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EU Japan EPA text analysis – Easy on the ambition?

The European Commission published the bulk of the text of the EU Japan Economic Partnership Agreement in early December last year.


Below some highlights of the pact and some comments – result of your truly’s Christmas break reading. The deal favours significantly EU exporters and is relatively unambitious in services.


Goods: exporting the European supermarket, department store and car dealership


The EU Japan trade pact is quite ambitious in achieving import tariff eliminations but is not as ambitious as the EU’s trade pact with Canada, CETA.


Most tariffs in industrial goods are eliminated on entry into force. For Japan this exercise was painless, given the fact that it already applies very low import tariffs.


On agriculture and food products, the liberalisation achived by the parties is significant given both the EU’s and in particular Japan’s notorious trade protectionism in this sector, but the trade agreement will – by far – not result in an open market.


Both sides go back to ancient habits of taking a lot of time to liberalise tariffs or quotas in agriculture. The EU will eliminate tariffs on a large variety of Japanese agriculture products in a period of 15 years. The EU is not liberalising rice imports from Japan, nor imports of items like seaweed – all iconic Japanese staples.


Japan opened its markets in wines and spirits immediately to European exporters. The EU’s success in getting a better deal for its dairy exports – a key ask in the negotiations – remains very limited.


The tariff rate quotas the EU obtained for products such as ‘wheat’ (270 tonnes at 9.4 yen per kg by year 9 of the agreement), ‘food preparations of barley’ (200 tonnes by year 6), ‘butter, skimmed milk powder, butter milk powder and condensed milk’ (15.9 thousand tonnes by year 6 plus a hefty tariff) are surprisingly small.


The picture looks a little better for EU cheeses – 20 thousand tonnes as of year one, to be increased to 31 thousand tonnes by year 11 of the agreement. It also looks better for processed foods more generally. Products like frozen pizza, pasta, meat products such as sausages, confectionery, vegetable and fruits and related preparations (eg. jams), will get to enter Japan duty free five years after entry into force of the agreement. The tariff rates will be gradually reduced before that deadline.


EU fashion and textiles exporters are also winners in the pact, although individual items such as Gucci bags (leather bags with metallic buckle) will have to wait 5 years until they can enter Japan duty free.


It’s been a long time since the EU agreed to phase-in periods that are longer than seven years, but with Japan, it did it.


Japan’s top ask in the negotiations was to see the EU’s 10 percent auto tariffs brought down to zero. For passenger cars, the EU agreed to phase in the tariff eliminations in seven years. But tariffs on imports of tractors or buses will only be eliminated after twelve years after the coming into force of the agreement, down from their current high level of 16 percent of the value of the import. For Japanese motorcycles the picture looks a bit better: a phase-in period of five years only.


The EU is slightly more generous when it comes to liberalising import tariffs on Japan’s famous knives (HS 821192 and HS 821193): the 8.5 percent tariff will go down to zero in five year. So one day these sharp and expensive knives will become a little bit more affordable in Europe.


The rules of origin for the goods are generally relatively simple, with a general rule of 55 percent local content in the FOB – freight on board – price, or 50 percent regional value. These rules are more restrictive for cars (60 percent and 45 percent respectively), ships and boats (65 percent and 40 percent respectively), and for other products such as ceramics or some chemicals. In textiles the model taken is the EU’s style requirement of ‘double transformation’.


The tariff and quota deals are complemented with chapters on sanitary and phytosanitary measures and technical barriers to trade. Through an annex on food additives and auto standards, the EU gets Japan to accept international standards, not least UN ECE’s famous Working Party 29 on technical standards in cars.


Japan also recognises EU Geographical Indications for foodstuffs. This is presumable a major achievement for the EU – but the text is not yet available.


All in all the picture on goods that emerges is a broad win for the EU’s food processing industry, fashion (including thanks to the rules of origin), and car industry (the standards issue is more important than tariffs). What Japan really gets in return appears relatively limited: free trade for its competitive machinery perhaps.


Services: a TiSA and CETA minus agenda, visas for spouses


In the area of services, both Brussels and Tokyo did not get out of their comfort zone.


The liberalising commitments – except for Mode 4 – are made on the basis of a ‘negative list’, making the reading of the services schedules much easier than that included in other free trade agreements signed by the EU. The list of reservations published by both parties bears no surprises and matches the current picture of the EU and Japanese regulatory landscape.


