TRADE RELATIONSHIP BETWEEN THE EU AND JAPAN

Report written by Rosa Serrano Fuentes, International Trade trainee in Lisbon, Portugal

Economic Partnership Agreement between the European Union and Japan

The entry into force of the EU-Japan Economic Partnership Agreement (EPA) in 2019 represents an important milestone in trade and investment relations between the two parties, in a context that has been marked over the last few years.

What are the benefits of the Trade Agreement between the two countries?

• It guarantees the opening of services markets, in particular financial services, telecommunications and transport.
• Ensures non-discriminatory treatment of EU companies operating in public procurement markets.
• Improves the protection of intellectual property rights in Japan, as well as the protection of high quality European agricultural products, the so-called Geographical Indications (GIs).
• Saves businesses on both sides significant amounts of money and time in bilateral trade in goods.
• Provides for greater support for smaller businesses, which are disproportionately affected by trade barriers.
• Eliminate tariffs and other trade barriers to make it easier for businesses on both sides to import and export.

The tariff chapter is very important in any trade agreement, and while in the case of Japan the average tariff on European products prior to the entry into force of the agreement was relatively low (around 4%), the benefits of eliminating or reducing tariffs for some sectors are crucial to increase their competitiveness in the Japanese market.

At the tariff level, there was a large gap between non-agri-food products (with an average tariff of 2.5%) and agri-food products (with an average tariff of 13.1%). It is therefore quite clear that the latter is one of the sectors that will benefit most from the entry into force of the agreement. In general, 90% of tariffs on European products to Japan are eliminated when the agreement enters into force, and 7% will be eliminated within a maximum period of 15 years. With regard to Japan, the concessions are similar, so that 99% of tariffs are eliminated when the agreement is fully implemented. (Eurostat data).

Key points.

The Agreement covers a number of elements, including the following.

– Elimination of customs duties: more than 94% of EU exports to Japan will be duty free, including all industrial products.

– Agricultural and food products: customs duties are eliminated or reduced on many of the EU’s most important export products, including wines, meat products, cheeses and processed products such as pasta, chocolate or tomato sauce.

– Geographical locations: the special status on the Japanese market of more than 200 European agricultural products from specific European geographical origins known as “geographical indications”, e.g. Roquefort, Rioja, Aceto Balsamico di Modena and Irish Whiskey, is protected.

– Industrial products: with the entry into force, tariffs on most industrial products will be eliminated; tariffs will be phased out in sectors such as chemicals, plastics and cosmetics, as well as textiles and clothing. In the case of leather and footwear, the current quota system will be abolished upon entry into force of the Agreement.

– Fishery resources: most tariffs will be eliminated, both on the EU and Japanese side.

– Forest products: tariffs on wood products will be completely eliminated; most of them will be eliminated with immediate effect, while some minor tariff lines will be eliminated after 10 years.

– Non-tariff barriers: the Agreement will facilitate access for EU companies to the tightly regulated Japanese market by addressing technical requirements and certification processes, e.g. for:

– motor vehicles: both Japan and the EU will follow the same international standards for product safety and environmental protection, meaning that EU vehicles will not have to be re-tested and re-certified when exported to Japan;

– labelling of textile products: in March 2015, Japan adopted an international textile labelling system similar to that of the EU, eliminating the need to change labels on garments exported to Japan.

– Trade in services: the Agreement contains a number of provisions affecting trade in services as a whole, designed to make it easier for businesses on one side to provide services in the other side. The Agreement stipulates rules for a number of sectors, including:

• Postal and courier services.
• Telecommunications;
• Financial services.

– Intellectual property rights: the commitments reached by both sides in the World Trade Organisation (WTO) are extended and strengthened, in line with the EU’s own rules. The Agreement includes rules for the protection of trade secrets, trademarks, copyright safeguards, patents, common minimum standards for the mandatory protection of pharmaceutical test data and civil enforcement measures.

– Data protection: the rights of the parties are protected for the enforcement of rules aimed at the protection of personal data. Through a “mutual adequacy” agreement, the EU and Japan have recognised the compatibility of their respective data protection systems, leading to the creation of the world’s largest area of secure data transfers with a high level of protection of personal data.

– Sustainable development: the Agreement includes all the key elements of the EU’s approach to sustainable development, and is in line with other recent EU trade agreements. Commitments made include:

– the implementation of core labour standards of the International Labour Organisation (ILO) and international environmental agreements, including the United Nations Framework Convention on Climate Change and the Paris Agreement on Climate Change;

– the preservation of local labour and environmental laws and the non-relaxation of such standards for the purpose of attracting trade and investment;

– conservation and sustainable management of natural resources and addressing issues related to biodiversity, forestry and fisheries resources;

– the promotion of corporate social responsibility and other business and financial practices conducive to sustainable development.

