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The Japan-EU Agreement: A Win-Win Trade Deal?

 4 min read / 

After four difficult years of negotiations and eighteen rounds of (in)tense talks, two of the world’s largest economies, the European Union (EU) and Japan, finally came to a consensus regarding the main elements of the planned Japan-EU Economic Partnership Agreement (JEEPA).

After EU Trade Commissioner Cecilia Malmström and Japanese Foreign Minister Fumio Kishida sealed the deal through a symbolic exchange of Japanese Daruma dolls (symbolizing fortune and resolution), Japanese Prime Minister Shinzo Abe, European Council President Donald Tusk, and European Commission (EC) President Jean-Claude Juncker provisionally signed the agreement just before this year’s G20 summit.

Some details of the pact still need to be further negotiated and then approved by both sides (in the case of the EU – all its member states), but it is hoped that JEEPA will come into effect starting from early 2019.

The importance of this agreement rests on its participants, as the EU and Japan together account for approximately one-third of the global economy. Currently, the EU is Japan’s second biggest trading partner (and Japan is sixth for the EU), and JEEPA is expected to increase flows of both goods and services between the two regions, while also providing new investment opportunities. If wholly ratified, JEEPA would create the largest trading bloc in the world, on par with the North American Free Trade Agreement (NAFTA) led by the US.

The Main Changes

The agreement has a long list of areas in which a tariff-free trade would become a reality from 2019 onward, with the main focus on slashing tariffs on cars and agricultural products. The Japanese government is obliged to reduce tariffs on EU cheese and agricultural exports over the next ten to fifteen years, and in return, the EU will phase out its 10% import duty on Japanese automobiles by the end of 2024.

Additional benefits include allowing EU exporters to save on annual custom duties, currently amounting to €1bn, as well as benefit from the reinforcement of international standards on wine additives and motor vehicles, fostering a more efficient rules-based international system. It is expected that, as a result, EU exports to Japan will increase by between 16% and 24%, while Japan’s to the EU by a whopping 29%.

While hurdles still remain in bringing these projections to reality, the EU has become savvier in anticipating potential opposition. Rather than push for an investor-state dispute settlement (ISDS) mechanism, a somewhat controversial point, JEEPA relies on investor courts instead. While Japan is still reluctant to approve the use of these courts, such a clause is unlikely to be a deal-breaker.

The Effects

Indeed, both sides have a number of strong incentives to shepherd to agreement through to implementation. Should the agreement come into effect in 2019, both Japan and the EU are expected to reap significant economic benefits; for example, their respective GDPs are predicted to grow by 0.76 pp and 0.29 pp. Moreover, the UK’s decision to leave the EU is a pressing issue for Japan, as more than a thousand Japanese firms have their headquarters across the UK, with investments of over £40bn.

Japanese financial institutions based in the UK fear the loss of the “single passport” which ensures unfettered access to Europe’s financial markets, and Japanese exporters are concerned they may see exporting from the UK to the EU become expensive and burdensome. JEEPA has arrived on the scene as a way for Japan to safeguard its access to the EU, even in the face of Brexit.

Conclusion

Perhaps the real value of JEEPA is not measured in direct financial gains, but by a commitment to (relatively) free trade. In a world of growing protectionist and isolationist tendencies, JEEPA represents an opportunity for both sides of the agreement to take a stance for free trade and international cooperation. Japan and the EU appear aware of this symbolism, which only increases the pressure on both parties to make sure the Agreement is ratified and implemented.

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