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29 October 2020

Yohannes Ayele is Research Fellow in the Economics of Brexit at the University of Sussex and Fellow of the UKTPO.

Update 30 October 2020: This is a slightly revised version of the blog we released yesterday. Sorry for any confusion we may have caused. Essentially, we tripped over the fact that the first year of the UK-Japan CEPA trade liberalisation schedule lasts for only one month, in order to bring it into line with that of the EU-Japan EPA.

Having left the EU and with the conclusion of the transition period at the end of 2020, the signing of new free trade agreements with countries that cover 80% of the UK trade by 2022 has been an integral part of government plans. On 23 October 2020, the UK signed its first post-Brexit free trade agreement  – with Japan, the UK-Japan Comprehensive Economic Partnership Agreement (CEPA). This blog provides an analysis of the extent of the trade liberalisation in this new deal.

The importance of Japan

Japan is one of the largest and most open economies in the world with 4% of world GDP. Although Japan has historically not been a leader in signing free trade agreement, since the 2000s it has signed several large-scale free trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the CPTPP (which the UK is also negotiating to join) and is the largest free trade agreement after the United States-Mexico-Canada Agreement and the European Single Market in terms of GDP.  Japan has also signed the Economic Partnership Agreement (EPA) with the EU which entered into force on 1 February 2019. Japan has signed a total of 17 FTAs—all coming after 2002.  The CEPA with the UK is therefore consistent with Japan’s approach to regional integration and in part reflects the importance of the UK as a base for accessing the EU market.

In 2019, Japan’s goods import were 705 billion dollars while its exports were 720.96 billion dollars. Japan’s share in UK total exports was 8.34 billion dollars or 1.78% of the total in 2019; while the UK’s imports from Japan were 13.9 billion dollars for the same year. For comparison, the UK imported goods worth 672 billion dollars while exporting goods worth 468.3 billion dollars. Office of National Statistics (ONS) data shows that UK’s service export to Japan in 2019 were £7.9 billion (2.4% of UK’s total service exports), with export of financial services constituting £5.9 billion while import of services from Japan was £6.6 billon (2.97% of UK’s service imports).

Tariff analysis

With respect to the UK-Japan Comprehensive Economic Partnership Agreement, the UK government claims that over 99% of the UK exports to Japan would face zero tariffs.  To see how much of a liberalisation this implies, we have calculated how much of the UK’s goods exports would face zero tariffs under three trading regimes: Japan’s Most Favoured Tariff (MFN) regime, the EU-Japan EPA which entered into force in 2019 where the UK is also a member until it leaves the EU, and the tariffs under the new UK-Japan CEPA.  Table 1 shows the share of UK exports to Japan in 2019 that would have faced zero tariffs, non-zero tariffs and non-ad-valorem duties under these two trading regimes. The FTA agreements call for tariff reductions over periods of years, so the pattern changes through time.

Table 1: Tariff UK Export faces to Japan under EU-Japan and UK-Japan trading regimes

UK-Japan CEPA EU-Japan EPA
Year  Zero Tariff Non-Zero Tariff non ad-valorem duty  Zero Tariff Non-Zero Tariff non ad-valorem duty
2021 98.67 1.33 1.23 98.67 1.33 1.33
2022 98.69 1.31 1.16 98.68 1.32 1.26
2023 98.69 1.31 1.16 98.68 1.32 1.26
2024 98.94 1.06 1.02 98.93 1.07 1.13
2025 98.94 1.06 1.02 98.93 1.07 1.13
2026 99.01 0.99 1.02 99.00 1.00 1.13
2027 99.01 0.99 1.02 99.00 1.00 1.13
2028 99.01 0.99 1.02 99.01 0.99 1.13
2029 99.43 0.57 0.78 99.42 0.58 0.88
2030 99.43 0.57 0.78 99.42 0.58 0.88
2039 99.66 0.34 0.75 99.66 0.34 0.85

Note: For Japanese duties years refer to 12-month periods starting on 1st April of the year named.

Close to 89% of UK exports to Japan would face zero tariffs under Japan’s MFN regime while the remaining 11% faced non-zero tariffs. On the other hand, Table 1 shows that under the EU-Japan EPA, close to 99.7% of UK (2019) exports to Japan would have faced zero tariffs by 2039. The total share of UK export products that face non ad valorem duties at the tariff line level decreases from 3.1% (under MFN) to 0.85% under the EU-Japan EPA.

Our calculation for the same exercise for the newly signed UK-Japan CEPA agreement reveals almost identical figures to the EU-Japan FTA: 99.7% of UK (2019) exports to Japan would be under zero tariffs as of 2039 and 0.75% would face non ad-valorem duties.

We also calculated the number of products that face different tariff rates between the EU-Japan EPA and the UK-Japan CEPA. The EPA entered into force as of 2019, and the CEPA will enter into force on 2021. By 2021 the CEPA will be in its third year, while the UK-Japan FTA is in its first year. Thus, the logical unit to compare the two FTAs should be the 3rd year schedule of the EU-Japan FTA and the first year of schedule of the UK-Japan FTA. We find that under the UK-Japan agreement, there are only 10 tariff lines out of the 9444 where the UK tariff is lower (and only marginally so in nine of them), and that rises to 11 products in the 5th year (2025). In 2019, the UK had no exports to Japan in any of these. After 12 years there are no differences between the UK-Japan CEPA and EU-Japan EPA tariffs.

No change, no gain

In general, in terms of both ad valorem and non-ad valorem tariffs, the analysis shows that the new UK-Japan CEPA basically mirrors the EU-Japan EPA so far as tariffs on UK exports are concerned. However, there are some differences as well. For example, under the EU-Japan FTA there are 25 tariff rate quotas applicable while in the UK-Japan FTA there are 10. (Tariff rate quotas let a limited quantity of a good in at low tariffs and charge a high tariff on the rest. They essentially restrict imports to the permitted low-tariff quantity.)  In addition, the UK government has been keen to highlight provisions in areas such as e-commerce, data flows and financial services, see Minako Morita-Jaeger’s blog post for more discussion.

Similarly, the UK’s tariff reduction schedule for Japan’s imports mostly replicates the EU’s tariff reduction schedule under the EU-Japan EPA. (The timing is such that for imports we need to match year 1 of the CEPA with year 2 of the EPA etc.) There are 24 tariff product lines that are listed in the EU’s schedule of exceptions to immediate liberalisation but not in the UK’s schedule, so, at least for a period, in these products UK consumers are paying less tax on imports than they would have done under the EU-Japan EPA. Imports under these headings accounted for 1.4 billion dollars out of a total of 12.1 billion dollars that the UK imported from Japan (11.67% of the imports) in 2019. Other than these 24 products, in which the EU catches up with the UK relatively quickly, the UK’s tariff reduction schedule to imports from Japan is identical to the EU’s tariff reduction schedule to the Japanese imports.

The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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