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The Significance of the Japan-EU Economic Partnership Agreement

Kimura Fukunari [Profile]

[2018.10.17]

US President Donald Trump’s administration has announced protectionist trade policies, and trade friction with China is growing acute. The economic partnership agreement that Japan and the European Union signed in July can be viewed as an attempt to push back at the threats to the international trading system.

A Quiet Launch

The Japan-EU Economic Partnership Agreement that Japan and the European Union began negotiating in April 2013 was signed on July 17, 2018. Seeking to avoid disruptions from Britain’s scheduled EU exit on March 29, 2019, and from European Parliament elections in May 2019, Japan and the EU are pressing forward with ratification to ensure that the agreement takes effect by March 1 next year.

Compared to the Trans-Pacific Partnership Agreement (TPP) or its successor, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP, also known as TPP11), the Japan-EU EPA has not received much media attention. Seeing the strong opposition of civic organizations in the EU to the Transatlantic Trade Investment Partnership negotiated concurrently by the United States and Europe, negotiating parties did not deliberately release much information on the Japan-EU EPA. Should this agreement take effect as scheduled, it will be an extremely important agreement for the future of the international trading system.

Its significance can be specified in terms of size, content, and context.

600 Million People and a Third of Global GDP

The Japan-EU EPA will be the largest free-trade agreement signed by Japan and the EU, encompassing 640 million people and 28% of the world’s GDP. Should the CPTPP be ratified by the remaining 11 nations without the United States and take effect, its share of world GDP will be only 13%.

Weak growth over many years has caused Japan’s share of the world economy to decline in relative terms. Japan, however, is still accepted as a major economic power, such that the free trade agreement concluded with the EU can be seen as heralding the arrival of an era of mega-FTAs.

A Comprehensive Commitment to Liberalization

The second reason for the significance of the Japan-EU EPA is its content. In both the commitment to the liberalization of market access and the crafting of international rules, the Japan-EU EPA compares favorably to the CPTPP in degree and the breadth of targeted policies. The agreement also includes many elements that are particular to the EU.

The Japan-EU EPA provides for a high degree of market access appropriate for an FTA between advanced economies, setting aside Japan’s agricultural sector, where considerable protectionism persists. The rate of import tariff elimination (the percentage of tariffs eventually reduced to zero) is 99% on an item basis for the EU and 94% for Japan. Japan’s figure, when broken down further, is 82% for agricultural, forestry, and fishery products and 100% for industrial goods. Protectionist policies will continue in the agreement for five major agricultural products—rice, wheat, meat, sugar, and milk products—for which many trade barriers also survived in TPP negotiations. It is unfortunate that Japan has still not resolved this unfinished business from the previous century.

In the Japan-EU EPA, a negative-list approach was adopted for the liberalization of services and investment. In this approach, all sectors are subject to liberalization in principle, and a list is used to specify those measures and sectors where liberalization is reserved. Regarding the entry and temporary stay of natural persons, provisions were made for business visitors for establishment purposes, investors, intracorporate transferees, contractual service suppliers, independent professionals, short-term business visitors, and accompanying spouses and children. Regarding government procurement, while both Japan and the EU are parties to the WTO’s Agreement on Government Procurement, the application of the principle of nondiscrimination was broadened, and both sides committed to expanding market access to the railroad sector, where there is much interest.

International Rules to Energize Automobile Production Networks

Interesting differences in the crafting of international rules can be noted between the Japan-EU EPA and the CPTPP.

Japan’s nontariff barriers have been a sore point for the EU for some time. The Japan-EU EPA includes an annex for automobiles and automobile parts, which commits to cooperation between regulatory authorities, the elimination and prevention of the negative effects of nontariff measures, the harmonization of international standards, and the mutual recognition of model number authorizations. When certain terms are met, some parts produced in third countries with FTAs with Japan or the EU will be recognized as produced within the region. In contrast, the United States is enforcing highly problematic trade policies. In the US-Korea Free Trade Agreement, the United States will be allowed to export a certain number of automobiles meeting only US safety regulations. In the renegotiation of NAFTA, the United States has demanded extremely protectionist rules of origin. Japan and the EU can be applauded for enhancing competition-based free trade and investment and for working toward energizing the global production networks of the automobile industry.

In the Japan-EU EPA, geographical indications will be emphasized with respect to intellectual property, particularly for agricultural products and alcoholic beverages. Commitments were made to mutually protect geographical indications for 71 items from the EU (such as Gorgonzola cheese) and 48 items from Japan (such as Kobe beef). Prompted by negotiations with the EU, Japan will introduce a comprehensive geographical indication system.

