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Brexit not only has a significant impact on the United Kingdom and Europe. The impact is global as well. Even as an independent nation, the UK is a big player in world trade. Another big player is Japan, being the third-largest trade country in 2018. Japan and the UK invest in each other, being in each other’s top 6 trading partners. However, Japan has a healthy and sustainable economic relationship with the EU; the EU-Japan Balance sheet is in almost perfect equilibrium. The upcoming years are crucial for Japan to lay the foundation of a new post-Brexit order. Unfortunately for the UK, according to Tokyo Review, the UK is not Japan’s highest priority. Nonetheless, the UK and Japan are vocal advocates for free trade and are determined to defend a rules-based international trading system. What are the current opportunities to trade and ensuring that the UK remains the gateway to Europe, or will this be the downfall that causes Japan to relocate their business elsewhere?

The Free Trade Agreement (FTA)

In 2020, Japan and the UK signed an FTA, namely the CEPA (UK-Japan Comprehensive Economic Partnership Agreement/日英包括的経済連携協定). This agreement is the first deal the UK has struck as an independent nation. With this deal, the countries wish to overcome the economic challenges surrounding COVID-19. In other words: Lower import and export tariffs.

For the next three years, the UK wishes to secure FTAs with countries covering 80% of the UK trade. Meanwhile, the total UK-Japan trade value is 29 billion GPB (in 2018). A long-term FTA between the UK and Japan could increase the total trade value by 15.2 billion GPB. By removing trade barriers, small and medium-sized enterprises that import and export goods gain benefits. This situation creates the desire for UK-companies to enter the Japanese market and Japanese companies to enter the UK-market as well. The covered areas in the treaty are:

Agriculture, food and drink
Manufacturing
Digital and data
Financial services
Creative industry
Fashion
Small and medium enterprises (SMEs)
Services
Investment

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)

The CPTPP is one of the world’s largest free trade areas, with 13% of the GDP (Global Gross Domestic Product) in 2018. Japan is the largest CPTPP member, representing over 28% of the total trade. The UK wishes to join the CPTPP, with the signing of CEPA being the first step. If the UK joins, the GDP increases to 16%. The UK will benefit from significant long-term trade. The UK will benefit from investment opportunities in business in the Asia-Pacific region, and vice versa.

We all go through uncertain times. It is yet to be seen how Brexit and future trade treaties will unfold for the UK and Japan’s trade relationship. If you are unsure of what to do, talk to us, we would love to help. If you would like to read more about CEPA and the UK’s future plants to join CPTPP, you can find more in-depth information on the UK Government website. Meanwhile, we summarized benefits and (potential) threats for the UK-Japan trade in an overview below:

Benefits and threats for the UK

*Section*	*Benefit*	*Threat*
*Digital trade*	The UK’s ambitious digital provisions, including the free flow of data between Japan-UK, lead to innovation and development of emerging technologies (blockchain, driverless cars, quantum computing). The estimated trade boost is estimated to be over 15 billion GBP.	The UK left the most significant free trade zone of the EU and Japan. Even with the UK’s extra focus on digital trade, tariffs could rise nonetheless.
*Profession and business services*	CEPA allows professionals to move more quickly and support recognition of professional qualifications, such as accountancy and the legal profession. The export of businesses from the UK to Japan, including accountancy, engineering, and legal services, is 1.5 billion GBP.	Political significance with CEPA is certain, but the economic impact is likely to be very small. This is due to limited improvements compared to the EPA (EU-Japan Economic Partnership). According to UoS, lawyers worry about subsidy deals being weaker in Japan than in the EU.
*Financial services*	With reduced barriers to cross-border trade and investment and co-operation between UK-Japan on financial regulation, the export of financial services to Japan is estimated to grow. The current export of financial services is 4.1 billion GBP.	Whereas CEPA is more potent than EPA, it can have drawbacks. For example, the UK wants to receive quotas for some agricultural products exported with a lower tariff. Instead, the UK can use left-overs from the EU’s quota with Japan, potentially putting UK exporters at a disadvantage.
*Automotives*	Cars are one of the UK’s top goods exports to Japan, worth around 1.1 billion GBP. By 2026 the British tariffs on Japanese cars are removed.	The EU is Japan’s biggest car market. If trading between Japan and the UK becomes undesirable, Japan can choose Europe instead. Since 2016, Japan has already postponed or closed some car factories and projects. Critics say that the UK’s GDP (Gross Domestic Product) is only boosted by 0.07%, a fraction of the lost trade with the EU.

