by Vladimir Milic

While the leading supporter of free trade after World War II was the USAas it started  withdrawing its backing, the EU and other big players had to step in to take its place. The most recent example is the Economic Partnership Agreement (EPA) signed during the 25th EU-Japan Summit held in July this year. This is expected to create one of the world’s largest trade blocs. These two economies make a third of global economic output and have more than 640 million consumers combined.

According to Eurostat, total trade between the two has declined over past years, but they continue to remain important bilateral trade partners. In 2017, Japan was the EU’s sixth largest trading partner, and the EU was Japan’s third export destination as well as it is the second most important source of imports. Although Japan benefited in the past from significant surpluses in the trade of goods with the EU, trade has recently become more balanced as Japan experience a surplus in traded goods whilst the EU experience a surplus in traded services. Moreover, the EU was the largest contributor to FDI in Japan, and also, Japanese FDI ranked the EU as their second largest recipient.   

The EU-Japan Trade deal promises to eliminate 99 per cent of tariffs over the period of 10-15 years, which will save consumers in both countries around 1 billion euros annually. Besides falling prices for imported goods in both economies, the EU hopes this deal will stimulate higher exports of agricultural products such as wine, pork, and cheese. Significant benefits are also expected in the pharmaceutical, chemical, machinery, textile, and clothing industries. It is expected that opportunities for EU’s companies to participate in Japan’s public procurement market, services and investment sector will also increase. Protection of intellectual property rights and geographical indications (GIs) have been emphasised and included in the agreement. 

Japan is expected to gain most from the automotive industry, as well as the tea and fishing industries. The deal anticipates the reduction of regulatory problems Japanese companies face when trying to do business in the EU. 

Besides lower tariffs, both the EU and Japan believe that this deal will help to shape future globalisation by moving beyond tariff cuts. Such an agreement on standards and procedures will aid in reaffirming their shared commitment to venture into sustainable development. It is the first time that a trade deal includes a specific commitment to the Paris Agreement on Climate Change of 2016.  

Flag Bearers for the World Trade 

When negotiations started in 2013, time was not the main priority for either side. However, things changed. Back then, Japan gave higher importance to the Trans-Pacific Partnership (TPP). Following the failure in the TPP negotiations, the deal with the EU was placed at the top of their list due to the unfolding of the Brexit referendum. Both the EU and Japan gave great significance to finalising and rectifying the agreement before the end of March 2019, in order for the deal to automatically apply to Britain. This would leave a time frame of 2 years to reach a new separate deal with the UK following their separation from the European Union. 

This agreement can also be perceived as an additional policy to “Abenomics” which covers a set of monetary, fiscal and structural policies set by Prime Minister Shinzõ Abe. It is expected to lower import prices by stimulating domestic consumption in Japan.  

Interestingly, the EPA is just one of the trade deals which Japan is trying to sign. Since the US withdrew from the TPP at the beginning of last year, Japan is trying to keep talks about free trade in the Pacific alive through the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP). 

The European Union also has failed to reach an agreement on trade with the USA. The Transatlantic Trade and Investment Partnership (TTIP) was halted by President Donald Trump, who then initiated a trade conflict with the EU. Talks should be resuming in the upcoming months,  but it is far from clear if this agreement will be finalised and whether its conclusion is desirable.  

Future of Free Trade 

The EPA is a significant step forward for free trade and an example that integration of countries remains achievable and benefits all sides involved. It is a clear signal that the rest of the developed world will not follow the protectionist steps of the USA. The EU-Japan trade agreement could empower future negotiations that are in the works for both countries. Such agreements are with Australia, Canada, New Zealand, Mexico and other countries.   

Alongside the economic benefits expected, a successful trade deal between these two leading economies sends a strong political message that they will protect the liberal international economic order from populism and trade protectionism.

20 September 2018
This text was published in Bullseye issue 73