It looks like the EU in particular used the Japan agreement to take a swipe at the United States by including – or not including – topics that were contentious in the now-stalled plurilateral Trade in Services Agreement and the bilateral TTIP negotiations in 2015-2016. The EU included a list of sectors in which ‘future measures’ will not be covered by the agreement, for instance. Another example is a chapter on liberalisation of international maritime services. Importantly for the EU the text includes a new chapter on regulatory cooperation in financial services – something Washington refused to discuss with the EU in TTIP.


The services chapter cover basic issues in areas such as e-commerce, telecommunications, postal and courier services (including insurance), or financial services and insurance.


Perhaps the more innovative parts of the services section is the one covering Mode 4, ie the temporary movement of professionals across borders, where both sides take commitments on intra-corporate transferees in close to forty sectors and on independent professionals in close to twenty sectors. Sectors covered mainly involved high jobs such as law, accounting, engineering or architecture.


There was no effort to conclude a deal on the mutual recognition of qualifications for these professions – contrary to what was achieved with Canada in CETA.


As amply reported by Borderlex, the deal does not include language on free data flows – except in the financial services section. A rendez-vous clause is included allowing for talks to resume three years after entry into force of the agreement.


Japan was successful in achieving the one objective it was doggedly pursuing: better visa conditions for spouses of corporate employees sent to Europe for work.


Public procurement


The procurement chapter of the trade agreement does not match the depth and breadth of ambition achieved by the EU with Canada in CETA.


The EU obtains significant market access concessions from Japan nonetheless. The EU’s key asks were the sub-federal level and fairer rules for its bidders.


The text of the procurement chapter refers to the World Trade Organization’s Government Procurement Agreement. It commits the parties to “additional rules” to those of the GPA. These cover rules surrounding publication of notices, conditions for participation in tenders, specifications of the qualification of non Japanese suppliers, technical specifications, and environmental conditions.


The list of sectors covered by the FTA that Japan did not sign on to in the GPA is extended to include a variety of professional services (financial, computing, management, for example).


Japan further commits the prefecture of Kumamoto to extend the coverage of goods and services it will submit to GPA disciplines, and reduces the financial thresholds to which GPA and the FTA rules apply.


Many ‘independent local administrative agencies’ take new procurement commitments (mainly universities, hospitals and public energy companies), as well as unspecified ‘Core cities’.


Finally, five Japanese railway companies commit to taking bids from EU railway equipment exporters (i.e. Alstom and Siemens).


Interestingly, the EU also offers specific concessions to Japan on public procurement. France in particular adds entities such as Paris’s flagship Louvre museum to the list of public entities requiring to let Japanese companies bid for contracts. Japan also gets commitments to get fair treatment when its own railway suppliers (i.e. Hitachi) bid for contracts in Europe.


Regulatory cooperation and other regulatory areas


Other disciplines included in the agreement cover state-owned enterprises, competition policy and subsidies, as well as intellectual property rights. On intellectual property ACTA like provisions on enforcement of intellectual property protection and 70 year copyright protection are included.


The text includes a chapter on good regulatory practices and regulatory cooperation – that was a key ask by Japan. The influence of TTIP can be strongly felt on the working of the text. It covers mainly information exchange (early notice of measures, impact assessments) and largely voluntary cooperation between the EU and the Japanese government.


The agreement includes a now obligatory chapter on labour and environment,  committing both sides to abiding by core international labour conventions and multilateral environmental conventions, with the 2015vParis agreement on climate receiving particular attention. The chapter will be subject to review in future. There’s also a chapter on corporate governance.


All in all the trade agreement is a major commercial and political step for Japan in particular. For Tokyo, the EU agreement involves requires a significant effort in trade liberalisation – not least in the previously unassailable agricultural sector. This matters even more after the United States pulled out of the Transpacific Partnership in early 2017, after which Japan felt is was left in the cold.


Commercially, for the EU the agreement is not the most ambitious agreement it ever signed, although many sectors will benefit from better access to a sophisticated market of solvent customers. CETA remains the gold standard here. However the Japan pact does expand the EU’s way of doing things and regulating international trade in areas such as services, geographical indications, auto standards in Asia. It also confirms the EU as a comparatively timid actor in the area of services and digital.

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