EU and Japan agree on free-trade deal and fill the post-TPP void

Jean-Claude Juncker, President of the EC, Donald Tusk, President of the European Council and Shinzō Abe, Japanese Prime Minister at the EU-Japan Summit (Brussels, July 6, 2017). Copyright: European Union; Source: EC – Audiovisual Service; Photo: Etienne Ansotte

Last week, right before the kick-off of the Hamburg G20 Summit, the European Union and Japan announced they formally agreed on a free trade deal. Japanese Prime Minister Shinzo Abe made an unscheduled stop in Brussels on Thursday on his way to Hamburg to formalize the conclusion of a new trade agreement, which is scheduled to come into effect in early-2019 and will guarantee tariff-free trade between the two superpowers.

The deal, despite being still an “in principle” ratification, represents a milestone in the history of the two regions, and points a big challenge to Donald Trump’s administration, which back in January this year scrapped the Trans-Pacific Partnership, a major trade agreement with Japan and other Pacific Rim counties, opting for protectionism.

Background

Talks between the EU and Japan began in 2012, after the release of an impact assessment of the future Free Trade Agreement in July the same year. Negotiations were officially launched on 25 March 2013 and, after 18 rounds held with national governments, on 6 July 2017 the European Union and Japan reached an agreement in principle on the main elements of the EU-Japan Economic Partnership Agreement. A Strategic Partnership Agreement between the two has been negotiated in parallel.

Already at the end of last month, when EU Trade Commissioner Cecilia Malmström met with Japanese Foreign Minister Fumio Kishida in Tokyo, it became clear that the two parts where incredibly close to an agreement on the mammoth free trade pact. Commissioner Malmström immediately expressed optimism after the two-days meeting, and told reporters she was “quite confident” that leaders could find an agreement at the 6th July summit in Brussels. “We are almost there”, Malmström said on June 30. “We made a lot of very important progress”.

The Trade agreement

And the progress was real. “We did it”, European Council President Donald Tusk announced following the signing last Thursday’s morning. “We concluded EU-Japan political and trade talks. EU is more and more engaged globally”, he also said. The pact, though still being an “in principle” agreement, is scheduled to come into effect in early-2019, and is expected to liberalize 99 percent of trade between Japan and the EU. Two of the most important sectors are Japanese cars and, for Europe, EU farming goods into Japan.

“The highly ambitious and comprehensive Economic Partnership Agreement will consolidate our solid and evolving trade and economic partnership and pave the way for the future”, said an official statement by the European Commission on July 6. “It will bring our two economies closer by addressing issues related to market access for goods, services and investment, procurement including railways, as well as those related to non-tariff measures and the protection of geographical indications as well as intellectual property rights”.

The Strategic Partnership Agreement

Japan and the EU also reached agreement in principle of the Strategic Partnership Agreement. This will provide a framework for an even “deeper and more strategic EU-Japan cooperation”, as stated by the European Commission in last week’s press release. The Strategic Partnership Agreement highlights the shared values and common principles that form the foundation of the EU-Japan partnership, and will see the two regions cooperating in areas like human rights, climate change and the rule of law. “This basis of shared values, which we not only respect, but which – in accordance with the Strategic Partnership Agreement – we have committed to promote, has allowed us to conclude these negotiations”, said President Tusk at the press conference of the EU-Japan summit in Brussels.

A clear international message

With this bilateral pact, the EU and Japan also wanted to send a clear message internationally. Indeed the deal comes just a few months after the collapse of a long-awaited trade agreement between Japan, the US and other Pacific ring countries, the Trans-Pacific Partnership (TPP). The gigantic trade deal was scrapped in January by US President Donald Trump, who has always claimed he was against big free trade agreements, and might have even put rocket boosters behind the ratification of an EU-Japan deal.

Many indeed see that, after negotiations have been proceeding for years – and definitely not at the speed of light – they were surely were accelerated after Mr. Trump abandoned the TPP. Japanese carmakers and micro-components producers have been on the alert since Mr. Trump’s “America First” policy was launched, with the open threat of reduced business with the US. The new deal so became also a clear sign that the EU wants to be leader of the world trade agenda, and filled the gap the United States have left behind in liberalization.

“Win-win” deal

“Although some are saying that the time of isolationism and disintegration is coming again, we are demonstrating that this is not the case”, said President Tusk. “That the world really doesn’t need to go a hundred years back in time. Quite the opposite”, he also added. Japanese Prime Minister Shinzo Abe said a “win-win” deal sends “a strong message to the world”. The Japan Business Council in Europe, representing Japanese firms in the EU, also applauded the agreement in principle “towards a comprehensive and ambitious Free Trade Agreement/Economic Partnership Agreement”. “The agreement reached today demonstrates the commitment of the EU and Japan to values of globalisation and openness in the face of rising protectionism and isolationism”, said the JBCE in an official statement last week.

With the deal in place, EU tariffs of up to 10 percent on Japanese cars will be phased out over seven years. A study by the European Commission says the deal could remove almost all custom duties which sum up to EUR 1bn annually, impacting the pharmaceuticals, medical devices but most of all the agro-food and automotive sectors. According to main reports, most EU food exports, including chocolate and biscuits, will see tariffs end over time, with a predicted increase of Predicted increase of EU exports of processed food such as meat and dairy products to Japan between 170% and 180% or up to additional €10 billion. Duty of up to 29 percent on hard cheeses like Parmesan will fall to zero over 15 years, Reuters reported. Japan will respect over 200 EU geographic protections on product names, like Parma ham or Polish vodka.

Japan is s the world’s third-largest economy, with a population of about 127 million, and it’s the EU’s second biggest trading partner in Asia after China. The value of EU exports of goods to Japan currently amounts to €58 billion, whilst the value of EU exports of services to Japan is close to €28 billion.