The UK published its strategic approach to negotiating a free trade agreement (FTA) with Japan on 13 May 2020. The document has 96 pages, so here is a summary of the Top 7 observations relevant for businesses trading goods.
Japanese businesses have a significant presence in the UK. There is also substantial trade volumes between the two countries, as documented in the UK government’s publication. With the UK scheduled to leave the EU in January 2021, at which point the EU-Japan Economic Partnership Agreement (EPA) will no longer apply to the UK, businesses in the UK and Japan will be keen to keep their preferential access to each other’s markets.
However, the main challenge will be timing. Given the interconnectedness of supply chains within the EU, Japan will likely want to see what the UK’s future relationship is with the EU before it agrees to an FTA with the UK. As such, should the UK and the EU fail to reach an agreement by the end of this year, there may be a delay in having access to a UK-Japan agreement.
Amidst all the uncertainties, it is more important than ever to be prepared for the upcoming disruptions to trade and play an active part in shaping future UK trade agreements.
Top 7 observations and action points
#1 Given that the EU-Japan EPA will no longer apply to the UK from January 2021, businesses currently using the FTA should anticipate the financial impact of this change
The EU-Japan EPA entered into force on 1 February 2019, so it has been around for almost a year and a half by now, and by the end of 2020 it will have been around for almost two years. During this time, businesses may have gotten used to the benefits. From January 2021, for businesses in the UK and Japan, these benefits may suddenly disappear. It is recommended to review the impact of this change with suppliers and customers.
#2 The winners to this UK-Japan FTA would still need to take actions to benefit from preferential treatment by meeting rules of origins
A common misconception is that an FTA automatically removes customs duty. This is not the case. Each FTA has its own set of rules of origin for each product covered by the FTA, their purpose is to prevent benefits leaking to unintended non-signatories to the FTA. Rules of origin are fundamental to an FTA, but the document detailing the UK’s strategic approach barely touches the surface of this complex issue. One of the limitations to the impact assessment done to date relate to rules of origin complexities, see page 85 for more details.
This is a space to watch. Businesses can start by examining the existing rules of origin in the EU-Japan EPA to see if their goods would be eligible and if not, determine what changes would benefit them. In addition, when businesses are assessing whether or not using an FTA would substantially reduce their costs or make their products competitive in the destination market, the cost of evidencing origin should not be overlooked.
#3 The UK-Japan FTA might bring benefits faster than the EU-Japan EPA, this is important for planning where to manufacture
As it is common in FTAs, the EU-Japan EPA has a lengthy schedule of lowering duty rates over time (e.g. 12 years for some automotive parts). The UK government will “consider whether for some tariff lines it would be beneficial to seek or provide accelerated liberalisation”. If this is achieved, it would mean the customs duty rate for some goods may be reduced faster under the UK-Japan FTA. Depending on the estimated savings over the years, it may be worth considering the impact this would have on where goods are produced (i.e. UK vs EU).
#4 Small and Medium-sized Enterprises (SMEs) will not only get their own chapter in the FTA, efforts will be made to fit existing trade facilitation schemes to them
Businesses operating in the UK had previously raised concerns such as “ensuring that simplified customs procedures and trusted trader schemes are suitable for SMEs” (page 22). Assuming that both the UK and Japan will work to make sure that SMEs can take advantage of the benefits achieved through the FTA, SMEs should plan ahead and prepare the application to existing schemes that will facilitate trade, such as the Authorised Economic Operator (AEO) certification. The preparation for the application is a lengthy one, so starting early won’t hurt.
#5 Watch the reactions of CPTPP members
The document mentions that the bilateral negotiations with Japan will also be “a logical stepping stone to joining the comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)” (page 6). With this end in mind, what the UK and Japan agree with each other will need to take into account of CPTPP members’ considerations. Trade agreements have formed an intricate web over the years in Asia, the UK will need to tread softly. This may limit the ambition of what is agreed with Japan.
#6 Anticipate additional complexity due to the Northern Ireland Protocol
Where the document mentions territorial application, it states that the negotiating objective should “provide for application for the treaty to all four constituent nations of the UK, taking into account the effects of the Northern Ireland Protocol” (page 11). There is currently limited information on how the Northern Ireland Protocol will work in practice, so if your business has operations across Ireland, Northern Ireland as well as the rest of the UK, watch how these developments evolve over the next few months.
#7 There will be stakeholder engagements to gather further insights so be prepared to share them
In the summary of analysis and next steps section, the document states that the UK government “has established several stakeholder engagement mechanisms to seek expert insight on relevant trade policy matters and help build the evidence base to support future detailed impact assessments. These groups will enable the Government to draw on external knowledge and experience to enhance the evidence base underpinning the UK’s trade policy” (page 70). It is the responsibility of the business community as a whole to work together and contribute to the success of the UK-Japan FTA. After all, it will be businesses using the UK-Japan FTA, not the FTA negotiators.
Are you concerned about any of the strategies discussed, as well as what is not discussed, in the UK government’s publication? Do you want to map out the next steps for your business to prepare strategically for the upcoming changes? Please feel free to contact me for a discussion in English or Japanese!
Phone: +44 20 8064 0896
Here is the link to:
UK-Japan Free Trade agreement: The UK’s Strategic Approach