Photo: European Union
Author: Julian Grinschgl
In April 2017, the 18th round of negotiations on Free Trade Agreement (FTA) between the European Union (EU) and Japan was held in Tokyo. Both sides fortified their aim to reach an agreement this year. The negotiations started in 2013 but stalled until now. Recent developments led to a new effort of both actors to settle an agreement in order to counter protectionist movements in the global economy. It is a great chance for the EU to fill in the vacuum created by the US withdrawal from the Trans-Pacific-Partnership (TPP) and to present itself as a reliable alternative. Both actors have incentives to finish negotiations this year but significant obstacles and challenges remain.
Together, the EU and Japan account for roughly a third of the global GDP and a fifth of world trade. Both sides have a lot to gain from coming to an agreement. Various studies suggest that a satisfactory deal could lead to an increase of 32,7% of EU exports to Japan while the Japanese exports could rise by 23,5%. Even in a conservative scenario, this would enhance welfare effects for Japan at roughly €9 billion per year and €11 billion per year for the EU. While the tariff elimination would lead to only small economic gains, negotiations about the reduction of non-tariff barriers across different sectors are expected to have a lot of potential for mutual benefits (Bertelsmann 2017, p. 63; EEAS, 2017; Bloomberg, 2017).
The total trade in goods between the EU and Japan in 2016 was worth €124,5 billion which makes Japan the EU’s second biggest trading partner in Asia after China. Simultaneously to the FTA, the EU is, as it did before in negotiations with Canada, negotiating a Strategic Partnership Agreement with Japan. This includes more coordination and cooperation on a set of other important issues such as nuclear non-proliferation, the rule of law, climate change and human rights (EEAS, 2017; EC, 2017).
But there are wider implications and motives behind intensified negotiations besides mutual beneficial economic prospects. On the first day in office, the new US President Donald Trump withdrew from the talks on the Trans-Pacific Partnership agreement between the US and eleven other Asian and Pacific nations including Japan, which aimed to link Asian-Pacific States to the US and to form a counter-balancing alliance against the new emerging hegemon, China. Further, the US seems to question the long-established doctrine of multi-lateral trade and free and open markets and considers adopting protectionist actions. Both present a huge blow for Japan’s economic prospects and its security-related goal to preserve the regional balance of power (Politico, 2017). Japan has a special relationship with the US as a military ally with US troops on Japanese soil and is given security guarantees. The goal of Japan's effort for TPP was to stimulate its lagging economy by promoting economic growth and exports and by pulling the US closer to Japan in the wake of the crisis in South-China Sea and troubles with North Korea. But circumstances changed and Japan as a proponent of free trade is seeking for alternatives and the EU may be one of them. However, the US will continue to be the biggest ally of Japan. Also, because Japan has closer economic ties with the US and trade volume is larger than that with the EU.
The European Union, on the other hand, has one more opportunity to present itself as a heavyweight in open rules-based trade and as a trustworthy and reliable alternative to the US in Asia. The EU is not a newcomer in successfully settling agreements with Asian states. The Union did so before with South Korea, Singapore, and Vietnam and is also taking the opportunity to engage in trade negotiations with Indonesia (Politico, 2017). One can argue that the EU tries to join, or supplement, the US pivot to Asia by fostering its ties with Asian states and to open new markets for exports. But while an agreement with Japan would provide big benefits for the EU in economic and political terms, there are still many obstacles. One obstacle is the EU itself. As we have seen during negotiations of the Transatlantic Trade and Investment Partnership (TTIP) with the US and the Comprehensive Economic and Trade Agreement (CETA) with Canada, free trade agreements are facing the resistance of the EU population and numerous politicians. Moreover, a recent judgement of the European Court of Justice grants national parliaments a veto right concerning trade agreements with Singapore – which also has effects on all other trade deals. If the EU fails to accomplish an agreement, as it was in the case with TTIP and to some extent with CETA, then the EU would lose credibility which would have equally negative effects on the EU’s stance as the champion of open trade and as a reliable partner in the future (FAZ, 2017; Japan Times, 2017).
Further, issues with various trade sectors in Japan are slowing down the negotiation process. The EU insisted that Japan would lower tariffs on foods and reduce public subsidies for its railway industry and end non-tariff barriers for cars. Especially agriculture proves to be a sensitive sector for both actors. The EU and Japan are still highly subsidising their farmers and follow a protectionist approach for this trade sector and are reluctant to make any concessions in this area. In return, the EU would end its 10% tax on cars from Japan and improve accession for Japanese executives and not insist on zero tariffs on sensible goods such as beef, pork, and rice (Bloomberg, 2017). So while in the past seventeen trade rounds the progress was made in trade areas like investment and customs, other sectors such as agriculture, services in trade and investment dispute settlement terms are still open and highly contested. And most importantly, non-tariff barriers are still existent, especially in Japan where there is a restraint culture for foreign business and investment in their domestic market (ICTSD, 2017).
