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Free Trade between Japan and the EU

Much More at Stake Than Cheaper Products

October 02, 2017 | by MARTIN SCHULZ

The Port of Yokohama. Photo by yuukin via flickr.com, CC BY 2.0

Japan and the European Union agreed upon the broad lines of a free trade deal. More than slashing tariffs on wine and cars, it now needs to build a framework for future investor relations in Asia.

The timing was perfect: On July 6, 2017, the day before the G20 summit in Hamburg, the European Union and Japan announced a basic agreement on a free trade pact (JEFTA). At a time of growing concerns about economic integration and US unilateralism, it simultaneously signaled that complex trade agreements are still possible, that they can be done without the US, and that China is not becoming the only active player in shaping Asian trade. The Japan-EU Economic Partnership Agreement (JEEPA), as it is known in Japan, intends to go far beyond trade, however. Explosively growing digital markets and increasingly difficult investor relations in Asia need new frameworks, and JEEPA will try to be a start.

On the trade side of the agreement, negotiations had to deal with such contentious issues as trading “cars for cheese” between the world’s most competitive automobile producers and heavily regulated diary markets, which was already a remarkable achievement. In pure economic terms, however, an Ifo Institute analysis published in March 2017 shows that the impact of the free trade agreement will be more limited at about 0.1% additional GDP for the EU and 0.2% for Japan. The most direct impact will be felt in some heavily regulated sectors like pharma and food as well as between head-on competitors in machinery and electronics. Wine in Japan will become cheaper, hybrid cars in Europe hopefully too.

Japan’s objective: reform and growth

Politically, the agreement might become more relevant, as its “front loaded” start has already shown. Before JEEPA, Japan has been a staunch supporter of a multilateral WTO approach to trade agreements, and was slow to adopt bilateral negotiations with partners. Strategically, Japan faces a “noodle bowl” of bilateral and regional agreements in Asia, which are hard to negotiate comprehensively, and an increasingly assertive US and rising China that want to extract concessions when negotiating bilaterally. Furthermore, with only about 16% of exports in GDP, not its exporters’ interests but those of domestic, often very local industries and services dominate the political agenda and make it difficult to strike deals on deregulation even if overall gains seem obvious. Entire industries had been built on specific regulations for malt content in beer and dimensions of mini-cars, so-called Kei cars, while regional government procurement had become an important instrument for local development.

The overture of an economic partnership agreement towards the EU therefore only gained traction in 2012, when Shinzo Abe became prime minister on the back of his “Abenomics” program that promised to kick-start the economy by printing money while implementing a broad range of structural reforms. As Bertelsmann Foundation’s Sustainable Governance Indicators (SGI) project clearly showed in 2016, Japan has indeed been underperforming in almost all policy performance indicators when compared to Germany. International trade agreements have been identified by the authors of the SGI Japan Report to be one of the best whips to drive more competition, deregulation and productivity in an otherwise anemic, fast ageing economy. Instead of focusing on negotiations with the EU, however, which promised greater gains because of higher tariffs from an industry perspective, the government entered Trans-Pacific Partnership (TPP) negotiations with the US and ten other countries, which promised much greater political clout and reform potentials. TPP offered not only access to major Asian markets, but was attractive because of the US’ emphasis on promoting “high-level” reregulation of trade and services across Asia, while pushing for copyright, investor and environmental protection.

Filling the vacuum after President Trumps withdrawal from TPP

JEEPA came only back into focus after Donald Trump signed an executive order formally withdrawing the country from the TPP. Ironically, the Japan-EU pact, which was thought to focus mostly on bilateral trade, now has the chance to play an important role in broader Asian trade and investment negotiations. The EU is a proven player in setting de-facto international standards because of the size of its market and the EU Commission’s strength in finding common solutions. In other important fields, such as securing data protection and cyber security, on the other hand, it might lack the US’ clout in pushing such standards and their enforcement. To fill this gap, initiatives to “building a data driven economy” in the EU Digital Single Market now need to find their way into agreements on cross border e-commerce, reform of copyright, and communication regulation. In terms of investor protection, which is now under negotiation as the final part of JEEPA, the results will become particularly important as the EU and Japan are increasing their investment in other Asian countries.  

For investor-state dispute settlement procedures, the EU is trying to mend growing reservations against far reaching investor protection, which has gained a reputation as an opaque tool of multinational companies to circumvent local public policies. By proposing a multilateral investment court that would be more transparent, standardized, better accessible for smaller investors and focused on the protection of public before investor interests, it hopes to set a new standard in this field, too. In much less integrated Asia, however, such institution building is seen with great skepticism, because a standing court might limit national sovereignty even more than single investor demands for compensation. In Asia, dispute settlement needs to be flexible, simple and compensation oriented. It would be a major achievement if JEEPA would contribute to a workable solution between the competing poles.

Creating a future oriented investment framework will be particularly important not just because Chinese authorities are tightening their regulatory framework with little regard for foreign investor interests. The Chinese government also actively supports investment in Asian-wide infrastructure, e-commerce and digitalization with a number of initiatives. So far, similar initiatives within the TPP framework, the Japan-Australia Economic Partnership Agreement or within the ASEAN group have stalled. Since these are some of the most important issues for Japanese and EU investors in Asia as well, a well-negotiated framework on investment and dispute settlement could become an important basis for future agreements in Asia. JEEPA might therefore have the potential to break the deadlock and further improve investment regulations throughout Asia.

Martin Schulz is Senior Research Fellow at Fujitsu Research Institute in Tokyo, Japan.

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