EU-Japan trade to increase by 18% thanks to free trade deal

The EU has signed up to its biggest ever bilateral free trade agreement.

The Economic Partnership Agreement or EPA with Japan, effectively born in 2011, was signed on July 17, 2018 by Japanese Prime Minister Shinzo Abe and European Commission President Jean-Claude Juncker and European Council President Donald Tusk in Tokyo.

It still needs to be ratified by both sides however which may not be plain sailing, as was the case for the EU-Canada free trade agreement (CETA) when the Belgian region of Wallonia stalled proceedings. Ultimately though, CETA was ratified and with the amount of political capital and negotiating time invested in the deal, it is almost unthinkable that it could fall apart at this stage, and it will likely come into effect in 2019.

This brief assesses the impact the EPA will have based on the findings of the European Commission’s June 2018 impact assessment, which is predicated on what has actually been negotiated in the agreement.

Tariff and tariff rate quota reductions

In a nutshell, the EU has agreed to gradually remove its automotive sector tariffs in exchange for Japan reducing or removing its tariffs on various agri-food products. The accord has even been branded the “cars for cheese” agreement. The deal also ensures that both sides will eventually have no tariffs on industrial goods whatsoever, though this is actually a grander claim than it sounds, given that tariffs on most industrial goods were very low or non-existent already.

By product group:

  • Agricultural goods: The EU has granted full liberalisation of agricultural products with the exception of rice which is mutually excluded and with the exception of some processed agricultural products (PAPs) not fully liberalised by Japan. Japan will gradually reduce or remove tariffs and increase quotas for goods such as wine, dairy products, pork, beef, poultry and eggs.
  • Automotive goods: The EU’s most sensitive sector in the negotiations was without doubt passenger cars. There will be a phasing out of the 10% tariff on cars over seven years. This is longer than in the EU’s FTA with South Korea which has a transition period of three to five years. On car parts, the EU will eliminate most tariffs immediately. This was done with a view to retaining production of Japanese brand cars in the EU. The impact assessment notes: “In order to produce cars here Japanese companies need to be able to import the relevant parts. However, for some parts with high tariffs or of a particularly sensitive nature there is some staging (up to 7 years). The same applies for trucks, buses and tractors (7-12 years staging for most categories). Tariffs on motorbikes are phased out over 3-5 years.”
  • Other industrial goods: As earlier mentioned, industrial tariffs will be fully removed by both parties. Currently Japan already applies 0% tariff in product groups such as machinery, electrical machinery, instruments and vehicles. However, for sectors such as chemicals, textiles and clothing, metals, ceramics and glass, cosmetics, plastics and jewellery and precious stones, Japan will eliminate duties immediately upon entry into force. According to the impact assessment: “The impact of this sweeping tariff elimination will be important for clothing and chemicals in particular, as these are sectors in which tariffs are still relatively high and in which the EU has significant potential for market penetration.”

Non-tariff barrier reductions

Non-tariff barrier liberalisation often sounds very boring and typically deals with harmonising standards and regulations but is usually considerably more important in terms of its impact than reducing tariffs. This is usually because tariffs tend to be fairly low on most goods already, as is the case for Japan-EU trade.

Major sectoral impacts include:

  • Motor vehicles: Both Japan and EU will fully align to the same international standards on product safety and environmental protection. This means that European cars will not need to be tested and certified again when exported to Japan.
  • Textiles labelling: In March 2015, Japan adopted an international textiles labelling system similar to the one used in the EU. Labels will no longer need to be changed on every single garment exported to Japan.
  • Medical devices: As part of the negotiation, in November 2014, Japan adopted the same international standard on quality management systems for medical devices as the EU, reducing the costs of certification of European products exported to Japan
  • Beer: From 2018 onwards, European beers can be exported as beers and not as “alcoholic soft drinks”. This will also lead to similar levels of taxation, thus doing away with differences between different beers.

Impact assessment

The impact assessment asserts that by 2035, EU and Japanese GDP will be 0.14% and 0.61% greater than they would have been if the EPA had not come into force. Such relatively small impacts on GDP are typical of free trade agreements generally. The numbers around trade flows are much greater however. By 2035, EU exports to Japan should be 13.2% higher than they would have been without the EPA, while for Japan’s exports to the EU, the corresponding figure is 23.5%. Total bilateral trade will increase by 18% or €36bn.

By sector, the largest increases in EU exports to Japan in absolute and relative terms are in the textile, apparel and leather (€5,213m, +220.0%) and dairy (€729m, +215.0%) sectors, followed by processed foods (€1,095m, +51.8%), motor vehicles (€1,222m, +11.5%) and chemicals (€1,606m, +6.9%).

As for Japanese exports, the sector that is expected to see the highest increase in exports in both absolute and relative terms is motor vehicles (€8,174m, 51.3%) followed by minerals and glass (€3,018m, +83.0%), machinery and equipment including medical, precision and optical instruments (€3,576m, +13.6%) and then chemicals (€3,306m, +30.0%).

Overall, the deal is welcome news for freight forwarders. It provides a timely reminder that there are still major economies driving towards trade liberalisation, when most of the headlines are being dominated by US and Chinese tariff threats.

Source: Transport Intelligence, July 26, 2018

Author: David Buckby