Be Prepared for Uncertainties in UK-Japan Trade – How to Position Yourself to Optimise Potential FTAs

UK and Japan have just announced a new trade deal. Companies need to move fast and automate their trade management processes to gain a strategic advantage and benefit from the agreement.

If your enterprise is a player in the UK-Japan trade corridor, you need to start getting ready for a new reality – the Comprehensive Economic Partnership Agreement (CEPA) – between the two nations.

On 1 September 2020, the two countries announced an in-principle agreement on a Free Trade Agreement. The exact contours of the deal are expected to be be available sometime in October. But businesses exporting to the UK and vice versa will need to get their act together so that they don’t lose the competitive advantage the FTA offers.

The deal was necessitated by Brexit and its fallout. UK exited the European Union (EU) on 31 January 2020 and is presently in a transition period wherein it continues to be part of the EU customs union and part of the single market. This transition period ends on 31 December 2020. As long as UK was part of the EU (including the transition period), trade between Japan and the UK was governed by the Economic Partnership Agreement (EPA) between the European Union (EU) and Japan.

UK had the option of requesting the EU to extend this transition period but chose not to do so. This meant that it had little over six months to work out Free Trade Agreements (FTAs) with a whole range of its trading partners, including Japan. When negotiations between the two governments commenced in June, most analysts were skeptical about an agreement being reached before the end of the year with the cutoff date for the Brexit transition period coming to an end. Without an FTA in place, trade between the two countries would have reverted to the rules set by the World Trade Organisation (WTO), leading to additional tariffs on both sides. The speedy resolution of the negotiation has come as a welcome surprise for all experts.

The trade deal is significant for both countries. In 2018, the total trade – goods as well as services – between the two countries was £29.6 billion. In May 2020, a policy paper released by UK’s Department of International Trade  had said that a UK-Japan FTA could increase trade between both countries by £15.2 billion in the long run. While UK was eyeing sectors like textiles, agriculture and services to benefit from the FTA, Japan was reportedly focusing on securing continuity and protection of its existing interests in areas like automobiles, immigration and investments.

Details like how the UK-Japan CEPA deals with sticky points like ‘Rules of Origin’ (RoO) are still not clear, but according to a UK government statement, ‘UK businesses will benefit from tariff-free trade on 99% of exports to Japan’. The statement also said that the agreement contained ‘cutting-edge digital and data provisions that go far beyond the EU-Japan deal’.

Automate to Save Costs

Japanese businesses trading with UK and EU will now have to deal with two sets of rules. According to most experts, even if the UK-Japan CEPA closely mirrors the EU-Japan EPA, the fact is that every trade agreement is different based on diverse economic and trade realities of each party. Dealing with multiple rules of two agreements, however similar they might be, is only likely to add an additional level of complexity for trade managers.

It is their inability to deal with these complexities that results in most companies not making effective use of FTAs. This can be seen in a recent Thomson Reuters survey that had over two-thirds of the responding companies saying they found FTAs too complicated to comply with. In the process, these companies were paying millions of dollars more in terms of tariffs.

If businesses eliminate manual processes and automate trade management using a comprehensive FTA solution that integrates with their ERP platforms, they can easily save this money.

Thomson Reuters ONESOURCE™ Free Trade Agreement (FTA) Management is a content-powered Expert System that helps companies identify opportunities to qualify their goods under FTA-specific rules of origin and reduce supply chain costs. It further reduces risks in complying with FTA guidelines by streamlining trade compliance workflow, eliminating manual work, and ensuring adherence to the latest regulatory changes.

It can integrate highly complex bill of material structures before quickly analyzing them against the Rules of Origin of multiple agreements at the same time on a cloud-enabled system. It can also automatically self-certify error-free declarations, thereby mitigating potential penalties while building the audit trail for future preferential claims. 

The exact nature of the various elements of the UK-Japan CEPA like RoOs is unclear as of now. But what seems certain is that those enterprises which take proactive steps to deal with them by using Expert Systems-based FTA management solutions will have a strategic advantage.

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