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The Japan-EU agreement: Clear the way for Japanese cars

The Government of Japan and the European Union have signed an agreement to create one of the largest free trade areas in the world. Unlike escalating trade disputes between the US and its trading partners, Japan and the EU are sending a signal.

The signing in Tokyo marks a rare moment of unity in international trade. In recent months, President Donald Trump has imposed a series of tariffs on products from China and other countries, declaring that these measures are necessary to correct the unfair trade advantages of other countries.

The Japan-EU agreement sends a message against protectionism

The EU and Japan’s response to Donald Trump’s trade policy is the biggest trade agreement ever concluded by Brussels. According to the European Union, European companies pay around €1bn a year in tariffs. The savings for Japanese exporters to the Union of 28 countries are likely to be double.

“We are sending a clear message that we are against protectionism,” said European Council President Donald Tusk at a press conference with Japanese Prime Minister Shinzo Abe and European Commission President Jean-Claude Juncker.

“Japan and the EU are predictable and responsible,” Donald Tusk continued. “We defend a world order based on rules, freedom, transparency and common sense… We are putting in place the biggest bilateral trade agreement ever. This is an act of enormous strategic importance for the rule-based international order, at a time when some are questioning it.”

US takes China and the EU to the WTO

The agreement between Japan and the EU abolishes most bilateral tariffs. This will create more favourable conditions for Japanese cars sold in the EU. On the other hand, the agreement facilitates the export of European wine and dairy products. The EU and Japan together account for around 30 percent of global economic output.

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Japan-EU: gross domestic product. Source: IMF

As US allies and opponents of Donald Trump’s policies converge, Washington filed complaints with the World Trade Organization against China, the EU and other states for retaliatory tariffs imposed on the US.

With Donald Trump taking office, the EU launched a trade offensive to balance America First trade policy through existing and new negotiations. Japan and Mexico are at the top of the list for Brussels. Both are interesting not only because of their economic value; there is also a political message behind the rapprochement with the long-standing US trading partners.

Japan and EU agree on common rules for data exchange

At the same time, the EU resumed long-stalled talks with Latin America’s largest trading bloc, Mercosur. Mercosur includes Argentina, Brazil, Paraguay and Uruguay. Last month, the EU also launched official talks with Australia and New Zealand to strengthen global trade relations.

Part of the Japan-EU agreement is also the mutual recognition of the framework conditions for the transfer and protection of privacy. European Union representatives indicated that the agreement will facilitate economic integration without compromising personal data and would create “the world’s largest space for secure data flows”.

The EU had so far only extended its so-called adequacy decision to a dozen countries, including Canada and the US. The agreement with Japan will enable both parties to play a more important role in data protection worldwide.

Japan-EU: Alarmed by possible car tariffs

Both the EU and Japan were hit by the Trump government when it recently imposed tariffs of 10 percent on aluminium imports and 25 percent on steel imports. This marked the start of the US trade offensive. Japan is also alarmed by US government plans to impose tariffs on car imports. This would directly affect one of Japan’s most important export goods.

Japan has only recently committed itself to free trade. For years, the country resisted opening its economy to foreign products. Under Prime Minister Abe, Japan is now pursuing a strategy that allows more imports. Japanese companies are to become more globally competitive and open up new international markets.

Japan-EU: economic growth comparison. Source: IMF

Under the new Japan-EU pact, both sides will remove barriers to industrial and agricultural products. The European tariff of 10 percent for Japanese cars will be abolished over a period of eight years. Tariffs on 92 percent of Japanese car parts will be abolished immediately. Car manufacturer Mazda Motor, which sells more than half of its cars in Europe, spoke of “great news”.

The Japan-EU agreement indirectly hits American products

Tokyo will completely abolish customs duties on European wine and lower duties on soft cheeses over the next 16 years. By way of comparison, when an agreement between Japan and Chile abolished tariffs on the South American country’s wine in 2007, Japan’s imports quintupled within a decade. At the same time, imports of Californian wine have fallen by 30 percent. Further free trade agreements which exclude the US are also likely to affect the competitiveness of American products.

