1 December 2020
On 23 October 2020, the governments of the United Kingdom and Japan signed the Comprehensive Economic Partnership Agreement (UK-Japan CEPA). The UK-Japan CEPA is the first new free trade agreement that the UK Government has concluded since its departure from the EU. It aims to conclude a number of other significant new trade agreements before the end of the transition period on 31 December 2020, in order that they may come into force on 1 January 2021. The UK regards the conclusion of the UK-Japan CEPA as an important step towards joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
The UK-Japan CEPA is intended to replace the EU-Japan Economic Partnership Agreement (EU-Japan EPA), which has governed the trading relationship between the EU and Japan since its entry into force on 1 February 2019. Pursuant to Article 129 of the Withdrawal Agreement, the UK continues to be bound by its obligations under the EU-Japan EPA, and the UK “is to be treated as a Member State” for the purposes of this and other international agreements, until the end of the transition period. The UK-Japan CEPA is expected to enter into force on 1 January 2021.
The UK-Japan CEPA is largely based on the EU-Japan EPA. As the Government explains in the Explanatory Memorandum which accompanies the treaty laid before Parliament, the Agreement “builds on the existing EU-Japan [EPA] and enhances it in areas such as e-commerce, financial services and intellectual property”. The CEPA has, according to the House of Commons International Trade Committee (ITC) report on the agreement (ITC Report), “generally been welcomed as [bringing] much needed continuity to UK businesses involved in trade with Japan” (para. 7).
In contrast to other trading agreements that the UK has reached with existing European trading partners, the Government has presented the UK-Japan CEPA as much more than a simple “roll-over” of the existing EU-Japan arrangement. The Government highlights what it regards as the key differences between the UK-Japan CEPA and the EU-Japan EPA in its Parliamentary Report, published by the Department for International Trade (DIT) alongside the UK-Japan CEPA. However, the reports of two parliamentary committees on the UK-Japan CEPA – the ITC Report and the report of the International Agreements Sub-Committee (IASC) of the House of Lords (IASC Report) – suggest that the differences are less significant than claimed. Notable exceptions highlighted by the ITC and IASC include the “provisions on digital and data, and financial services” (ITC Report, para. 8; see also ITC Report, paras. 35-38; IASC Report, p. 3 and Chapter 4), as well as the new chapter on women’s economic empowerment, a new provision on anti-corruption, and (to a lesser extent) the provisions to protect intellectual property.
In relation to investment, the provisions of the UK-Japan CEPA on “investment liberalisation” in Chapter 8, Section B are the same as those in its EU-Japan precursor. And like the EU-Japan EPA, there are no provisions relating to investment protection and no mechanism for investor-State dispute settlement (ISDS). Article 8.9(4) explicitly excludes investor-State dispute settlement procedures in other international agreements from the scope of ‘treatment’ for the purposes of the MFN clause.
Given the absence of any existing UK-Japan bilateral investment treaty, one might have expected the parties to have sought to include a comprehensive investment chapter, with investment protection provisions and an ISDS mechanism, in the UK-Japan CEPA. Indeed, it has been reported that Japan initially sought to include such a chapter, but then considered “setting it aside in favour of reaching an early accord” that would allow the agreement to come into effect immediately after the end of the transition period. The ITC similarly concluded that the Government “was unable to [go further on investment] due to time constraints”, but added that another relevant factor might have been “the likelihood of public controversy over investment protection provisions.” (ITC Report, para. 41). The ITC observed that it was “notable” that “DIT continues to lack a fully worked-out position on this important aspect of trade policy” (id.). It appears that some of the evidence submitted to the ITC welcomed the absence of ISDS from the CEPA (id.), while evidence given to the IASC regarded it as a “missed opportunity” (IASC Report, para. 45). Comments made in the House of Lords debate on the treaty on 26 November echoed that sentiment.
In our view, the ITC’s observation that “time constraints” caused the parties to abandon any attempt to reach agreement on a comprehensive investment chapter is likely to be correct. The EU and Japan currently have no agreement on investment in place between them. Negotiations on an EU-Japan “Investment Protection Agreement” have been on hold since March 2019, apparently because of disagreement between the parties on the procedural provisions (in particular, according to the European Commission, Japan’s opposition to the “Investment Court System” (see here)). It would have been quite some achievement for the UK and Japan to have reached agreement on a comprehensive investment chapter in the limited time available, with no existing arrangement to build on at all.
Nonetheless, Article 8.5(3) of the UK-Japan CEPA reflects an intention on the part of the UK and Japan to return to the negotiating table to discuss investment protection in due course. It provides for either party to request a review of Chapter 8, Section A and B, “with a view to the possible inclusion within this Agreement of such provisions that could provide for the improvement of the investment environment” upon the signature by the other party of an “international agreement with an investment chapter that contains provisions for investment protection or provides for [ISDS] procedures”. The UK Government confirmed in the UK-Japan CEPA’s Parliamentary Report that the States would “continue discussions on these topics when appropriate” (para. 120).
The text of the UK-Japan CEPA is available here; its Explanatory Memorandum is available here; and its Parliamentary Report is available here. Our previous Brexit Insights article on the progress of UK trade negotiations is here.
If you wish to discuss these or other issues raised in our Brexit Insights, please contact Stephen Fietta or Laura Rees-Evans.