Japan and the EU sign historic and far-reaching deal: how does it affect your business?
On 17 July 2018, European Commission President Jean-Claude Juncker, European Council President Donald Tusk, and Japanese Prime Minister Shinzo Abe signed the EU-Japan Economic Partnership Agreement (the EPA), creating an open trade zone covering around a third of global GDP and 40 percent of world trade.1 The EPA must now be ratified by both the European Parliament and the Japanese Diet before it enters into force, possibly as soon as next year.2
Both sides have hailed the wide-ranging trade agreement as a signal of their shared commitment to trade liberalisation and to strengthening mutual economic ties.3 The EPA eliminates approximately 99 percent of EU customs duties and approximately 94 percent of Japanese customs duties as between the two parties.4 It also includes provisions on sustainable development, labour, safety, environmental and consumer protection standards, and on climate change.
Agreement in principle on the terms of the EPA was reached in July 2017, and negotiations concluded in December. However, at that time, a number of controversial issues remained open, in particular in respect of data protection and investment protection, as discussed further below.
Data protection: equivalency agreed
As to data protection, the EU and Japan on 17 July 2018 also reached agreement on a "reciprocal adequacy" arrangement to complement the EPA. Under this arrangement, the parties agreed to recognise each other's data protection systems as equivalent and to adopt reciprocal adequacy decisions. As a general rule, under EU law, the export of personal data from the European Economic Area (EEA) is not permitted to countries that do not provide "adequate" data protection. An "adequacy decision" rendered by the European Commission in respect of a third country establishes that that country provides protection of personal data comparable to the EU, such that data transfers between that country and the EU are treated as compliant with EU data protection law without being subject to any further safeguards or authorisations.
This reciprocal (rather than unilateral) arrangement with Japan is a first for the EU, and creates what the parties' representatives described in a joint statement as "the world's largest area of safe data transfers".5
Japan recently modernised its data protection legislation, but it currently does not align completely with EU standards. As such, before the European Commission formally adopts its adequacy decision with respect to Japan, Japan has agreed to introduce a series of additional safeguards in relation to data that is transferred from the EEA to Japan. These include:
- the expansion of the Japanese definition of sensitive data;
- making the transfer of Europeans’ data from Japan to a third country subject to a higher level of protection; and;
- the establishment of a complaint-handling system under the supervision of the Japanese independent data protection authority, the Personal Information Protection Commission.
The newly-agreed framework for data flows between Japan and the EU is expected to become operational by autumn 2018, subject to both parties completing the relevant internal procedures for the adoption of an adequacy decision.
Investment protection and ISDS: the discussion continues
As for investment protection, the discussion between the EU and Japan continues. Traditional investment protection standards and investor-State dispute settlement (ISDS) mechanisms recently have been the subject of considerable debate and, in particular from the EU, criticism. Perhaps as a result of this controversy, or perhaps out of caution on the part of the EU in the light of the Court of Justice of the EU's recent decision that any treaty concluded by the EU including ISDS provisions must be ratified by each EU Member State individually,6 the EPA does not set forth general investment protection standards nor make provision for any form of ISDS. Negotiations between the two parties in respect of these issues are ongoing.
The EU's Chief Negotiator for investment protection, Maria Martin-Prat, met with the Japanese Chief Negotiator, Deputy Assistant Minister Teiji Hayashi, on 11 July 2018. According to a European Commission press release following that meeting, while the two sides are broadly aligned in respect of standards of investment protection, differences remain in their respective positions regarding the appropriate mechanism for the resolution of investment protection disputes.7
Japan is generally regarded as pro-ISDS, with most of its recently-concluded free trade agreements (a prominent example being the Comprehensive and Progressive Agreement for Trans-Pacific Partnership) including detailed investment protection provisions and providing for "traditional" ISDS by international arbitration.8 Japan has advocated this approach for the EPA with the EU, and Japanese investors increasingly are taking advantage of the protections provided by investment treaties to bring arbitration claims against States.
By contrast, the EU has stated in unambiguous terms that, from its perspective, "ISDS is dead".9 It rejects international arbitration as a means of resolving investor-State disputes. The EU's preferred approach, as reflected in the Comprehensive Economic and Trade Agreement signed between the EU and Canada in October 2016, is for investment disputes to be handled by a new "investment court" more closely resembling a domestic court.
Despite these apparent differences in approach, the European Commission stated on the date of signing the EPA that "[t]he firm commitment on both sides is to reach convergence in the investment protection negotiations as soon as possible, in light of their shared commitment to a stable and secure investment environment in Europe and Japan"10A further meeting to discuss this subject is reported to be scheduled for late autumn this year.
In the meantime, Japanese investors in the EU should continue to consider available investment protection under existing bilateral treaties or the Energy Charter Treaty.
We continue to monitor the progress of the EPA, the data protection arrangements between Japan and the EU and the related investment protection negotiations, and will report on further developments as they arise.1 Japan-EU EPA (Outline), Ministry of Foreign Affairs of Japan, July 2018, p. 1.
2 “EU and Japan sign Economic Partnership Agreement”, European Commission press release, 17 July 2018.
3EU and Japan sign Economic Partnership Agreement”, European Commission press release, 17 July 2018; Japan-EU EPA (Outline), Ministry of Foreign Affairs of Japan, July 2018.
4Japan-EU EPA (Outline), Ministry of Foreign Affairs of Japan, July 2018, p. 2.
5 Joint Statement by Haruhi Kumazawa, Commissioner of the Personal Information Protection Commission of Japan and Věra Jourová, Commissioner for Justice, Consumers and Gender Equality of the European Commission, 17 July 2018.
6 CJEU Opinion on the EU-Singapore Agreement At A Glance, European Parliament, May 2017.
7 “EU-Japan investment negotiations”, European Commission press release, 11 July 2018.
8 The recent Japan-Australia Economic Partnership Agreement does not include ISDS provisions, but includes a review clause providing for future consideration of an ISDS mechanism.
9 “A new EU trade agreement with Japan”, European Commission, July 2018, p. 6.
10 “EU and Japan sign Economic Partnership Agreement”, European Commission press release, 17 July 2018.