Europe is now taking a more confrontational approach with the US. In response to the steel and aluminium tariffs introduced in June, the EU imposed surcharges on American products, including Bourbon whiskey and Harley Davidson motorcycles. US President Donald Trump has threatened to impose additional tariffs on European cars if these measures are not revoked. The move could have serious economic consequences and lead to further escalation.

The Japan-EU agreement must be ratified by parliaments

The absence of the US from trade efforts has put others on the map. Malaysia’s new Prime Minister, Mahathir Mohamad, who took office in May, has called for a renegotiation of TPP 11. China is also trying to fill the vacuum left by the US with trade agreements outside international standards. A free trade agreement between Asian economic powers and Georgia, an important partner of the Belt and Road Initiative aimed at creating new trade routes through Central Asia, came into force in January.

The agreement between the EU – the world’s largest economy overall – and Japan, the fourth largest economy, accounts for almost 30 percent of global economic output. It is the largest trading bloc in history, although some experts say the agreement is mainly symbolic. Japan and the EU want the agreement to enter into force next year, after receiving approval from the Japanese and EU parliaments and national governments.

Japan-EU: GDP per capita comparison. Source: IMF

Japan-EU negotiations have been happening since 2011

The Japan-EU negotiations began in 2011 when former Prime Minister Naoto Kan and the then President of the European Council Herman van Rompuy began exploratory talks. Official negotiations began in April 2013 with the aim of concluding the agreement by the end of 2015. But the discussions on the export of dairy products stalled.

Negotiations resumed in 2017, with both sides reaching agreement in principle in July of the same year. When Donald Trump moved into the White House in 2016 and started a protectionist trade policy, the EU was additionally motivated to reach an agreement with Japan.

Once signed, Japan and the EU will have their parliaments ratify the agreement. The two parties hope to complete the ratification process and bring the agreement into force by March 2019 before Britain leaves the EU.

Although the Japanese economy is the fourth largest in the world after the EU, the US and China, it is only the seventh largest European export market. The new agreement will gradually make it easier for European countries to expand their exports of goods and services to Japan, which last year amounted to €58bn and €28bn respectively.

Europeans benefit most from food exports. Once the agreement enters into force, Japan will abolish tariffs on European wines. Tariffs for cheese, pork and leather goods will also be abolished or reduced. Experts expect agricultural exports to triple. EU exports to Japan could increase by a third.

The Japan-EU agreement helps Toyota and Co.

Japan’s main interest in a trade agreement with Europe lies in increasing its car exports. The EU is currently levying a duty of 10 percent on Japanese vehicles. Under the agreement, this rate will be reduced to zero over a period of eight years. Although cars and car parts account for about one fifth of Japanese exports to Europe, Japanese car manufacturers account for only about 10 percent of the European market, significantly less than in the US or Asia.

The agreement will enable Japanese car manufacturers to offer more competitive products. But Toyota and Co. are facing fierce competition. Countries such as France have announced that they will stop selling petrol and diesel cars by 2040. Japanese manufacturers must adapt to a rapidly changing market in Europe.

The Japan-EU agreement meets US agriculture

The main reason why the talks gained momentum last year was the rise in protectionism. Japan, the EU and Germany in particular are export-oriented economies and representatives of open trade. US President Donald Trump’s protectionist stance has shown how vulnerable exporting nations are.

The Japan-EU agreement is seen as a strong commitment to the rule-based international trading system. The concessions Japan has made to the EU on agricultural products also affect US agriculture. The Americans have been hoping for a long time to open up the closed Japanese market.

Although wine, cheese and pork are not important US exports, the Japan-EU agreement will meet with US displeasure. The US agricultural industry is seen as an important power base for Donald Trump and his Republican Party.

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