investment decisions, should also be moving forward soon.  The finalized agreement with Vietnam, likewise, could be pushed along more quickly in the wake of the EU-Japan announcement.  Ongoing negotiations with Indonesia and India are likely to speed up.  The EU has just started talks with Australia and with New Zealand.

This week Japan is hosting a session with CPTPP members to discuss accession procedures for new members.  Now that Mexico and Japan have completed domestic ratification processes, only four more approvals are necessary for CPTPP to come into force.  

The EU agreement with Japan must still be ratified by parliaments in both Japan and the EU.  Neither is guaranteed (as the hiccup over EU approval of CETA with Canada has shown).  The splitting off of investment provisions from the core agreement should help facilitate approval, however.