In sum, both Japan and the EU have a lot to gain from this deal. Japan can mitigate US withdrawal from TPP to some extent and defend together with the Union the open trade. But if a new bilateral trade deal with the US appears on the horizon in the near future, it should be clear that Japan’s focus could quickly shift again to the US since it is a bigger trading partner. Even more importantly, the US is the only country capable of establishing together with the other signatories of TPP a credible counterbalance against China.
The EU, besides gaining economic benefits, can present itself as an alternative to the US in Asia and appear as a reliable big player in the global economy and as a defender of rules-based trade and promoter of economic interdependence and the liberal international order. But if it is found that the treaty contains elements which are not solely under the authority of the European Commission and it fails to convince its constituents and national parliaments of the importance of this trade deal, it could likely face massive resistance and might have to pause negotiations. This scenario will have an enormous negative impact on the image of the EU in other countries and raise the question if the EU is still functioning the way it should. Therefore, the EU should continue its increased efforts to settle the Free Trade Agreement with Japan and provide the public with arguments based on shaping and protecting environmental and labour standards. Furthermore, the way the EU will settle future disputes on investor protection and access will be crucial for new trade deals in the future since especially this particular topic caused turmoil among European politicians and citizens.
2017 will soon be half over, and we will see if by the end of the year the EU can manage to appear as a unitary and credible actor in economic relations vis-a-vis the rest of the world, or if internal turbulences will stop ambitions to remain the leading economic power in the world and to shape future trade norms.
Julian is currently finishing his two Bachelor degrees in Political Science and History at the University of Vienna, and for a term, he stayed abroad at Trinity College Dublin. His primary fields of interest include international trade and international security, always with special attention to the role of the European Union. In fall 2017 he will start at University College London (UCL) his Master in International Public Policy.
Bertelsmann Stiftung (2017.) Ifo Institute (GED study) On the Economics of an EU-Japan Free Trade Agreement, 3 Mar 2017.
European Commission (2017), Trade Picture Japan. [online] Available at: http://ec.europa.eu/trade/policy/countries-and-regions/countries/japan/ Accessed: 20 May 2017.
European Union External Action (2017). Political Relations. [online] Available at: https://eeas.europa.eu/headquarters/headquarters-homepage/19223/political-relations_en Accessed: 20 May 2017.
European Union External Action (2017). Trade and Investment Relations. [online] Available at: https://eeas.europa.eu/headquarters/headquarters-homepage/19226/trade-and-investment-relations_en Accessed: 20 May 2017.
Frankfurter Allgemeine Zeitung (2017). Nationale Parlamente dürfen Veto gegen Freihandelsabkommen einlegen. [online] Available at: http://www.faz.net/aktuell/wirtschaft/ttip-und-freihandel/eugh-urteil-ermoeglicht-parlamenten-veto-gegen-freihandelsabkommen-15018177.html Accessed: 20 May 2017.
Herszenhorn, D.; Von der Burchard, H.; Oliver, C. (2017). EU reaches for the rising sun. [online] Available at: http://www.politico.eu/article/eu-japan-trade-trump-agriculture-news-brussels-shinzo-abe/ Accessed: 20 May 2017.
International Centre for Trade and Sustainable Development (2017). Regional Trade Agreements (RTAS) EU, Japan Officials Eyeing „Early Conclusion“ of Trade Deal, in: Bridges, 2017; 21(6) [online] Available at: http://www.ictsd.org/bridges-news/bridges/news/eu-japan-officials-eyeing-early-conclusion-of-trade-deal Accessed: 20 May 2017.
Japan Times (2017). EU hurries to fill Trump trade void with Pacific partners Japan, Mercosur. [online] Available at: http://www.japantimes.co.jp/news/2017/04/27/business/eu-hurries-fill-trump-trade-void-pacific-partners-japan-mercosur/#.WQ8mydxBqUk Accessed: 20 May 2017.
Stearns, J. (2017). EU, Japan Forge Ahead in Trade Talks as Trump Gives Impetus. [online] Available at: https://www.bloomberg.com/news/articles/2017-03-21/eu-japan-trade-talks-at-decisive-stage-as-trump-gives-impetus Accessed: 20 May 2017.