While animal welfare is not an issue that has gathered much attention in Japan, cooperation is mentioned in the chapter on regulatory cooperation. In the EU, animal welfare is a matter of strong interest going beyond civic organizations. Some sort of response will be expected of Japan’s livestock industry if exports to the EU are to become a possibility.

Accepting EU Standards on Privacy Protection

Negotiations are to continue on procedures for investment dispute settlement. Japan advocated investor-state dispute settlement, which has been adopted in many FTAs and investment agreements. Strong opposition to ISDS, however, exists in the EU, which is calling for the establishment of a permanent investment court with an appeal tribunal. Here we see the EU challenging the international order centered on ISDS.

In the case of e-commerce, commitments made in the Japan-EU EPA are less broad than in the CPTPP. The CPTPP specifies (1) the free movement of data, (2) the prohibition of requirements for data localization (prohibition of the crossborder transfer of personal information), and (3) the prohibition of requirements to transfer or access source code. The Japan-EU EPA specifies only (3). It was agreed, however, in parallel negotiations by Japan’s Personal Information Protection Commission and the European Commission on the transfer of personal information, to recognize the mutual movement of personal information. In the General Data Protection Regulation that took effect in the EU in May, the transfer of personal information outside of the EU is strictly regulated. It will be a significant outcome if the free movement of data is recognized between Japan and the EU. This will also mean Japan accepting EU standards on privacy protection, which has the potential to influence how international rules are crafted in the future.

Countering Threats to the International Trading System

The Japan-EU EPA is also significant for pushing back at the threats to the rule-based international trading system.

The United States, under the administration of President Donald Trump, has announced a series of protectionist trade policies in rapid succession. Its protectionist stance is pronounced in renegotiations of the US-Korea FTA and NAFTA. The trade policies being implemented are undermining confidence in the rule-based international trading system. They include invoking Section 232 of the Trade Expansion Act based on the pretext of national security concerns and imposing tariffs on China by way of Section 301 of the Trade Act, a step epitomizing an “America First” policy.

Many trade problems exist with China and other emerging market economies, going well beyond the protection of intellectual property and state owned enterprises. These are not, however, issues that can be solved by launching a trade war. The approach to take should be to make the case for economic policies based on international rules and to have these economies join a rule-based international trading system. With its present actions, the United States is heading in the opposite direction.

The Japan-EU EPA taking effect in such a context is highly significant. It sends a strong message to the world about the importance of a rule-based international trading system. Despite the differing viewpoints existing within the EU, member nations’ qualified acceptance of the attempt by Brussels to push forward with the EPA with Japan can be viewed as reflecting a growing sense of European urgency.

Should the Japan-EU EPA take effect, trade diversion, where EU exports replace US exports to Japan, and investment diversion, where investments are made in Europe rather than in the United States, can be expected to occur to a greater or lesser degree. While such developments will be small when measured against the economy as a whole, a situation clearly disadvantageous to US businesses may trigger a change in the domestic political situation. The United States may be lagging even further behind in the crafting of international rules than its citizens realize. If the CPTPP takes effect around the same time as the Japan-EU EPA, this will have an even greater impact on domestic politics in the United States.

While negotiations had been stalled for some time, it now appears that broad agreement will be reached within the year on RCEP, the Regional Comprehensive Economic Partnership (also known as the ASEAN+6 FTA). The domestic politics of the United States are beyond our control. We must, however, do what we can to have the United States resume its position as the standard bearer of free trade and the crafting of international rules. With its involvement in the mega-FTAs of the Japan-EU EPA, CPTTP, and RCEP, this is a situation where Japan has a large role to play.

(Originally published in Japanese on October 1, 2018. Banner photo: From left, President Jean-Claude Juncker of the European Commission, Prime Minister Abe Shinzō, and President Donald Tusk of the European Council smile after signing the economic partnership agreement and holding a joint press conference on July 17, 2018, at the Prime Minister’s Office in Tokyo. © Jiji.)

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  • [2018.10.17]

Professor of economics at Keiō University. Chief economist at the Economic Research Institute for ASEAN and East Asia (ERIA). Expertise in international trade theory and developmental economics. Born in Tokyo in 1958. Graduated from the University of Tokyo and earned his PhD in economics from the University of Wisconsin. After serving as an assistant professor of economics at the State University of New York and at Keiō University, assumed his current position in 2000.

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