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Can the EU-Japan Deal Prompt a US Recalibration on Trade?

 
 

Nowhere is U.S. President Donald Trump’s antipathy for multilateral trade liberalization hitting harder than in Europe and Japan. Both have the U.S.-led international rules-based order to thank for enabling their present-day security and prosperity. And as major export-oriented economies, they share a huge stake in shaping the future global economic order. It is not surprising, therefore, to see Brussels and Tokyo stepping up at a time when Washington is retrenching from its traditional leadership role on global trade issues. Their agreement on a free-trade pact timed with the G20 meeting in Germany can be as substantive as it is symbolic, raising the key question of whether it might serve as a turning point for the United States as the Trump administration decides on its future trade agenda.

Both the EU and Japan have for years had their eyes on separate trade agreements involving the United States — for Japan, the 12-nation Trans-Pacific Partnership (TPP), and for the EU, the Transatlantic Trade and Investment Partnership (TTIP). The prospect of deepened trade integration with the United States served both economic and geostrategic rationales.

The EU and Japan viewed their prospective trade deals with the United States as a way to uphold the international rules-based order by setting high joint standards (in such areas as labor, safety, digital trade, and environmental and consumer protection) underpinned by shared norms and values that would force emerging powers like China to accommodate. Moreover, TPP and TTIP would, respectively, serve to complement and deepen Japan and the EU’s security partnerships with Washington at a time of growing pressure from China in Asia and Russia in Europe.

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Trump’s early decision to withdraw the United States from TPP and de facto freeze the TTIP negotiations was accordingly a major setback to Tokyo and European capitals, and it intensified Japan and Europe’s desire to strike their own trade deal with each other. While the bilateral EU-Japan trade negotiations date back to 2013, the Trump administration’s economic nationalism and protectionist rhetoric incentivized both sides to announce their “agreement in principle” on the Japan-EU Economic Partnership Agreement (JEEPA) ahead of the G20 meeting in Hamburg in early July.

The economics of the deal speaks for itself — Japan is the EU’s second biggest trading partner in Asia after China. Together the EU and Japan account for more than a third of the world’s GDP. Under the deal, Japan will lower or eliminate tariffs on EU wine, cheese, pork, and leather products, while Japanese automobiles will see far better trade terms in Europe. The two sides agreed on full liberalization for industrial goods, among other provisions. JEEPA also illustrates the two parties’ commitment to advance global trade liberalization without the United States if needed. In so doing, they are also sending a clear message to Washington: get on board or risk getting left behind.

For Japan, signing an FTA with the EU at this time could help ensure that TPP standards are incorporated in other U.S. deals in which Japan has an interest, like NAFTA, or any future U.S.-Japan bilateral trade discussions. It might also provide momentum for TPP implementation without U.S. participation, and it helps set a high bar for Japan’s talks in the Asia-Pacific region on the Regional Comprehensive Economic Partnership (RCEP). Tokyo might also hope that a trade deal with the EU will put pressure to bring the Trump administration back to the TPP negotiation table, although that seems to be a remote possibility.

Meanwhile, for Europe, completing an FTA with Japan helps demonstrate commitment to global trade liberalization after Brexit while awaiting Trump administration clarification of its willingness to eventually re-open the TTIP negotiations. The EU deal with Japan comes on top of its CETA agreement with Canada, an agreement mirroring TTIP in scope. The EU has also recently struck other trade deals in Asia with South Korea, Singapore, and Vietnam and is currently considering launching negotiations with Canberra on a bilateral EU-Australian FTA. This flurry of activity puts Brussels, not Washington, in the driver seat of global trade.

Another rationale for moving forward with the EU-Japan trade deal is to reach a separate agreement on a Dispute Settlement Mechanism, which would underscore the importance of mutual efforts to address trade complaints rather than resorting to domestic trade law unilaterally. This issue is pertinent in light of the potential for the United States to apply a national security clause for justifying steel tariffs. Both EU and Japan share a desire for Washington to remain committed to the World Trade Organization since industrialized countries such as European states and Japan, rather than China, would also be indiscriminately hurt by such tariffs.

Beyond symbolism and negotiating tactics, the potential substantive impact of JEEPA is what counts most. U.S. businesses that produce or sell beef, pork, wine, shoes, cosmetics, plastics, and a wide range of other products to Japan could eventually see a meaningful drop in price competitiveness, as tariffs fall for EU exports. This comes on top of a similar agreement between Japan and Australia affecting some of the same products. U.S. automakers will be at a disadvantage in both the EU and Japanese markets if the JEEPA takes effect. Moreover, rules governing trade in services, intellectual property rights, product origin, auto safety standards, and other trade definitions are in danger of being written without U.S. input.

All of this should mobilize American industry and state governors to lobby Congress and the White House for a more flexible approach to multilateral trade frameworks, even if this is by means of accumulated bilateral negotiations with many partners. Much depends, of course, on how aggressively Japan and the EU move toward implementation, and how much importers pass on the savings from lower tariffs to their consumers. It is too early to predict the outcome, but the stakes are clearly rising.

Despite JEEPA’s omission of important components such as digital trade and the fact that ratification is likely to be a lengthy process, the agreement between the EU and Japan is nevertheless a significant milestone. It raises the question of whether global trade liberalization is possible in the absence of leadership from Washington. In particular, is it possible to form an enhanced strategic partnership between the EU and Japan on the one hand, joined by like-minded states on the other, as either a substitute for U.S. leadership in the areas of trade and globalization or perhaps a prod to get America back among the vanguard for shaping an open rules-based order?

For the time being, the onus remains with Japan and the EU to go beyond symbolism and follow through on their agreement. As the United States retrenches from globalization under Donald Trump, other liberal democracies need to step up and do more to maintain and further shape the international order that America first orchestrated after World War II. Facing unprecedented challenges from countries like China and Russia, it behooves the EU and Japan to continue deepening their partnership and expanding their globalist network. If they are able to do so, it should cause other American stakeholders to more aggressively promote the traditional U.S. leadership role on trade, in part to protect their own interests and avoid getting left behind.

What is clear now is that Tokyo and European capitals don’t intend to sit idly by and simply wait for America to make up its mind.

Erik Brattberg is director of the Europe Program and a fellow at the Carnegie Endowment for International Peace in Washington. James L. Schoff is a Senior Fellow in the Asia Program at Carnegie and a former Senior Advisor for East Asia Policy at the U.S. Department of Defense.

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