fighting protectionism

The Brussels-Tokyo Pact

Japanese Prime Minister Abe and German Chancellor Merkel during media tour of the world’s biggest computer fair CeBit in Hanover
Leading the world on trade - or trying to anyways. Source: Reuters

As the United States takes a turn toward protectionism, the European Union and Japan are intent on demonstrating that ambitious free trade deals remain possible even without Washington’s global leadership.

EU leaders and Japanese Prime Minister Shinzo Abe are hammering out the blueprint for what is being referred to as JEFTA, or what would be the world’s largest trade agreement. Both economies together comprise a third of the world’s economic output with more than 640 million consumers combined.

The deal, which Brussels and Tokyo hope to finalize this year, would eliminate up to 99 percent of all tariff barriers between the economic heavyweights. The deal focuses most notably on reducing barriers in the automotive industry. European carmakers would have seven years to prepare for the elimination of the 20-percent tariff that Brussels currently imposes on automobile imports from Japan. In exchange, Tokyo would drop standards that make it more difficult for European carmakers to break in there.

German business is in strong support, even though it would place greater competitive pressure on the automobile industry, one of the main pillars of Europe’s largest economy.

“Free trade secures jobs and creates more progress and prosperity for all participating nations,” said Elmar Degenahrt, the head of Continental, one of the largest car parts suppliers in the world.

17 p9 Japan and the EU 2016-01

The agreement promises to transform the trade relationship between the EU and Japan. Brussels and Tokyo have long focused on their respective economic ties to the US at the expense of their bilateral relations with each other. Indeed, the European Chamber of Commerce in Tokyo has complained for years that trade between Japan and the EU is not living up to its full potential.

The Japanese prime minister was long resistant to a trade pact with the EU due to concern that domestic farmers would take a hit. Indeed the balance of power in this area is in Europe’s favor, as the deal would see Tokyo would open its agricultural market by freeing 85 percent of all products from import tariffs. In 2016, Germany exported €406 million in agricultural goods to the island nation, while Japan exported a meager €60 million in return.

But US President Donald Trump’s decision to pull the US out of the Trans-Pacific Partnership has left Japan searching for alternatives. In response, Tokyo has moved quickly to seal a deal with Brussels, while the EU wants to score a win on trade after facing grassroots resistance to deals with the United States and Canada last year.

Under the deal, the EU would see its exports to Japan increase by 4 percent, while imports from the Asian powerhouse would jump by 11 percent, according to the Institute for Economic Research in Munich. Experts at the European Commission estimate the EU’s economic performance would increase by 0.76 percent compared to just 0.29 percent in Japan. The numbers might seem mixed, but the message of leading economists in Germany is clear – an agreement with Japan is an important strategic move that will greatly benefit German companies.

“The trade deal offers above all German companies an opening to the entire Asian market, which will be made easier through access via Japan,” said Marcel Fratzscher, president of the German Institute for Economic Research in Berlin.

An agreement with Japan is an important strategic move that will greatly benefit German companies.

Indeed, German automakers hope to the trade deal will help them finally crack Asia’s second-largest economy. Japanese regulations have long hindered foreign carmakers. Special certification rules and additional tests on imported cars and parts drive up costs. As a result, foreign carmakers represent just 6.4 percent of all new vehicle registrations in Japan. In Germany, by comparison, imports represent approximately 30 percent of all new cars. Tokyo is supposed to address these non-tariff barriers in the trade deal.

But Japan also stands to benefit from reduced tariffs in Europe. Currently, Japanese automakers have a market share of just 4.6 percent in Europe, a pittance compared to other regions of the world. In the US, for example, Japanese carmakers are set to boost their market share to a whopping 40 percent this fiscal year. These figures illustrate that Tokyo’s pivot toward Europe will not diminish the United States as a key trade partner.

“Japan cannot replace the US as a trade partner, but the free trade agreement with Japan is an important success,” said Clemens Fuest, president of the Institute for Economic Research in Munich.

Other key industries in Germany – machines, chemicals and electronics – also strongly back the trade deal, though they do not stand to gain as much. Tokyo, for example, imposes virtually no tariffs on the import of machines and electronics, but German companies still have not managed to gain a significant foothold in the Japanese market. When it comes to machines, Germany has a €1 billion trade deficit with Japan, and the country’s electronics companies are so strong that German rivals cannot compete.

Japan, on the other hand, is one of the most important markets for German chemical companies in Asia, second only to China. But tariffs in this sector are already low so it’s unclear how much these German companies really stand to gain here. Still, the industry is supportive.

“The EU and Japan are sending a clear message to the other participants of the G20 summit – for free trade and against protectionism.” said Utz Tillmann, head of the German chemical industry association VCI.

Though there is a lot of support for the deal, there are still bumps in the road ahead. Tokyo, for example, is insisting on using private courts to settle disputes between companies and governments, a method that is highly controversial among Europeans. Brussels wants public courts to have jurisdiction.

It’s also unclear whether Brussels will classify the Japan deal as an EU or a mixed treaty, a decision that would have major consequences on how the agreement is ratified. An EU treaty is simply ratified by the Council of Ministers and European Parliament, while a mixed agreement would require the approval of all 27 national parliaments as well, a much heavier lift. Still, most observers believe the deal will become reality – the symbolism is too important for the credibility of the EU, at a time when protectionism is en vogue in many corners of the world.

 

Several Handelsblatt correspondents contributed to this report. To contact the authors: s.kimball@extern.handelsblatt.com

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