Tax & Accounting Blog

How Japan and EU FTA Affects Automobile Industry

Blog, Global Trade, ONESOURCE August 4, 2017


Japan and the European Union (EU) leaders reached a political agreement on two landmark agreements, the Strategic Partnership Agreement and the Economic Partnership Agreement at the 24th Brussels Summit (July 07, 2017). Both agreements are expected to greatly benefit both Japan and the EU.  It is expected that the EU-Japan Economic Partnership Agreement will lay an ambitious and comprehensive foundation for “a strategic partnership for free and fair trade, against protectionism”.[1]

The Free Trade Agreement between the EU and Japan (EU-Japan FTA) is the third of a new generation of FTAs and once it gets inked it will create the world’s biggest open economic area accounting for a third of the world’s GDP[2]. Both the EU and Japan have assigned their respective negotiating teams to fine tune and rapidly finalize this agreement.

Both sides have also finalized the technical work on the Non-tariff measures (NTMs) issues including the NTM auto annex with all remaining issues resolved after in-depth consultation with each of the industry associations.

It’s expected to be signed at the end of 2017, ratified in 2018 and go into effect in 2019.

 What does this mean to automotive manufacturers in both economies?

There are many similarities in this FTA to the Korea-EU FTA. The NTM auto annex covers a very substantial part of the United Nations Economic Commission for Europe (UNECE) Regulations undertaken under the NTM list for cars being reviewed by relevant Japanese regulators. The list embraces passenger cars, and commercial vehicles like buses and trucks of all sizes as well as motorcycles. The auto annex, together with the NTM work concluded, should result in the removal of all regulatory barriers for accessing the Japanese car market.

The FTA also establishes robust compliance provisions such as the use of international standards, emissions, products with new technologies like autonomous drive and electric cars, convergence of future requirements, a most-favored nations (MFN) clause and hydrogen fueled cars.

In addition, the EU-Japan FTA consists of a safeguard clause limited to 10 years, allowing the EU to reintroduce tariffs if Japan stops the application of UNECE regulations or reinstalls removed NTMs. It’s expected that monitoring the implementation of commitments will also be undertaken through a working group on motor vehicles and parts, which will meet at least once a year.

Rules of Origin

The Agreement also set out one chapter on rules of origin (RoO) procedures as well as annexes to include introductory notes, product specific rules, text of the statement on origin and provisions on Andorra and San Marino[3].

There are some similarities between this agreement and other FTAs in place such as the originating requirements of the absorption rules and the principle of territoriality. Except accumulation of origin, originating goods exported from EU members or Japan to a non-party return, ‘they must be considered non-originating, unless they can be proved to the customs authority that the returning goods are the same as those exported and they have not undergone any operation beyond that necessary to preserve them in good condition while in the non-party or while being exported’.

Both the EU and Japan agree that certain goods shall be considered originating even if they have undergone working or processing outside Japan, on materials exported from Japan and subsequently re-imported there, provided that the working or processing is done in the areas designated by the Parties pursuant to Annex IV of the agreement.

The WCO does allow countries which are part of a preferential trade agreement to share production and jointly comply with the relevant rules of origin provisions.  However, some outstanding terms should be taken into consideration as the provision on accumulation that allows ‘both bilateral and full accumulation between the parties; accounting segregation applied only for material, not for final products; and non-alteration rule stipulating the activities which may be undertaken in light of originating products in a non-party such as operation to preserve the products, storage, splitting of consignments and exhibitions’.  Accumulation rules are attractive and widen possibilities, but also require greater supplier documentation to support verification (i.e. supplier COs).

In light of origin verification claims, the importer is requested to provide information to enjoy preferential tariff treatment. Unlike the requirements in Korea for their process of origin verification, direct visits by the customs authorities of the importing parties to an exporter or producer in exporting country shall not be allowed for the verification in this trade agreement. It will be done under the mutual administrative assistance between Japan and the EU.

All Product Specific Rules of Origin (PSRs) were agreed upon the basis of the condition that they would allow EU exporters to qualify for the tariff reductions negotiated under the agreement.

Cars and other vehicles – HS headings 8701-8705 require 45% max Non-originating material (NOM) of the ex-work price of the car. There are some HS headings required to phase out. For instance; passenger cars – HS heading 8703, there is a staging period of 6 years during which the threshold is at 55% max NOM over the first three years and at 50% max NOM over the following 3 years; and car parts – HS heading 8708 with a staging period of 3 years where the threshold is at 60% max NOM.

To sum up with the speech delivered at Stockholm University of Economic, Ms. Cecilia Malmström, Commissioner for Trade also addressed the challenges when this FTA goes into effect. “Japan is adopting a number of United Nations international safety standards for cars that are also recognized in Europe. Dealing with these kinds of trade barriers is of course a challenge, because of the technicality of the negotiations and because we have to be so careful to maintain the democratic decisions about precaution. But the progress we have already made shows the potential”.

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[2] 91% of imports duties from EU to Japan will be eliminated at entry into force and to 99% at the end of the staging period, while the remaining imports (1%) will be partly liberalized through quotas and tariff reductions (in agriculture). In terms of lines, Japan fully liberalizes 86% of its tariff lines at EIF[2], going up to 97% after 15 years. The overall level of liberalization of the EU is set at 99% with 96% of its lines eliminated at EIF. In terms of imports the EU liberalizes only 75% at EIF, but rising over 15 years to close to 100%. Tariff lines on automobiles will be fully liberalized in 7 years, car parts varying from EIF to 7 years.