On 1 January 2021, the Japan-UK Comprehensive Economic Partnership Agreement (Japan-UK CEPA) came into force, after only a few months of intense negotiations. Japan and the UK embarked on formal negotiations on 9 June 2020 and reached an agreement in principle on the deal on 11 September 2020. This remarkably speedy achievement reflected enormous pressure from business leaders to have a deal in place before the end of the UK-EU transition period on 31 December 2020, at which point the UK was to lose coverage under the existing Japan-EU Economic Partnership Agreement (EPA) in light of Brexit.
The Japan-UK CEPA, essentially a “rollover” of the prior Japan-EU EPA, ensures that business between the two countries avoided falling back onto minimum WTO trading terms. Indeed, early data suggest the Japan-UK CEPA accomplished its goal: according to a survey conducted by the Japan External Trade Organization in early 2021, roughly 10% of survey participants already rely on the terms of the Japan-UK CEPA. Moreover, over 80% of other survey participants are considering relying on CEPA in the future.
To fully benefit from the Japan-UK CEPA, importers as well as exporters of goods need to understand how and when they can claim preferential tariff treatment. Once preferential tariff treatment is granted, customs duties will be reduced or eliminated completely on originating goods.
Under the Rules of Origin provisions of the Japan-UK CEPA, goods will be considered as originating where they are:
- wholly obtained or produced in a party (g. a live animal born and raised in a party, or a product obtained from a live animal raised in a party, such as a cow born and raised in Scotland); or
- products produced exclusively from materials originating in a party (g. Japanese sake wine, made of Japanese rice only); or
- products produced using non-originating materials which satisfy all applicable requirements under the product specific rules of origin ( PSR ) (g. Japanese cars produced using non-Japanese parts but which otherwise satisfy all the applicable requirements under the PSR).
While such provisions are common among free trade agreements, the Japan-UK CEPA goes further by providing for “extended accumulation”, notably taking account of third party inputs from the EU in determining whether a product “originates” from either the UK or from Japan. Thus, production carried out in the EU or materials originating in the EU may be taken into account for the purpose of determining whether the product originates in either Japan or the UK. This reflects the existing deep integration of the UK into EU manufacturing processes, and indeed Japan’s reliance on UK-based sales of product components originating in the EU-27 Member States.
By way of example, consider a scenario where wine is produced in the UK and exported to Japan. Under the tariff classification system called “the Harmonized System Codes”, wine products are classified under the heading of 22.04, and the “Change of Tariff Heading”, must be satisfied for the product to be considered as originating in a party. This means that pursuant to the PSR of the Japan-UK CEPA, all non-originating materials in the production of the product (wine in the current scenario) must undergo a change in tariff classification at the first four-digit level (i.e. a change in tariff heading). To put it another way, sufficient work or processing must be carried out on all non-originating materials in order to generate the 22.04 classification.
Moreover, the PSR provides that all the materials under subheadings 0806.10, 2009.61 and 2009.69 used be wholly obtained. Fresh grapes are classified under the subheading of 0806.10. This would normally mean that wine produced in the UK will be considered as originating in the UK only if the fresh grapes used in its production were entirely grown in the UK. However, because of the provision for “extended accumulation”, the wine will qualify as “originating” in the UK as long as fresh grapes used in its production were wholly obtained not just in the UK, but anywhere in the EU as well.
In terms of rules of origin procedures, a claim for preferential tariff treatment may be based on:
- an attestation of origin produced by the exporter (“Statement on Origin”); or
- the importer’s knowledge that the product is originating.
A Statement on Origin must be made out using either the Japanese or the English version of the text set out in Annex 3-E of the Japan-UK CEPA, on an invoice or any other document that describes the originating product in sufficient detail to enable its identification.
A claim for preferential tariff treatment and its basis, whether the exporter’s statement on origin or the importer’s knowledge, should be included in the customs import declaration in accordance with the laws and regulations of the importing party.
It is worth noting that the procedures for claiming and obtaining preferential tariff treatment has been simplified since the Japan-EU EPA. These simplified procedures should make it easy for business operators, in particular small businesses who may not have ample administrative resources, to make use of the otherwise complicated rules to export to Japan or the UK.
Coincidentally, 1 February 2021 marked the second anniversary of the Japan-EU EPA. Japan and the EU celebrated this day by affirming that the deal had made trading easier and cheaper for both Japan and the EU. With the Japan-UK CEPA in place, this looks set to remain true for the UK, despite its decision to leave the EU through Brexit.