Tax & Accounting Blog

New EPAs in 2015 with Japan

Blog, Global Trade, ONESOURCE September 25, 2015

An FTA (Free Trade Agreement) is the agreement between multiple countries, or regions, in order to eliminate tariffs and to facilitate free trade of goods and services between the participating countries. Based on the structure of the FTA, Japan drives EPA’s (Economic Partnership Agreement)[1] because to the EPA facilitates not only free trade but the movement of persons, investments, and by harmonizing the areas of intellectual property, competition, and cooperation in many diverse fields.  More importantly, Japan is trying to enhance greater and closer economic cooperation and relationships with the countries they are signing EPA’s

The focus of this article will be on two new EPAs for 2015.  The significance of these EPAs is in the timing since Japan has not signed an EPA in 3 years.

The first agreement is the Japan-Australia Economic Partnership Agreement.  This was the 14th EPA signed on July 8, 2014 and implemented Jan. 15, 2015. One of the main benefits of this EPA is in the form of tariff elimination of 99.8% import value from Japan to Australia and in 93.7% from Australia to Japan over the next 10 years after the EPA is in force. Australia is the 4th largest trading partner for Japan and Japan is the 2nd largest partner for Australia.  To date this is the biggest partner in EPAs Japan has concluded.

It is noteworthy that the preferential tariffs for beef have been applied in this EPA for the first time. Tariffs of 38.5% for fresh beef will be reduced gradually to 23.5% in 15 years and for frozen beef to 19.5% in 18 years. This EPA also implements safeguards upon reaching the ceilings negotiated in the agreement and applying original tariffs to protect domestic beef producers with import restrictions.

Beef import statistics covering same period over three years (January – June 2013 to 2015)[2] showed Australia has held the leading market share in Japanese beef imports for many years, but since introduction of the Japan and Australia EPA, its dominance has increased.  Australia has seen its share of beef imports grow steadily from 47% to 53% since 2013, while the US share lowers to 37% with a slight rise of 42% in 2014.  Australia’s gain is likely attributable to lower costs under the EPA.

From the perspective of the quantity and value in beef imports from Australia in January – June 2015, imports increase 12% in quantity and 49% in value year-on-year. However, though the numbers are appealing to both countries, consumers don’t benefit from this EPA due to a weak yen and growing demand for the beef globally in emerging nations such as BRIC[3]s.  This is an important point as the demand in China has increased the volume of beef imports jumping fivefold from 2012 to 2014 due to the westernization of the diet and the increase of the middle class demanding more beef[4]. This demand leads to soaring wholesale prices of beef in this region of the world.

Additional preferential treatment for this EPA is the Tariff Quota of natural cheese for processed cheese, which is 4,000 tons in the first year and will be raised to 20,000 ton in 20 years. The dairy industry has historically made important contributions to the food industry in Australia with Australia having 7% in value in dairy transaction market share[5]. Therefore, through this EPA, Australia requested better acceptance on tariffs for cheese. Japan accepted this point in the agreement providing the increase in volume to be imported for only Australia as a special concession.  The EPA still protects domestic dairy farmers by keeping the same tariffs.  Other areas in food and beverage addressed in this EPA are wine, with the elimination in tariffs over the next 10 years at a maximum tariff of 3.5%; and the southern Bluefin tuna to be removed over the next 10.

Another interesting focus of this EPA is on motor cars. Initially the Australia government took issue with Japan’s actions on tariff elimination of motor cars to be imported. However, Australia accepted important points in the agreement which included the immediate elimination of 5% in motor cars with the displacement of 1,500cc to 3,000cc (engine capacity ranges), or the gradual elimination for other motor cars or auto parts in 3 years due to Japanese concessions on beef.  This was a very important point for Australia because of Australia’s position as one of the leading export partners of motor cars for Japan. The figures in the quantity and the value of motor cars to be exported in 2014 fell year-on-year, now showing positive growth in January – June compared to the previous year since the EPA was put in force.

