Japan and the EU have agreed to a trade deal that will eliminate the vast majority of both tariff and non-tariff barriers. Although the deal carries many economic benefits it has been more recently pushed in order to counter rising protectionism.
International cooperation revived
Protectionism has surged in the last year as evidenced by the Trump administration abandoning both the Trans-Pacific Partnership (TPP), a free trade agreement in which Japan was a major player, and the Transatlantic Trade and Investment Partnership (TTIP), a free trade agreement between the US and the EU. Having been spurned by the US, Japan and the EU are now coming together to form a strategic economic alliance which will account for 28% of global GDP.
This trade agreement marks a concerted effort to combat rising protectionism. Both parties have voiced that the deal is intended to send a message that cooperation and trade liberalization remain a positive force in the world.
Japanese Prime Minister Shinzo Abe emphasized that “it is important for us to wave the flag of free trade in response to global moves toward protectionism by quickly concluding the free trade agreement with Europe”. And included among the key points of the European Commission’s report on the agreement is that the deal “would send a powerful signal that cooperation, not protectionism, is the way to tackle global challenges.”
The best deals
Japan and the EU are already mutually important trading partners. The EU exports around $98b in goods and services to Japan each year and imports around $93b in return. The deal will open up this trade further by eliminating a wide range of tariffs, such as those on agriculture and automobiles, and resolving non-tariff measures such as technical requirements and regulation.
Once fully implemented, the deal will eliminate 97% of Japanese tariffs on European goods. This includes scrapping the current 30% tariff on European cheese along with other tariffs on processed agricultural products such as pasta, chocolate and wine. The deal would also offer many European agricultural products the protection of Geographic Indications, that is, if a product is to be labelled a Roquefort cheese, it must come from Roquefort, France.
In exchange, the 10% European tariff on Japanese cars will be eliminated – this is expected to make up much of Japan’s benefit from the deal. Automobile tariffs are a crucial concern for Japanese carmakers who struggle to be competitive against South Korea, whose cars are sold to the EU tariff-free thanks to a free trade agreement signed in 2011. Perhaps more importantly, however, the EU and Japan will align their environmental and safety standards on automobiles, allowing for streamlined trade.
Despite the buoyant conversation around it, the deal reflects the hard bargaining of both sides. Agriculture and automobiles are traditionally contentious areas. The Japanese agricultural lobby has significant clout in Japanese politics and has long defended its relatively inefficient farming community. Automakers are one of the largest sources of jobs in the EU – raising concerns that cutting tariffs may cause a flood of Japanese cars. Quotas will be established on several European agricultural products, reflecting the strength of the Japanese lobby. The deal also includes a clause that would allow the EU to reintroduce tariffs on cars and car parts in the event that Japan reintroduces non-tariff barriers to EU car exports.
Remaining barriers
The deal still has some hurdles to jump. It will have to be passed by the Japanese Parliament, the European Parliament and European national governments.
Furthermore, if the deal is ruled to be a “mixed deal” by the European Commission, it will also have to be voted on by European national parliaments. This process nearly derailed CETA, the Canadian-EU trade agreement, when Wallonia, a region of Belgium, initially refused to sign the agreement.
Although CETA should only have had to be passed by the European Parliament and European national governments, political pressure and anti-EU sentiment ostensibly forced the European commission to declare it a mixed-deal. This declaration gave European national parliaments additional self-determination but may have set a precedent that will be relived in the Japan-EU trade agreement.
Sending a message
The deal is a rebuff to the Trump administration’s protectionist flair. Although negotiations began in 2013, it was not until recently that the two parties felt the urgency of reaching a conclusion. The agreement shows that both Japan and the EU are concerned that an “America First” policy fails to make room for traditional allies.
Japan and the EU are not the only ones concerned. Mexico is also seeking to conclude an expanded free trade agreement with the EU later this year. Its fear is that the renegotiation of NAFTA promised by the Trump administration would cause significant harm to the Mexican economy.
Altogether the deal is not just an economic agreement but a strategic one. Both parties are concerned not only about rising protectionism but also about the absence of global leadership on areas such as climate change – the deal makes explicit mention of committing to the Paris Climate Agreement, which the Trump administration deserted in June. Together the EU and Japan seek to uphold the values of economic cooperation and environmental stewardship which have faltered due to lack of US leadership.
The hope is that the deal will come into force in 2019. If ratified, the deal is expected to boost the EU economy by 0.8% and the Japanese economy by 0.3%. More importantly, however, the deal is intended to send a message that trade liberalization is more than a zero-sum game.
