Analysis
2 Aug 18

Positive outlook for the EU – Japan trade agreement

It came as fresh wind of good news when the trade agreement between the EU and Japan was televised in July 2017. In the midst of trumpist trade wars, it might look as a reaction from both countries to a growing trade uncertainty and protectionism across the world, but in reality, both parties have been working on this agreement since 2013.

The essentials

The EU-Japan Economic Partnership Agreement or EPA will establish a free trade area with a combined market of around 640 million consumers. This is roughly one third of the world's gross domestic product (GDP). Initial assessments indicated that EU exports to Japan could rise by up to 34 %, but according to a more recent Commission estimate, European companies would save up to €1 billion in customs duties per year as a result of the EU-Japan EPA.

Abenomics

Japan’s economic politics, better known as “Abenomics”, named after the country’s Prime Minister, Shinzō Abe, are based on 3 pillars: aggressive monetary policy, fiscal stimulus and structural reforms to ensure short- and long-term sustainable growth. When Abe became Japan’s leader, the country was suffering from negative GDP growth, a 42% decline in the Nikkei 225 stock exchange and needed urgently economic reform

Abe’s policies have, according to his critics in Japan, not delivered the hoped outcome, but then again, Japan is not a country that takes 180 degree turns. Evolution and change go slowly and the generation in charge today is still behaving very Japan-centric and prefers tradition to modernity.

Nevertheless, Abe has managed to sell the EPA to Government and the National Diet, Japan’s bicameral legislative chambers. The fact that the USA, Japan’s preferred economic partner, withdrew from the Trans-Pacific Partnership in January 2018, accounts for Abe heard to say that the “FTA is the new engine of Abenomics”.

Trade deficit

Even though the total trade between the EU and Japan had declined over the past years, the EU and Japan remain important bilateral trade partners. Total trade in 2017 was worth €129.3 billion in 2017, with a trade deficit on the EU side of €8.3 billion.

The trade deficit used to be much bigger, but due to increasing export from EU to Japan and decreasing export to the EU, trade figures have recently become considerably more balanced. Part of the deficit is due not so much to boarder obstacles (import taxation), but rather due to “behind the boarder” obstacles, such as regulatory imperatives, the preference of the Japanese consumer for domestic products and a conservative business culture.

Negotiations

Therefore, tariffs were not the only topics of negotiation. Europe also wanted to lower the regulatory barriers, gain access to Japan’s public procurement market (such as the railway sector) and establish more harmony in the regulations of intellectual property rights, amongst other objectives.

Japan was more focused on tariffs and regulatory agreements, but also understood that the other standards inherent to the EU, such as the free movement of persons, could be of benefit to its economy.

The outcome

  • The larger part of the export tariffs will be removed. Gradually and after 15 years of liberalisation steps, 97% of all tariffs from the EU to Japan will be eventually removed and 99% of tariffs vice versa.
  • A number of non-tariff measures top the agreement; it comes down to the fact that products, certified on either of the parties’ territory, won’t have to be recertified after import.
  • The Europeans receive better conditions to provide services in Japan, including arrangements for business people and their families to move to Japan.
  • Europe obtains access to Japan’s important government contracts.
  • Surprisingly, a chapter of the EPA is dedicated to SMEs and includes beneficial terms for the 78% of EU small and medium-sized companies that export to Japan
  • The EPA will also strengthen regulatory cooperation between the EU and Japan by introducing better collaboration tools and more transparency

How will it affect EU car makers?

Many of the European OEMs were not outspokenly happy about the FTA; there’s a strong fear that opening the boarders will increase the penetration of Japanese brands, both for cars and components.

Analysts however, don’t think there will be a major risk for the European manufacturers. Firstly, almost 70% of all Japanese vehicles sold in the EU are in reality manufactured in the EU. Another 240,000 Japanese-brand vehicles made in the EU are exported to third countries and sustain local economy.

Instead, removing the tariffs could increase the number of Japanese plants and research and development centres in Europe (currently, there are 14 production plants and 16 R&D centres) and provide for more jobs (currently 161,000 EU citizens work for Japanese OEMs).

The EU – Korea trade agreement had a similar effect on the EU economy. Rather than seeing the EU roads flooded with Korean vehicles, the agreement has seen an increase in local revenue from Korean companies in Europe and a rise in exports of European cars to Korea.

Positive outlook

Scepticism is part of any evolution, but joining 2 major global economies is not a unrealistic nor surprising thing to do. OEMs have for a long time been diversifying the locations of their production plants to avoid trade tariffs and become able to diversify production in function of regulations and local needs – Toyota being a good example, with no less than 128 factories in 26 countries. Eventually, tariff reductions will be beneficial for the consumer and the fleet manager.

Authored by: Yves Helven