Last week the EU and Japan announced an ‘agreement in principle’ after four years of talks on an Economic Partnership Agreement (EPA) between the two economic giants. Yet the reaction to this news has not befitted a mega-trade agreement covering over 30% of world GDP and 40% of global trade. This is partly because news emanating from Washington dominates the headlines, but mostly because there is still a long way to go, with the two parties to the agreement bracing themselves for a set of difficult negotiations to finalize the deal.
The agreement in principle means that the chances of the deal falling through are slim, as long as talks are kept at the same level of political priority that made last week’s announcement possible. If agreed, the deal would mark a historic shift in the quality of economic and political relations between the two partners, with far-reaching consequences for third parties as well.
An FTA for the 21st century
The proposed bilateral trade agreement would be the biggest ever struck by either side, covering about a quarter of the world economy, rivaling the North American Free Trade Agreement (NAFTA) in size. More than four years in the making, it is what economists call a “mega-trade agreement” because, in addition to a trade component, it includes provisions related to consumer protection, intellectual property rights, data protection, cybercrime, and more. Perhaps most notably, it stipulates a specific commitment to the Paris Agreement on climate change which the U.S. announced it would leave last month.
Commentators have misleadingly dubbed the EPA the “cars for cheese” agreement. While it is true the two sides would significantly lower or eliminate tariffs for these two sectors (currently at almost 30% for European cheese in Japan and 10% for Japanese cars in Europe), its merits are much wider.
The agreement would also provide a boost in the leather, clothing, and pharmaceutical industries, among others, and guarantee EU companies access to the large public procurement markets of Japan in 48 large cities, boosting European exports by as much as €20 billion according to European estimates. Moreover, diplomats and experts concur that the breadth of provisions will set the standard for future free trade agreements with third parties.
Economic friends with geopolitical benefits
While the economic effects may take several years to materialize, geopolitical benefits are already starting to show. The two sides complemented the EPA with a Strategic Partnership Agreement on shared values and principles, and announced both agreements in principle the day before the G20 summit.
In so doing, the EU and Japan sent a clear signal that they stand united in their support for free trade and globalization, thus distancing themselves from the current U.S. stance. “There is no protection in protectionism,” said European Commissioner Jean-Claude Juncker, with Japanese Prime Minister Shinzo Abe stressing that the EPA will “serve as a model for the economic order of the 21st century on the basis of free and fair rules.”
For the EU, the EPA would demonstrate its ability to deliver concrete results despite the numerous crises it faces. By aligning itself with a leading economy and like-minded country, the EU is showing its allies and rivals alike that it remains an economic force to be reckoned with, capable of delivering massive agreements.
The EU is also ready to add a defense component to its engagement with Japan. Speaking at a recent event in Tokyo, the EU ambassador said the two parties are working on a framework for Japan’s voluntary participation in Common Security and Defense Policy (CSDP) missions.
Japan is similarly hoping that its own neighbors will take note of this development. Speaking at a news conference in Brussels on July 6, Prime Minister Abe said, “This is an achievement we should be proud of, which also sends a strong message to the world.”
Concerns over the rise of China continue to keep Japanese politicians awake at night, particularly since U.S. positions on trade and climate change helped soften Beijing’s image internationally. And given Pyongyang’s new habit of launching missiles on a near-monthly basis, the joint statement on North Korea following the EU-Japan summit on July 6 is an important signal in line with Japan’s goal of increasing international pressure on the rogue regime.
Next Steps, Outstanding Issues
EU and Japanese negotiators have expressed their intention to finalize the agreement by the end of the year. Given the sensitivity of the remaining issues, that timeline is very optimistic and highly conditional on sustained political will at the highest levels.
A particularly thorny issue is continued disagreement over the nature of the mechanism investors would use to resolve disputes resulting from the deal. The EU proposes the creation of a Multilateral Investment Court to deal with these issues – similar to the Investment Court System (ICS) stipulated in its Comprehensive Economic and Trade Agreement with Canada (CETA). Japan would prefer to continue with the current ad hoc arbitration system, which Brussels views as being too soft on corporations.
Meanwhile, domestic Japanese opposition to the agreement is already emerging. Japanese farmers fear competition from European wine and dairy industries, and national officials are already considering how they could boost subsidies to these relatively small domestic industries without violating the agreement.
Finally, the long and complicated ratification process in the EU could yet jeopardize implementation of the deal, though it is more likely that it will only cause delays, as in the case of CETA. Given all these variables, analysts estimate that the earliest the agreement could come into force is early 2019, potentially coinciding with the exit of the UK from the EU.
The Way Forward
Concluding such a complicated agreement in principle between two sides with strong positions was no mean feat. European Trade Commissioner Cecilia Malmström and Japanese Foreign Minister Fumio Kishida deserved the plaudits they received on finishing the painting of their duruma dolls, a symbol of focus and perseverance in Japanese culture.
With the U.S. seemingly more and more disengaged from the world order based on free trade and multilateralism, its allies are left in the unexpected position of setting the new global standards. If successful, the EU-Japan EPA would do just that. It would strengthen the EU’s and Japan’s international standing, as well as their leverage with Trump’s US, Xi’s China, and Putin’s Russia.
But first they need to finish the deal.
Irina Angelescu is a Council on Foreign Relations (CFR) Hitachi Fellow at the Japan Institute of International Affairs (JIIA) in Tokyo. The views expressed in this piece are her own.
The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of its individual authors.