– Competition: both parties commit to maintain comprehensive competition rules, and to enforce them in a transparent and non-discriminatory manner.

By signing the agreement, both the EU and Japan send a message of support for free trade as a means to advance their economies and the competitiveness of their companies. The EPA eliminates or reduces most tariffs in both directions, and particularly benefits European agricultural producers, who increase their competitiveness in Japan, especially in products such as cheese, meat or wine.

Car manufacturers also benefit from the agreement, with tariffs being progressively reduced and eliminated over a period of 15 years.

It also includes a range of measures addressing the reduction or elimination of non-tariff barriers, particularly important in the case of Japan as they were used strategically to protect its market. In addition, it also opens up the public procurement market in both directions, so that European and Japanese companies will be able to access tenders from central government, municipalities and other public bodies without restrictions and on equal terms. The EPA also includes provisions related to worker protection, sustainable development, environmental protection and corporate governance, so this is a new generation agreement that not only covers aspects related to trade and investment, but also includes some of the main values and principles by which both the EU and Japan are governed.

However, due to substantial differences of opinion on the investment protection mechanism, the EPA does not include provisions on investment protection, unlike the Comprehensive Economic and Trade Agreement with Canada (CETA). Finally, there are important opportunities for Spanish companies in Japan as a result of the signing of the EPA, especially in sectors such as agri-food, fashion and clothing, automotive and components, renewable energies and public procurement. Several years after the entry into force of the EPA, the benefits for our companies are already noticeable in sectors such as wine, having increased their exports to Japan by more than 20% due to the tariff dismantling that has taken place within the framework of the agreement, and in general throughout the European Union the volume of exports and imports has increased as a result of facilitating their transactions with the agreement.

Summary analysis:

The new Agreement should save EU exporters around €1 billion each year. This will create a huge Free Trade Area with 640 million people and the EU and Japan and also the total combined GDP will amount to 1/3 of world GDP. This will be a great opportunity to increase the welfare of people in Europe and Japan.

1 February 2020 marks the first anniversary of the entry into force of the EU-Japan Economic Partnership Agreement (EPA). In the first ten months following the implementation of the agreement, EU exports to Japan increased by 6.6 % compared to the same period last year. This exceeds the growth of the last three years, which averaged 4.7% (Eurostat data). Japanese exports to Europe grew by 6.3% in the same period.

Japan and the EU are, according to 2018 World Bank data, two of the four largest economies in the world and the deal will bring them billions of dollars.

The Japanese foreign ministry believes it will boost the Japanese economy by 1% of its GDP, or US$44 billion and 290,000 jobs.

The EU is expected to increase exports by 33%, according to a study by the London School of Economics, and create up to 140,000 new jobs for every $1 billion it gains from trade.

The two economies will be able to sell goods and services they both produce with 99% liberalisation of traded goods once the transition period is over.

This will benefit Japanese car exports and make it easier for European farmers to sell their products in the Asian nation. The end consumer will also find lower prices for such goods.

The agreement is, in Lester’s eyes, quite safe for both economies and very specific in the products it includes, so after a period of adjustment and perhaps resistance from some sectors, neither side is expected to lose out.

In the face of the stagnation that the WTO and multilateralism have suffered in recent years, the EU is proactively promoting the conclusion of bilateral agreements with its main global trading partners as a means to keep its companies competitive and maintain employment. However, the reform of the WTO and its role in world trade has long been the subject of intense debate.7 Thus, the EU’s policy of negotiating and signing free trade agreements has undergone a major transformation since 2006, when the EU published its “Global Europe” strategy, which proposed the signing of agreements that, in addition to dealing with purely trade and investment aspects, would also include some of the EU’s main values in the areas of labour and sustainability.

In this way, the EU’s geopolitical importance in third countries was expanded while at the same time opening up opportunities for EU companies. These agreements may create competitive advantages in some cases, but in others they serve to neutralise the advantages that other countries have gained in markets considered crucial for the EU. In this context, it is expected that by 2030 60% of world economic growth and 90% of the 2.4 billion new members of the middle class will come from the Asian region, so for the EU the establishment of a framework that regulates relations with the main Asian countries in a stable and beneficial way for its companies is fundamental, bearing in mind that it is the world’s main exporting bloc.

In short, the creation of a favourable framework for European exports and investment in Asia should be better exploited by our companies, especially given the rise of the Asian continent and its importance from an economic and geostrategic point of view.