Sources

United Kingdom Government – Tokyo Review – University of Sussex – Ministry of Foreign Affairs (Japan) – The Japan Times

There seems to be no escape: Brexit. Before the news came out that there finally was a deal, December was a month full of nervous waiting. The advice from the Customs, Chamber of Commerce, Tax Authorities, MLNV, the Embassy, and the Task Force VK all sounded the same: Whether there is a deal or no-deal, preparations are necessary! The deal situation has a few advantages (compared to a no-deal), such as facilitating documents of preferential origin and import duties, but this does not mean there is less work to be done.

We have listed a few pointers for you and your company.

1. Prepare your documents

Prepare for custom formalities, supervision of goods traffic, levying of customs duties and excise duties, and the non-tariff trade barriers. Most companies trading with the UK are familiar with these topics. We have listed some necessary documents for you, with a brief explanation.

1.1 Export from the EU to the UK? Take care of the export invoice (excluding VAT), transport documents and export declaration

This situation has a few adjustments. You can no longer make an intra-community delivery when providing the export invoice, which means an export declaration is required. An EORI number is necessary for this export declaration. You must ensure a correctly completed export declaration for the transport documents (CMR, B/L, or AWB) and proof of export. This declaration allows you to claim exemption from VAT with the tax authorities, depending on your Incoterm. Make sure to have your documents ready and stored because the customs can check your documents for up to 7 years.

When importing into the EU from the UK, it goes the other way around: the British supplier provides the export invoice and a British export declaration as proof of the VAT. He also includes transport documents, UK export declaration and, depending on where the goods enter the EU, the transit documents (T1). In the EU, you need an import declaration (AGS or EORI number), payment of import duty, consumption tax and VAT. With your requested VAT code number, according to Article 23 of the Turnover Act, you can reverse charge the VAT. This step is especially crucial for the person who takes care of the logistics for you.

1.2 Pay attention to the UK import declaration

You have to communicate an agreement about the import declaration with the customer. To apply for an EORI number, visit your designated tax authority’s website (e.g., if you own a Dutch company, you have to go to the Dutch tax authorities). For a British EORI number, you must go to the British Government website.

1.3 Bringing goods to the UK from the EU through roll on roll off ports?

The British Government has made an overview of preparations for using roll on roll off ports and ferry services. You can view this on their website.

1.4 Arrange the UKCA marking

(Web)shops have to deal with new rules, such as distinguishing between packages worth more or less than 135£. UKCA marking replaces CE marking. The safety requirements remain largely the same, but the UK standard is needed to get your products to the UK market. Some CE markings can still be used in the UK market until 1/1/2022. However, this does not apply to every marking. Therefore, check the UK Government website on how to arrange the UKCA marking.

2. Make sure everyone knows what to do

In matters such as VAT reverse charge, Incoterm costs, import and export declarations, and transport documents, you must continuously communicate with other parties (such as customers and suppliers). The necessary information can be obtained here:

2.1 Check the Brexit Checker

The UK Government has all the essential information. If you do not know what to look out for, you can do the Brexit Checker. We recommend this, even if you have done this scan before, as it updates frequently.

2.2 Check the consequences for public administrations and EU businesses

Do you have questions and uncertainties about excise duties, intellectual property law, and prohibitions and restrictions? The European Commission listed the EU guidelines so that you can keep an eye on these matters.

2.3 Check the UK Government

Changes in, for example, VAT payments can be found on the website of the UK Government. In general, the website provides essential information on the Brexit situation.

3. Select the best Incoterm

As you can see above, there are many Incoterms to choose from, so pick one that suits you best. Who will bear which costs (import duties, customs clearance costs) and transport risk depend on the agreed Incoterm. Pay attention to long-term contracts, EXW and DDP risk factors, risk during loading and unloading, and transport risk. For example, with the FCA Incoterm, the buyer is primarily responsible for the arrival of goods, whereas the DDP Incoterm, the seller is primarily responsible. You have to consider which party should be accountable and where the risk transfer points lie for you. Discuss this with your customer and suppliers.

If you are not sure which Incoterm suits you best, and how to arrange this, go to the UK Government website.

4. Check, check, and check again!

Djoeke Adimi, of the Task Force VK, describes the situation as ‘significantly complex.’ “If you want to trade or continue to trade with the UK, you have to do your homework.” You need to sit down and work for a while, and by this we mean: you have to check everything carefully, down to the details. The complexity depends on which actions you want to perform.

Feel free to talk to us, or visit brexitloket.nl or gov.uk for further details on Brexit matters. Do not be afraid to work together and ask for assistance: Although you need to have your paperwork in order, you certainly do not have to do this alone.

Bronnen:

Brexit Loket (Dutch Government) – Dutch Chamber of Commerce – Dutch Tax Authorities – Dutch Customs – UK Government

Illustrations by Global Connect Admin B.V.

The Brexit impact on Japan

Brexit: Some pointers for you and your company