Japanese Prime Minister Shinzō Abe concluded a historic visit to Eastern Europe this month, the first of a sitting Japanese Prime Minister in more than a century. To stress that the visit was more than a photo opportunity, 30 representatives from Japanese businesses accompanied him to the Baltics (Estonia, Latvia, Lithuania) and Balkans (Bulgaria, Romania and Serbia). Abe’s message was clear and consistent throughout the five-day trip: Japan wants to take advantage of the recently concluded Economic Partnership Agreement (EPA) with the EU to deepen its engagement with the region.
The EU and Japan announced the finalization of EPA negotiations last December, just hours after the EU concluded its phase one Brexit deal with the United Kingdom. The irony of free-trading Britain withdrawing from the EU just as the bloc signed one of the biggest free trade deals in history was not lost on media commentators.
A “new era for Japan and the EU is about to begin,” the Japanese Prime Minister told reporters following the announcement. His joint statement with European Commission President Jean-Claude Juncker stressed the “strategic importance” of the agreement, while European Commissioner for Trade Cecilia Malmström praised the deal as a “win-win agreement.”
Once adopted, the EPA will gradually enhance the economic ties between the two major economies and set global standards for third countries with which they trade. But the benefits of the agreement extend beyond trade. Perhaps for the first time since the end of the Cold War, the EPA and the other agreements the EU and Japan are currently negotiating could bridge the geographic distance between them with concrete economic and political results.
The intensification of negotiations between the two actors was both a consequence and a response to broader geopolitical developments such as U.S. policy under the Trump administration, the rise of China, and Brexit. Closer EU-Japan relations will not directly compensate for these developments but, if managed correctly, can substantially advance free trade and fundamental values worldwide.
A free trade agreement for the 21st century
The “mammoth trade deal,” as Politico called it, is the biggest either side has ever concluded. It encompasses 30% of world GPD, and 40% of the value of global trade – up to 70% in high-tech sectors like aeronautics and pharmaceuticals. However, with only 3.6% of total EU trade, Japan ranked as the EU’s sixth largest trade partner in 2016, behind the U.S. (17.8%), China (14.9%), Switzerland (7.6%), Russia (5.5%) and Turkey (4.2%). The goal of the EPA is to strengthen economic ties between these advanced economies further by gradually eliminating close to 98% of all tariffs and non-tariff barriers between signatories, and by modernizing trade rules. The media dubbed the EPA the “cars for cheese” agreement because it will drastically reduce tariffs for Japanese car parts into the EU, and in exchange eliminate Japan’s current 30% tariffs for European cheese – some of which will benefit from geographical indication (GI) status.
The most important change, however, will not be the elimination of tariffs, which are already very low, averaging 3.5% across all sectors. It is the reduction of non-tariff barriers, as well as regulatory harmonization and other provisions in the twenty-one chapters of the final text, which will likely have the greatest impact.
These include modern provisions in the field of intellectual property rights (IPR), labour protections, and even an explicit commitment to the Paris Agreement on Climate Change that the current U.S. administration rejects.
The EU and Japan are highly sophisticated economies, and their regulatory alignment will facilitate cross-party cooperation and innovation in cutting-edge technologies, consumer goods and services. All in all, the EPA is a so-called “mega-trade agreement” that goes beyond trade in goods to encompass services, public procurement, and other integral aspects of advanced twenty-first century economies.
While there is little doubt the EPA will have a positive impact on the economies of the two sides, it will not solve all the challenges of the economic relationship. In particular, the EPA will not be able to eliminate informal barriers to market access in Japan, which including a business culture with high entry costs (e.g. language skills, trusting networks of contacts).
As shown in a 2015 ECFR survey, EU investors are keenly aware of this reality. Similarly, Japanese businesses tend to be more risk-averse and discouraged from investing in some EU Member States with which they are less familiar. The EPA should help address some of these concerns by providing a stable legal framework for the needs of twenty-first century economies.
More negotiations on the cards
There are still a few items on the list for negotiation, ideally to be concluded before the current European Commission ends its mandate in 2019. One unresolved issue from the EPA negotiations has been the investor dispute settlement mechanism. The EU prefers the new Investment Court System foreseen in its free trade agreement (FTA) with Canada (CETA), but Japan would like to stick to the current arbitration mechanism known as the Investor-State Dispute Settlement. Both sides decided to separate this issue from the EPA in order not to slow down the EPA’s adoption.
