The UK and Japan signed a new Comprehensive Economic Partnership Agreement (CEPA) on 23 October 2020. This is due to replace the existing EU-Japan Economic Partnership Agreement (JEEPA) at the end of the transition period. JEEPA came into force on 1 February 2019. The UK was party to JEEPA as an EU member state and has continued to apply it during the transition period. Without a successor agreement between the UK and Japan, trade between them would have taken place on World Trade Organisation (WTO) terms after the transition period.
The UK’s general approach has been to establish continuity in its future trading relationships with countries that have an existing trade agreement with the EU by signing agreements that replicate those terms as far as possible. However, in negotiating a successor agreement with Japan, the UK has sought to go beyond JEEPA in some areas. The Government stated in a document outlining its strategic approach to a UK-Japan free trade agreement, published in May 2020, that it had agreed with Japan to: “negotiate a new bilateral agreement using the existing EPA as a basis, ensuring the new agreement is as ambitious, high standard and mutually beneficial as the EPA and enhanced in areas of mutual interest”.
This is the first trade deal that the UK has struck as an independent trading nation. This British shaped deal goes beyond the existing EU agreement with major wins for all parts of the UK in areas such as digital and data, financial services, food and drink and creative industries. This deal could boost trade between the UK and Japan by £15.7 billion and drive economic growth in the long run.
The Government has published a suite of documents alongside the text of the agreement:
- Explanatory memorandum: Among other things, this details how the Government intends to implement CEPA. Existing laws that implemented JEEPA provisions will be retained under the European Union (Withdrawal) Act 2018. Some changes, for example to do with geographical indications, would be implemented through regulations made under that act to amend retained EU law. Tariffs set out in CEPA would be implemented through regulations to be made under the Taxation (Cross-Border Trade) Act 2018. Other provisions, for example on procurement and mutual recognition, would be implemented through the Trade Bill once it receives royal assent.
- Parliamentary report: This provides an explanation of changes in CEPA as compared to JEEPA.
- Impact assessment: This found that: “In the long run, the trade costs reduced by the UK-Japan CEPA are estimated to drive an increase in UK exports to Japan by 17.2% or £2.6 billion and UK imports from Japan by 79.9% or £13 billion when compared to 2019 levels. Therefore in the long run overall bilateral trade between the UK and Japan is estimated to increase by 50% or £15.7 billion when compared to 2019 levels”. The impact assessment estimated that trade in services between the UK and Japan would increase by 46% in the long run, with the largest increases expected to be in financial services, insurance and business services. It estimated that trade in goods would increase by 53% as a result of the agreement. The largest increases in exports are expected in textiles and leather, agriculture and processed foods.
- A series of ‘explainers’ covering: benefits for the UK, agri-foods, rules of origin, geographical indications, and digital and data.
Scrutiny of the agreement
The House of Commons International Trade Committee and the House of Lords International Agreements Sub-Committee have both scrutinised CEPA. The International Agreements Sub-Committee drew special attention to CEPA on the grounds that it is politically important and gives rise to issues of public policy that the House may wish to debate prior to ratification.
The International Trade Committee welcomed the signing of CEPA. It said the evidence it had heard from a range of business sectors suggested they generally welcomed CEPA as it “brings much needed continuity and certainty to UK businesses involved in trade in Japan”. The International Agreements Sub-Committee agreed CEPA provides “valuable continuity” and secures some “useful additional provisions” that go beyond JEEPA.
However, the International Agreements Sub-Committee expressed concerns about how the Government has presented the deal publicly, “in some respects overselling the extent of CEPA’s achievements in going beyond JEEPA”. For instance, it pointed out that the Government had presented some of the tariff liberalisations on UK exports as though they were new in CEPA, when they are retaining provisions negotiated by the EU in JEEPA. It urged the Government “to be careful not to oversell its achievements, especially in contexts where nuance is hard to convey, such as on social media”. Similarly, the International Trade Committee said the Government had given the “inaccurate impression that CEPA automatically and immediately provides protection” to more geographical indications than JEEPA. The committee said that the differences between CEPA and JEEPA “may not be as extensive as claimed”, it did acknowledge that there were “notable exceptions, particularly the provisions on digital and data, and financial services”.
