Japan and the EU: the heroes free trade needs right now



Image credit: Shari's Berries: www.berries.com/

After four years and 18 rounds of negotiations, Japan and the European Union announced on 6 July a broad agreement in principle of an Economic Partnership Agreement (EPA) hailed by Japanese Prime Minister Shinzo Abe as creating ‘the world’s largest free, advanced, industrialized economic zone’.

Covering almost a third of the global economy, the EPA is set to eliminate well over 90% of current tariffs between Japan and the EU, and greatly expand markets for services and government procurements. Earlier in the year, one study estimated that the EPA will see bilateral exports increase by 34% for the EU and by 29% for Japan. Considering that two-way trade in goods for 2016 was worth 124.5 €bn, it’s worth making a big deal out of this big deal.

What’s in the EPA?

The centrepiece of the EPA is the sharp reduction of Japan’s tariffs on EU meat, wine and cheese, and the phasing out of the EU’s tariffs on cars imported from Japan. These have been areas of significant concern for interest groups, such as European carmakers and Japanese dairy producers. European carmakers will be facing competition from an influx of Japanese cars as the EU, already the world’s second largest importer of motor vehicles, will gain greater access to Japanese cars. Meanwhile, Japanese dairy producers have already been hit by the progress of the EPA. Share prices already dropped approximately 2% for dairy producers Megmilk Snow Brand and Rokko Butter on 7 July in anticipation of increased domestic demand for European food items.

There have also been many less prickly areas worth noting, particularly surrounding the many non-tariff barriers that the EPA is looking to eliminate. These include both parties aligning to international standards on their technical regulations, and for product and environmental safety in their car production standards. There has also been ambitious development regarding the temporary movement of company personnel, with the EPA expanding the EU’s modern mode 4 provisions to add a new category for short-term business visitors and investors.

Although the EPA seeks to remove a range of tariff and non-tariff barriers to trade, what’s not in the EPA is also worth noting. A particularly contentious area is the use of Investor-State Dispute Settlement (ISDS) tribunals, an investor protection mechanism that allows an investor to bring a claim against a host government that it believes has breached its investment obligations. The EU is currently proposing the use of a Multilateral Investment Court to replace the ad hoc tribunals that currently exist in most trade agreements with ISDS provisions, while Japan is currently standing firm against this novel approach to ISDS.

Looking beyond the text

For both the EU and Japan, the EPA is a show of strength against recent global protectionist and isolationist sentiments displayed by the US and the UK. The EPA comes only two and half weeks since the EU and the UK officially began Brexit negotiations. The wide ranging trade boost that the EPA is expected to yield serves as a timely reminder to the remaining 27 EU member states of the benefits that membership provides.

For Japan, the EPA will be a much-needed free trade win after President Trump withdrew the US from the Trans-Pacific Partnership (TPP) earlier this year. Representatives of the remaining 11 TPP nations (the TPP-11) will be meeting this Wednesday in Hakone, Japan to discuss ways in which the agreement can forge ahead despite its vastly diminished economic weight in the absence of the US. If Japan can successfully negotiate the final details of its deal with the EU, as well as reach some form of TPP-11 arrangement, it will be in a strong position to refuse concessions beyond those within these agreements when it comes time to finalise a bilateral trade deal with the US.

Although these two economic powerhouses have reached an agreement in principle on the EPA, there’s still much work to be done before it can be finalised. With the negotiating teams aiming to complete the negotiation process by mid-2018, and further aiming for the Agreement’s entry into force in early 2019, last week’s announcement may have been a premature celebration. But with a Brexit negotiation deadline fast approaching and a TPP dead in the water, even an agreement in principle is worth breaking out some celebratory cars and cheese.

Dylan Hubbard is the International Trade and Economy Fellow at Young Australians in International Affairs.

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