One important change brought about in this EPA is the “Origin Certification Document” process as the ‘Certificate of Origin’ through a Self-Certification System. This was first implemented in Japan and can be issued by the exporter, the manufacturer or the importer. Additionally, in Japan, a Third Party-Certification System has been adopted for Country of Origin of common EPAs. The entire process from application to receipt for registered companies to the issuance authority takes at least 5 business days.  It is expected that the “Origin Certification Document” process will streamline time and effort for the exporter and reduce lead time for the importer

The second Agreement is the Japan-Mongolia for an Economic Partnership[6] (EPA) signed Feb. 10, 2015. This is the first EPA for Mongolia. Under the agreement, the two Asian countries will eliminate import tariffs within 10 years on most products traded between them and further deepen the bilateral relationship and promote Mongolia’s economic development integrated in the regional economy

Mongolia pressed for this EPA, which included construction of major transportation for rail and air, as well as a coal-fired power plant. Japan pledged 36.85 billion Yen in loans to help the ongoing construction of an international airport in Ulan Bator, the Mongolian capital. An added benefit is the development between the two countries of mineral resources. Over the next decade, this agreement plans to remove tariffs on about 96 percent of the combined total value of trade between the two countries, which was valued at 41.8 billion Yen in 2012.   Japan has also committed to send experts to Mongolia to help draw up a medium- to long-term economic policy[7].

This agreement brought about a growing demand on construction machines. An immediate benefit of the agreement that was realized was in the export of main construction machines including bulldozers to Mongolia with a tariff elimination bringing significant advantages to Japan.

In the automotive industry, the statistics from the Japanese government[8] shows the export of motor cars to Mongolia has increased by 37% in quantity in the last 5 years. Tariff treatment for motor cars with displacement below 4,500cc (0 ~ 3 years old) is eliminated immediately.  In Mongolia there is an excise duty US$500 ~ US$1,500 imposed on motor cars[9] depending on the motor cars model and year. With this change, Japan expects to export more cars to Mongolia.

For imports to Japan, the immediate or gradual removal of tariffs in 10 years will be performed on almost all industrial products including rare earth metals, explosives, and various chemical products. Japan expects to utilize the vast mineral resources from Mongolia, and sees this as a good benefit of this EPA. On the other hand, Mongolia’s expectation is mainly the cooperation on environmental conservation and development of mineral resources such as coal, copper, uranium, rare metal or rare earth.  Mongolia hopes to leverage from Japan’s advanced technologies and experience with these resources.

Japan distributes power mainly through thermal power plants generating a growing need of fossil fuels in Japan. Consequently the Japan-Mongolia Agreement is a big achievement for a natural resource poor Japan.

Concurrently, some safeguards Japan has taken on their “sacred five” (rice, wheat, beef/ swine, dairy products and sugar) it is to hold firm and protect the tariffs imposed on these items. Japan did give concession on other some of the sacred five, except for rice and sugar, in the Japan-Australia Agreement.

Japan is hopeful these two EPAs will ensure greater economic development in each country and that Japan can forge stronger partnerships in all tariff treatments.

To learn more about FTA, visit our ONESOURCE for FTA page

Sources

Ministry of Foreign Affairs of Japan http://www.mofa.go.jp/policy/economy/fta/

Japan Customs http://www.customs.go.jp/toukei/info/index.htm

Mongolia Customs http://www.customs.gov.mn/en/

[1] http://www.mofa.go.jp/policy/economy/fta/australia.html

[2] http://www.customs.go.jp/toukei/info/

[3] Brazil, Russia, India and China combined

[4] http://gain.fas.usda.gov/Pages/Default.aspx

[5] http://www.austrade.gov.au/Local-Sites/Japan/Buy-from-Australia/Industry-Information/Dairy

[6] http://www.mofa.go.jp/policy/economy/fta/mongolia.html

[7] Japan, Mongolia sign economic partnership agreement, By Masaaki Kameda

http://www.japantimes.co.jp/news/2015/02/11/business/japan-mongolia-sign-economic-partnership/#.Vd8iVflVhBc

[8] http://www.customs.go.jp/toukei/info/

[9] http://www.customs.gov.mn/en/2012-03-14-03-21-37/trf