In parallel to the EPA negotiations, the EU and Japan also discussed its “political twin,” the Strategic Partnership Agreement (SPA) and expect to finalize it soon. The goal of the SPA is to reinforce the overall partnership based on fundamental values; consolidate all areas of political engagement in one document; and provide an upgrade of the relationship with the first legally binding agreement since the 2001-2010 Japan-EU Action Plan. This agreement will help EU and Japan better coordinate positions on a number of important foreign policy issues such as North Korea.
Finally, the EU would like to add a defense component to the relationship after the finalization of the SPA. Speaking at an event in Tokyo last year, the EU Ambassador to Japan, Viorel Isticioaia-Budura said the EU would like a Framework Participation Agreement in the EU’s crisis management operations with Japan modeled after the 2014 agreement with South Korea.
A response to current geopolitics
More than just an economic document, the swift finalization of the EPA is a response to recent geopolitical developments. First, the ambivalence of the current U.S. administration towards multilateral trade liberalisation have positioned Japan and the EU as the new champions of global free trade and multilateral agreements. It is no coincidence that the EPA negotiations accelerated after the U.S.’s withdrawal from Trans-Pacific Partnership (TPP).
Second, China’s growing presence in Europe has alarmed both Japan and the EU. Both actors saw China’s role in weakening the EU response to the 2016 International Court of Justice (ICJ) ruling on the South China Sea as a sign that China is using its economic leverage for political purposes.
The EU is also increasingly worried about China’s growing interest in strategic sectors of the EU economy, as illustrated by the European Commission proposal for an EU-wide framework to screen foreign direct investments. It is telling that Abe’s recent visit to Europe included Serbia, an EU candidate country with a very favourable attitude towards China. Writing in The Japan Times after Abe’s visit, former NATO Secretary General Anders Fogh Rasmussen expressed similar concerns, concluding that the EPA “is about freedom, and we need Japan to help us defend it.”
Brexit poses a third challenge for the EU and Japan. The EU sees the EPA as a symbol of its continued engagement with the world despite internal crises such as Brexit. Faced with the prospect of losing its “gateway to Europe” once the UK leaves the EU, Japan views the EPA as a way to preserve and promote its investments in continental Europe.
Finally, the EPA is an expression of EU and Japanese frustrations with the current WTO system. Japanese diplomats privately acknowledge that they are trying to circumvent the limitations of the current system through a series of agreements that will set new global standards. For its part, the EU is preparing to start FTA negotiations with Australia and New Zealand to add to its extensive network of such agreements. Perhaps not coincidentally, the EPA announcement came just days before the WTO Ministerial Conference (M11) in Buenos Aires that failed to achieve any significant progress.
Next steps and prospects
The EU and Japan hope the EPA will come into force by the spring of 2019 at the latest, before Brexit and the last few months of the current European Commission. Until then, the document will have to go through legal verification, translation in all the official languages, and ratification by the European and national Parliaments.
Having learned its lessons from the complicated ratification process of CETA, the European Commission has diligently promoted transparency about the EPA in anticipation of popular objections. The Japanese side is similarly committed to ensuring the successful ratification of the document, both by addressing domestic concerns, and by courting the support of European countries. It is no coincidence that Abe’s recent visit included the country that holds the current Presidency of the European Council (Bulgaria), as well as its successor during the expected date of entry into force of the EPA in spring 2019 (Romania).
In the current geopolitical context, both the EU and Japan stress that the promotion of free trade and fundamental values are a key component of their engagement. In parallel with the EPA negotiations, Japan has worked tirelessly to salvage the TPP after the U.S. withdrawal from the agreement. Its efforts bore fruit when Canadian Prime Minister Justin Trudeau announced last Tuesday that the eleven remaining TPP partners have reached a deal on the revised agreement, which they will likely sign this spring.
Japanese diplomats privately acknowledge that the tough EPA negotiations were also a trust-building exercise that gave them a new sense of appreciation for the competence and professionalism of EU negotiators. This better understanding could bring more opportunities for economic and political cooperation, as illustrated by Abe’s visit to Eastern European countries, which were previously low on the radar of Japanese investors.
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.