EU-Japan trade agreement: covenant of losers sets a bad example

On his recent journey through Asia, president Trump visited Japan. One of the topics discussed during the visit was a possible future trade agreement between the US and Japan, following Trump’s earlier withdrawal from the Trans Pacific Partnership (TPP). Despite Trump’s criticism of various American trade agreements, a bilateral trade deal with Japan seems to be an option of interest to Trump. The EU has also started negotiating a trade agreement with Japan. At the recent G20-summit in Hamburg, the EU and Japan even announced an effective agreement on their renewed economic cooperation. Despite the positive signal that a new trade agreement between developed economies sends out, the EU-Japan trade agreement is questionable. It is more like an alliance of losers than a daring vision for the future.

A new trade agreement is, in principle, positive news in a world of increasing protectionism. But behind this festive façade lies a less joyful reality. The EU-Japan Economic Partnership Agreement has so far been a disappointing bilateral agreement. It is an important symbol in a plea for further trade integration in the world, but the actual content of the agreement is far from ambitious. In reality, the agreement is quick-and-dirty. There is no deep economic integration, and, as a result, this has to be seen as a missed opportunity to strengthen the weakened European and Japanese position in the world economy through bilateral cooperation. Moreover, the weakness of the EU-Japan agreement also threatens to impact the way future agreements are drawn up. If new trade agreements mainly serve to maintain the perception of international economic integration, they become empty boxes that fail to give a meaningful response to the rise of protectionism worldwide.

The trade agreement between the EU and Japan is undoubtedly a historic achievement. A largely closed Japanese economy has never shown much enthusiasm to strongly integrate internationally by opening up its own market. In practice, many European companies have long been experiencing the difficulty of trading with Japan, despite many government initiatives to ease trade barriers. Cultural differences, differences in regulation, but also simply the geographical distance between the EU and Japan, have made EU-Japanese trade suboptimal for many decades. Japan and the EU are important trading partners in absolute value, but this is mainly due to the size of both economies and the type of products they trade with each other. Their bilateral trade consists mainly of cars, machines, electronics, chemical and pharmaceutical products. Typical products with a large volume or high commercial value. In contrast to Japanese exports, which are highly concentrated in these products, European exports to Japan are gradually becoming much more differentiated. The new trade agreement certainly offers Europe the prospect of further diversification as trade tariffs between the EU and Japan are reduced notably. The reduction in tariffs, together with the recognition of the geographical indication of products, should give a strong boost to European exports of agricultural and food products. More generally, the reduced customs duties and greater openness in Japanese public procurement to European service providers provide potentially encouraging opportunities for European companies. In addition, the negotiators managed to incorporate a number of trade-related issues into the agreement. For the first time, there is even an explicit reference to the Paris Climate Agreement in a trade agreement. This counts again as a symbol.

Despite these good elements, however, the new agreement remains fundamentally weak. There has been little progress so far in the area of trade-distorting regulation. Although the announcement of the agreement did mention that negotiators still have some technical work ahead of them, the persistence of trade-distorting regulation can hardly be seen as a small missing detail. More fundamentally, a unique opportunity is being missed to use the agreement as a basis for enhanced cooperation between Japan and the EU in order to structurally strengthen each other’s international competitiveness. Our cultural differences are reflected in a different management culture, a different approach to innovation and a different role of creativity in business. Cooperation in these areas could structurally strengthen the Japanese and European economies and trade in the global economy of tomorrow.

Such structural cooperation is desirable in order to increase the innovation and creativity of Japanese and European products and services, given the declining economic weight of both the EU and Japan in the global economy. The EU (excluding intra-EU trade) accounted for only 16% of total world trade in 2016, compared to around 4% for Japan. The European and Japanese shares of world trade have been steadily declining in recent decades to the benefit of emerging economies. At the same time, Europe and Japan have experienced very modest economic growth in recent years. For example, 2% real growth in real terms has been the exception rather than the rule for the EU for several years. Meanwhile, Japan is currently creeping out of the deep valley of two lost decades. Both the EU and Japan continue to stimulate their economies and combat deflation through unconventional monetary policy. In addition, governments are twisting high levels of public debt. In short, the EU and Japan have many common challenges. A joint approach to these challenges is therefore a good strategy. The EU-Japan Economic Partnership Agreement could be a good opportunity to develop strong strategic and innovative cooperation. By giving priority to a swift and limited agreement, however, this opportunity is missed.

Finally, the limited content of the EU-Japan Economic Partnership Agreement poses an additional risk. The traditional trade liberalisation provided for in the trade agreement in the form of a far-reaching reduction in tariffs will indeed lead to new trade creation between the EU and Japan. Cecilia Malmström even spoke of a tripling of trade, which is undoubtedly too optimistic in the short term. However, this trade creation comes at the expense of less trade with other countries. In other words, the EU and Japan are, with this trade agreement, solely sheltering themselves from increasing competition from other countries. This is a defensive attitude which offers a hiding place against the emerging economies in the short term, but in the long term it will weaken the EU and Japan even further. An offensive strategy as part of the EU-Japan Economic Partnership Agreement, on the other hand, would improve the future prospects for the European and Japanese economies.

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