World Economy

Why the EU’s agreement with Japan is a big deal

Jim Brunsden & Valentina Romei
Japanese Prime Minister Shinzo Abe in Brussels on July 6, 2017.
Yves Herman | Reuters

The EU and Japan could hardly have been more bullish about the free-trade deal announced on Thursday. No wonder: between them they account for 19 per cent of global gross domestic product and 38 per cent of goods exports.

Shinzo Abe, Japan's prime minister, hailed "the birth of the world's largest, free, industrialised economic zone". The European Commission welcomed "the most important bilateral trade agreement ever concluded by the EU".

The deal, reached after four years and 18 rounds of negotiations, includes big tariff cuts, co-operation on standards and regulations and the opening up of public procurement markets. The EU estimates the accord will save it €1bn in customs duties per year and boost exports to Japan from more than €80bn to more than €100bn a year.

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But much is still to play for. Businesses will be analysing what the deal means for them, while negotiators will be preparing to turn an "agreement in principle" into a complete text.

What is the real economic impact?

Not for nothing has it been called the "cars for cheese" deal. For the EU, the big goal was slashing Japan's tariffs on imports of European meat, wine, and dairy products. Tokyo sought the end of EU import duties on its car sector — a rich prize since the bloc is the world's biggest importer of road vehicles.

On both issues, the agreement is far-reaching: the EU has agreed to a gradual phase out for all tariffs on cars imported from Japan, with some safeguards against a sudden large increase in imports. In turn, Europe's farmers will face far lower tariffs when exporting to Japan. At present, duties on food are high, ranging from 15 per cent on wine to 30-40 per cent on cheese. When the deal comes into effect, some tariffs will fall to zero immediately, while others will be phased out over 15 years. For some very sensitive products, the zero tariff will only apply up to a certain volume of imports.

On goods, the deal may be more important for Tokyo, which sends about 10 per cent of its exports to the EU, more than double the proportion of EU goods exported to Japan.

But André Sapir at the Bruegel think-tank in Brussels adds that both sides will benefit from removing non-tariff barriers, such as incompatible product standards. "This is where the real meat is on the economy," he says.

What does the outcome mean for Europe's carmakers?

EU negotiators have been at pains to explain that the deal on cars is not the "one-way street" once feared by European manufacturers. Brussels notes that agreement with Japan includes greater harmonisation of standards that the EU hopes will help its manufacturers sell more. The European Automobile Manufacturers' Association has so far responded cautiously, saying the deal is a "positive signal for international trade" and that it will analyse the "full implications".

What are the wider implications?

For Mr Abe, the deal "is a major pillar in our economic growth under Abenomics". The Japanese prime minister sees the deal, in part, as a way to push the country's labour-intensive agriculture sector towards reform. He said he hoped the agreement could have a "positive impact" in helping to revive the planned Trans-Pacific Partnership, a regional trade deal that stalled after Donald Trump withdrew the US.

The EU sees the deal as a way to get back on the front foot in opening up new trading opportunities after the near debacle in 2016 over a deal with Canada that was held up by resistance from a Belgian regional parliament.

What happens next?

Jean-Claude Juncker, European Commission president, hopes the deal can take effect in "early 2019". But before that, the EU and Japan have to settle the sensitive issue of investor protection.

Brussels has rejected the use of traditional "investor state-dispute settlement" tribunals, criticised by campaign groups as a tool for multinationals to undermine environmental and labour standards. But Tokyo is not keen on the alternative of investment courts.

One option being considered, according to people briefed on the talks, is to leave the issue out of the deal entirely. This could also help the EU streamline ratification — so that the likes of Belgium's regional parliaments would not be able to hold up the deal.

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