Awaiting the Japan-Philippines Economic Partnership Agreement

The Senate has recently deferred voting for the Japan-Philippines Partnership Agreement (JPEPA), pending another exchange of notes between the Philippine and Japanese governments. Nevertheless, trade insiders believe that the Senate is set to give its nod to the Agreement. The anticipated approval of the Agreement comes after strenuous legal debate about the constitutionality of the JPEPA. The projected economic costs and benefits of the Agreement have also been discussed. In any event, whatever the possible outcome, it would only make good business sense to already include in their calculations, scenarios assuming the passage of JPEPA, which will provide benefits and opportunities to both Philippine and Japanese companies.

Thus, companies with operations in either the Philippines or Japan, or Japanese-based companies in the Philippines, should consider the potential trade opportunities that the possible approval and implementation of JPEPA could bring.

Opportunities for Japanese Companies

Under the JPEPA, the tariffs on some 3,947 product lines imported from Japan will be eliminated immediately. According to studies and official sources, these reductions include:

• Import duties on some automobile and automobile parts will be eliminated by 2010.

• For a number of electrical and electronic products such as plasma televisions, tariffs will be immediately removed while the rest will be eliminated in 10 years.

• Duties on almost all textile products imported from Japan to the Philippines will be subject to immediate elimination upon the Agreement’s entry into force.

• Certain types of flat rolled products or iron or non-alloy steel will be eliminated in six equal annual installments from the seven percent base rate to zero.

• Tariffs on cement will be gradually reduced to zero percent over a span of six years.

Opportunities for Philippine companies

Upon implementation of the JPEPA, tariffs on 95 percent of agricultural and industrial products exported by the Philippines to Japan will be eliminated. According to studies and official sources, the reductions relating to exports from the Philippines into Japan are:

• Tariffs on automobiles, auto parts, and electronic products, will be eliminated within a 10-year timeframe.

• Several varieties of fruit (e.g. avocadoes, mangoes) and vegetable exports (e.g. asparagus, cabbages, carrots, cucumbers, lettuce) from the Philippines will be granted duty free treatment upon implementation of the JPEPA, while tariffs on others will be phased out in five and seven year installments (e.g. onions, sweet corn, tomatoes).

• Poultry exports to Japan will be granted a tariff rate quota of 3,000 MT for the first year, which will grow to 7,000 MT by the 5th year of implementation. A preferential 8.5 percent in-quota rate will also be provided.

• Indigenous wines and liquor from the Philippines will be allowed to enter Japan tariff free upon the implementation of the Agreement.

• Japanese tariffs on textile products from the Philippines would likewise be immediately eliminated once the Agreement takes effect.

In anticipation of the passage and implementation of the Agreement, companies should review the Agreement and become familiar with the requirements for claiming preferential duty treatment.

Additionally, Japanese or Philippine producers may experience additional competition from a wider range of reduced cost imports. The Agreement has safeguard provisions, which may be useful if a local producer is negatively impacted by the Agreement. These safeguard provisions would have to be fully understood by domestic manufacturers, since these provide the legal avenues for them to preserve their share of the local market in the midst of growing competition. Complications may arise in comprehending and interpreting these rules in view of the growing slew of trade agreements that the country has signed on to, on top of the multilateral trade remedy rules at the World Trade Organization (WTO). Each bilateral/regional trade agreement the Philippines enters into would have safeguard provisions with minute differences, particularly in the nature and degree of shelter it provides to domestic industries. Close analysis therefore would be needed in determining the applicable rules.

The above goes without saying that the rules of the JPEPA are highly technical and complex. Of particular relevance here are the preferential rules of origin (ROO), as the JPEPA contains rules that are more complex than the ASEAN-Free Trade Agreement (AFTA) that we have long been accustomed to. The JPEPA ROO combines the three methodologies (the value-added test, the change in tariff classification and the specific process). In addition to this, there are also product specific rules which combines various permutations of the said methodologies on different products. It would do well therefore for companies to study these rules more carefully as they apply to their respective products in order to optimize JPEPA’s benefits and mitigate the possible risk of non-compliance (e.g. using a preferential rate without adequate support that the requirements have been met).

Readers should also be informed that the ASEAN-Japan Economic Partnership (AJCEP) was recently signed. The AJCEP is the third allied Agreement to the AFTA (after ASEAN-China and ASEAN Korea) and applies to Japan and all ASEAN members countries, including the Philippines. Although the JPEPA is presumed to have the most impact on the Philippines, being the more specific Agreement between the Philippines and Japan, the provisions of the AJCEP should also be closely examined. Having two separate agreements may give rise to conflicting interpretations, the resultant opportunities and costs of which have not yet been examined. Nevertheless, the possible interplay between AJCEP and JPEPA have already been foreseen by international law commentators. Reading and carefully analyzing the JPEPA alongside the provisions of the AJCEP therefore would be a recommended practice for companies to see possible areas that may need further clarification ahead of time in order to make the needed preparations.

It can be said that the deferment of the JPEPA vote gives companies yet another extension to undertake the due diligence in planning ahead for what may come. It is recommended that companies seek professional advice to confirm the appropriate implementation of a program to claim preferential duty under the Agreement.

(Jeremy I. Gatdula is a Principal for International Trade and Customs Services of Manabat Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please email [email protected] or [email protected]).