Amid talk of a super, transatlantic free trade zone, the eurozone now has a new potential partner: Japan. But, in light of Tokyo’s slow progress on the Trans-Pacific Partnership (TPP), can the Abe government match competitor South Korea in inking a trade pact with Brussels?
On Saturday, government sources from both sides told Japanese media that the European Union (EU) and Japan would commence talks in Tokyo in late March on a free trade agreement (FTA), following the 27-member bloc’s decision last November to seek a deal.
The first official round of negotiations may start in April on a pact that would account for around 30 percent of global gross domestic product –notable but less than the 40 percent of GDP possessed by the EU and the United States.
According to the European Commission, Japan is currently the EU’s second biggest Asian trading partner after China, with two-way trade in 2011 topping 146 billion euros (US$189 billion).
The announcement came ahead of Monday’s launch of TPP negotiations in Singapore, with the 11 countries involved eyeing a regional trade deal by October. Japanese Prime Minister Shinzo Abe has stated his intention to make an “early judgment” on joining the TPP talks, amid resistance from the nation’s agricultural sector and upcoming summer elections.
South Korea ahead
Japanese automakers have complained of being disadvantaged by the EU’s FTA with South Korea, which in July 2011 became Europe’s first such agreement signed with an Asian nation. Among other trade barriers, the deal abolished a previous 10 percent tariff on EU car imports from South Korea, giving automakers such as Hyundai an advantage over their Japanese rivals.
A Japanese trade policy source said at the time: "Japanese companies will have only two choices: expand local production or withdraw from the European markets."
According to EU data, in the first year after the pact’s implementation, EU exports to South Korea expanded by a rapid 37 percent. While overall EU imports from South Korea grew by only 1 percent, car imports jumped by 20 percent, partly at the expense of other trade partners.
Trade benefits
But while Japan may be seeking to level the playing field with South Korea, EU policymakers have plenty of reasons for doing a deal with Tokyo.
Britain’s Syed Kamall, Conservative Party MEP (Member of the European Parliament) for London, has urged his fellow lawmakers to “get down to talks as quickly as possible” to boost business ties.
“At a time when the EU continues to be crippled by anaemic if not negative growth rates, new free trade agreements present opportunities to reverse this trend. An enhanced trading relationship with Japan, underpinned by an ambitious free trade agreement, could generate a 1 percent boost in the EU's overall gross domestic product and up to 400,000 jobs,” he wrote in a November 2012 article for Public Service Europe.
According to the European Commission, an FTA with Japan could boost EU exports to Japan by nearly a third, creating an estimated 420,000 new jobs. Japan, on the other hand, could see its GDP increase by 0.7 percent and exports to Europe swell by 24 percent.
In its July 2012 assessment of an EU-Japan FTA, the Commission noted that trade between the two had been declining for several years, worsened by a combination of tariffs and non-tariff measures that negatively affected both sides.
While noting generally low tariffs on goods, the report said Japanese tariffs remained high for agricultural and processed foods and beverages, while EU tariffs were higher on key Japanese exports such as motor vehicles, electronics and machinery.
“Parts of the Japanese market [such as] agricultural products and some transport equipment and aeronautical products…are almost totally closed to EU exports,” the report said.
However, the EU announced in November 2012 that it would reserve the right to “pull the plug” on negotiations after one year “if Japan does not live up to its commitments on removing non-tariff barriers.”
For its part, Japan has declared its determination to “open up the country” in pursuing FTAs with a range of major trading powers, having signed deals with a number of Asian nations and entered into talks with Australia and South Korea.
Forging a pact with Europe would bolster Abe’s reformist credentials and further aid the nation’s manufacturers, which are already enjoying the benefits of a weaker yen. Nevertheless, an agreement will likely await July’s upper house elections for a government anxious not to upset its traditional supporters.