The EU – Japan trade agreement as the response to US protectionism.
Since Donald Trump has been elected as the 45th president of the United States, he already announced the withdrawal from the TPP (Trans-Pacific Partnership Agreement) and renegotiation of so far the biggest free trade area in the world – NAFTA. In contrast to that statement stands the newly announced trade agreement between the EU and Japan.
On July 6th 2017, during the G-20 summit which took place in Hamburg, Germany, Prime Minister Shinzo Abe of Japan, president of the European Council Donald Tusk and president of the European Commission Jean-Claude Juncker announced a broad agreement which strengthen both the economic and political relations between two mighty economies. This can lead to the creation of the EU’s biggest free trade zone. Combined together they account for more than a third of the world’s economy.
The EU and Japan already have close trade ties, as the latter being EU second largest trade partner in Asia after China. Find some essential facts about trade relations below:
- The EU exports over €80bn of goods and services to Japan every year
- More than 600,000 jobs in the EU are tied to exports to Japan
- Japanese companies in the EU employ more than a half a million people
- Every €1 billion of EU exports represents some 14,000 jobs in Europe.
What is the deal all about?
The EU-Japan Free Trade Agreement negotiations were officially launched on March 25th 2013 and its foundation is to increase the flow of Japanese cars to Europe and of European food to Japan. The agreement is emphasizing the following claims:
- Get rid of tariffs
- Get rid of other obstacles to trade
- Show the world that the EU and Japan reject protectionism
Duties & taxes on import
Getting rid of tariffs is the most vital sign of each free trade zone around the world. Although trade exchange between these two parties is continuously thriving, some of the sectors remain under high custom imposed.
Some of Japanese high customs include:
- Nearly 40% on beef
- Up to 30% on chocolate
- 15% on wine
- Up to 40% on cheese
- Up to 24% on pasta
The EU wants Japan to remove tariffs on a wide range of goods so that European products could be more competitive in the Japanese market, making it easier for them to sell it. Among some could be found Dutch cheese Gouda or Irish Whiskey. The same thing goes in the opposite direction and means to progressively remove tariffs on importing Japanese goods within the EU, mostly cars and components. According to the agreement, the EU is going to phase out its 10% import duty on cars from Japan over a period of 7 years, while the Japanese government will expand access for European farm goods and textiles. Ultimately the goal is to eliminate 99% of currently present tariffs.
Other trade barriers
The main obstacles to EU firms penetrating the Japanese market are Japanese rules and regulations which are different from international standards and practices, and the resulting high compliance costs for EU companies. Still to be negotiated remains the matter of resolving disputes arising as a result of the deal. The Europeans want to employ a court system rather than ad hoc arbitration, for which Japanese side is not so willing to agree on.
Most EU standards are based on international ones but Japanese standards often differ from international standards to a lesser or greater extent. This makes it difficult and expensive for EU exporters because they have to set up separate production lines for the Japanese market. Some companies say these obstacles make it 10-30% more expensive to export to Japan.
Reversing the global trend
At a time when protectionist pressures are growing, a trade agreement between the EU and Japan would send a clear signal that two of the world’s largest economies strongly endorse further globalization and reject protectionism. This also means that they are open for business and for trade on the basis of fair rules and high standards.
What benefits can be expected on both sides?
Leaders on both sides agree that setting up an agreement on establishing FTA (free trade area) creates a win-win opportunity. This statement finds confirmation in studies carried out by the London School of Economics, which shows that EU exports to Japan could increase by over one third and backwards by up to 30%. An independent Impact Assessment of a potential trade deal with Japan suggests it could increase EU output by up to 0.76%. Moreover the EU exports to Japan of processed food could rise by up to 180%, whereas chemicals by up to 22% . This would represent respectively up to €10 and €3 billion of extra sales.
On the other side Japanese companies would benefit from abolishing tariffs on imported cars and components within the EU, which presumably will boost production and jobs in Japanese car factories located on EU soil.
The following sectors are most likely to benefit:
- Medical devices
- Motor vehicles
- Transport equipment
The agreement will make it easier for EU firms to sell their services in Japan as well. Companies in the following areas in particular are expected to benefit:
- Business services
- Financial services
Japan itself is a hugely important market worldwide, being the fourth largest national economy with a population of 127 million. That in compare to EU more than 500 million inhabitants and GPD over 20 trillion USD creates strong incentive to take full advantage from its potential. The best way to do so is by enhancing economic integration.
Although the process is still on the run and negotiations are expected to end later this year. Once the negotiations have ended the final step will be ratification process made by parliament’s houses on both sides (and likely by each European national government). But as the EU experienced in recent history dealing with the ratification of CETA agreement (EU – Canada treaty), this process can last longer than expected and hit upon some obstacles.
Interested in more?
Click here to find out about the EU – Japan Economic Partnership Agreement in details.
Check out our other article on US – EU trade agreement, the TTIP, and what effects will it have on European SME’s.
Export Partners Consulting is a portuguese firm dedicated to help foreign companies in two different ways:
- Finding customers and sales representatives in Portugal and other European countries (https://exptpartners.com/sell-in-europe-export-to-eu/)
- Strategic sourcing and procurement in Portugal (https://exptpartners.com/sourcing-in-portugal/)