Both committees expressed reservations about the Government’s impact assessment. The International Agreements Sub-Committee concluded it:
[…] fails to provide the information that Parliament and the public need if they are to evaluate how well the Government has done in its negotiations with Japan, as it does not identify what extra benefit, if any, CEPA might generate over JEEPA. Instead the IA considers only one alternative scenario: trading on WTO terms with Japan (in effect, a ‘no deal’ option). We note that the Government’s IA of CEPA projects lower increases in GDP, imports and exports than its previous assessment of JEEPA’s benefits for the UK and would have welcomed more information to help explain this change.
The International Trade Committee said it was “regrettable” that the Department for International Trade had not provide any assessment of the value of the additional benefits the Government said CEPA represents, above and beyond those conferred under JEEPA.
The Regulatory Policy Committee (RPC) rated the impact assessment as ‘fit for purpose’. The RPC is a body of independent experts whose role is to assess the quality of evidence and analysis used to inform regulatory proposals affecting business and the economy. However, it also found that the “uncertainty” around using the scenario of the UK and Japan trading on WTO terms as the baseline “should be made clearer and set in context with the existing EU-Japan FTA”.
The International Trade Committee and the International Agreements Sub-Committee both pointed out that the operation of some parts of CEPA would in practice be affected by the EU. CEPA allows for ‘diagonal cumulation’ in trade between the EU and UK and the EU and Japan. This would mean that, for example, a UK producer could import a good from Japan, incorporate it into another product, then sell it to a customer in the EU; under rules of origin the good would be treated as if it was of UK origin. The International Trade Committee considered that “in the longer term, third country cumulation could become crucial with the shift to electric vehicles, which use batteries that are manufactured in Japan and Korea”. Both committees noted achieving the diagonal cumulation provided for in CEPA would depend on securing the EU’s agreement.
Another area where CEPA’s terms are dependent to some extent on the EU is tariff rate quotas (TRQs). TRQs allow a given volume of specified types of goods to be imported at a preferential or zero tariff rate. Once the quota is exceeded, a higher import tariff applies. Under CEPA, UK exporters sending goods to Japan will have access to ten of the 25 TRQs set out in JEEPA, but they can only make use of the amount of quota that is not used up by EU exporters in a given year. TRQs were described as “one of the biggest sticking points” in the negotiations between the UK and Japan. The Financial Times concluded it is “impossible to say for certain” and “will vary year by year” how much unused quota there may be left over for the UK. The International Agreements Sub-Committee described the TRQ arrangements as “sub-optimal”. Both committees reasoned that Japanese importers may prefer to buy from EU exporters rather than UK ones, as it may not be clear at the time of ordering whether UK goods will benefit from the lower tariff.
Under the Constitutional Reform and Governance Act 2010 (CRAG) the Government cannot normally ratify a treaty unless a minister has a laid a copy before Parliament and a period of 21 sitting days has elapsed without either House resolving that it should not be ratified. If the Commons were to resolve against ratification, the minister may lay a statement indicating that he or she is of the opinion that the treaty should nevertheless be ratified and explaining why. A second period of 21 sitting days is then triggered, during which the Commons may resolve again against ratification. Similarly, the minister may then lay another statement. In such a way the Commons theoretically has the power to delay ratification indefinitely. The House of Lords does not have this power. If the Lords resolves against ratification and the Commons does not, then the treaty may be ratified “if a Minister of the Crown has laid before Parliament a statement indicating that the minister is of the opinion that the treaty should nevertheless be ratified and explaining why”.
The Government formally laid the treaty text before Parliament on 23 October 2020, but the CRAG scrutiny period did not begin until 2 November 2020, when the House of Commons returned from recess. The initial 21-sitting day period is due to end on 8 December 2020. The House of Commons is due to have a general debate on CEPA on 25 November 2020. The House of Lords will hold a take-note debate on the agreement on 26 November 2020.
- Minako Morita-Jaeger, ‘Japan-UK free trade agreement—What is missing?’, UK Trade Policy Observatory, 22 October 2020
- Yohannes Ayele, ‘UK-Japan FTA: Tariff gain or no change?’, UK Trade Policy Observatory, 29 October 2020
- Robin Harding, ‘UK cheesemongers could find mould on tasty trade treaty with Japan’, Financial Times (£), 6 October 2020
Cover image by Image by jorono on Pixabay.