On March 25, the EU and Japan officially launched the start of negotiations for a free trade agreement (FTA). What can we expect? The answer to this question warrants an assessment of the evolution and present state of EU-Japan relations.
The following text is based on a recently published book “EU-Japan relations, 1970-2012. From confrontation to cooperation” that the author jointly edited with Joern Keck and Dimitri Vanoverbeke (see http://www.routledge.com/books/details/9780415658720/).
The book is the first comprehensive documentation of EU-Japan relations mainly written by former and present officials of the European Commission who had been or still are directly involved in negotiating and shaping the relationship.
1. From confrontation ….
External economic relations of the EU are managed under the Common Commercial Policy (CCP). The CCP forms the logical complement to the customs union and the common market envisaged by the Treaties of Rome (1957/1958). It implied that from 1970 onwards the Commission would become the sole representative of the Member States in matters of economic relations with third countries. Japan was in fact the first country with whom the Commission officially entered into negotiations in 1970. The relationship had not been what one would call trusting or friendly. France and Belgium both founding members of the EU, that was back then the EEC and later the EC, and the UK who was to join in 1973, had refused to grant Japan the most favored nations clause when it became member of the GATT in 1955. It took until the end of the 1980s to fully remove the discriminatory treatment. Another issue that occupied negotiations in the beginning was import restrictions for Japanese passenger cars that the UK, France, Italy, Spain and Portugal had concluded with Japan. These “voluntary export restraints” orchestrated by the Japanese Ministry of Trade and Industry (MITI) together with Japanese car manufacturers had to be translated into the framework of the Common Market. It was achieved by an agreement concluded in 1991 known as “the Elements of Consensus”, which also provided for the final abolition of the quotas by the end of the 1990s.
The main conflict during the confrontational years from 1970 to the early 1990s arose from the speed, industrial focus and “one-sidedness” or “imbalance” of Japanese trade expansion into the European Market. The size of Japan’s chronic trade surplus vis-à-vis the EU would determine the heat of the disputes. Tensions reached a climax when the Commission accused Japan of not granting European exporters the benefits provided by GATT. In 1982, the Commission backed by the Council of Ministers initiated consultations with Japan under Article XXIII. The article provides for the possibility to nullify rights granted under the GATT. Even the US considered this approach too radical. The procedures under Article XXIII were finally not pursued beyond 1983. Instead “export moderation” by the Japanese side was accepted as the compromise solution for the time being. Increased direct investment by Japanese companies in the EU combined with “local content” requirements helped to further reduce conflict. Market access demands by the Commission turned to focus on specific industries like passenger cars, alcoholic beverages, leather goods or financial services following approaches taken by the US in its negotiations with Japan.
2. … to cooperation
Entering the 1990s EU-Japan relations took on a more cooperative character. The shift is clearly marked by the 1991 Joint Declaration of the Hague, that emphasizes common interests and partnership. In line with the Joint Declaration, EU-Japan summit meetings started to be held annually. They were during the 1990s complemented by consultative bodies like the EU-Japan Regulatory Dialogue or the EU-Japan Business Roundtable to name only the most prominent. The Trade Assessment Mechanism (TAM) applied between 1993 and 1997 implied a more consultative and technocratic approach to market access issues. It was a dialogue rather then a battle with accusations and defenses.
Given the heated discussions in the 1980s and the fact that neither the trade balance nor the market access situation had fundamentally improved, this shift from confrontation to cooperation came as surprise not only to outside observers, but also to the officials involved in the negotiations (Waldenberger, Introduction, p. 20). Was it because Europe had finally adjusted to the Japanese challenge? Because Japan had lost its dynamism after the burst of the stock market and real estate bubble? Or because confrontation had led to nowhere? In the course of the 1990s China became the “new Japan”, challenging the world economic order. Also the strong growth of foreign direct investment (FDI) began to alienate corporate interests from national economic interests blurring the classical lines of confrontation that had dominated trade relations in the decades before. Last, but not least, many challenges faced by Japan, the EU and other highly industrialized economies like climate change, energy efficiency, environmental protection, intellectual property rights or international security pointed to a new level of global interdependence requiring cooperative rather than confrontational approaches.
3. The “untapped potential”
Following up on the Joint Declaration, the 2001 Action Plan, stressed the cooperative character of the relationship and further extended its scope beyond economic and trade issues, such as UN reform, arms control, human rights, terrorism and crime, demographic change, gender equality, education, environment, science and technology, energy and transportation and exchange programs for the Japanese and European youth. Whereas the Joint Declaration focused on consultation and dialogue, the new declaration called for “action”.
Cooperation is the natural way to proceed, given that Japan and the EU face similar challenges, share many values and have many interests in common. However, the euphoric and ambitious tone of the Action Plan somehow failed to stimulate corresponding outcomes. There seems to be “widespread discontent on the lack of concrete action and visibility of on-going policies, and an equally widespread accord that the Action Plan had defined common interests properly, but its implementation remained below expectations.” (Rothacher, Chapter 7, p. 179).
What has been preventing the EU and Japan from achieving more substantial results out of their numerous forums, dialogues and consultations? One can think of at least three possible reasons:
- The scope of the Action Plan might have been too broad and the time span of ten years too long. More focus, clearer priorities and shorter time limits might have rendered more concrete outcomes.
- The commitment on one or both sides to achieve substantial results might have been insufficient due to other, higher valued political priorities. In other words, concrete results would have been “nice to have”, but were not urgently needed.
- The “underperformance” may also have been due to lack of leadership. On the EU side, the Commission needs the backing of by now 28 governments and an increasingly influential parliament. On the Japanese side, the ongoing reshuffling of governments and cabinets after the resignation of Koizumi must have undermined the ability of Japanese negotiators to make strong commitments.
To really explain why the potential for cooperation between Japan and the EU has remained largely untapped it will be necessary to take a closer look at other bilateral relations both on the Japanese and the European side and see whether and why the performed better.
4. Towards a EU-Japan FTA
The EU and Japan have long been supporters of the WTO framework of multilateral negotiations. However, they alone could not ensure the completion of the Doha Round started in 2001. Instead, bilateral and regional free trade and economic partnership agreements have become the dominant approach to trade liberalization and economic integration. Japan, like the EU a latecomer in this trend, has so far concluded 13 agreements with ASEAN, India, Thailand, Indonesia, Malaysia, the Philippines, Singapore, Brunei, Viet Nam, Chile, Peru, Mexico and Switzerland. In 2011, the EU-Korea FTA was launched marking the EU’s first agreement with an Asian economy and it’s most comprehensive FTA so far.
Korean and Japanese companies compete head on in many industries. The EU-Korea FTA poses therefore a major threat to Japanese producers in the world’s largest integrated market. While they continue to face import tariffs, their Korean competitors are going to benefit from a step-wise elimination of tariffs over a five-year period. Not surprisingly, Japanese industry pressured its government to negotiate a similar agreement with the EU.
In 2011, the EU and Japan agreed on a “scoping exercise” to evaluate the prospects of an agreement. In July 2012, the Commission based on the assessment of the scoping exercise recommended to the Council to start negotiations. The recommendation was accepted in November 2012. The first round of negotiations was conducted mid of April in Brussels. The second round took place in Tokyo end of June/beginning of July.
Given the differences in the nature of import barriers, EU demands focus on Japanese non-tariff barriers and public procurement, whereas the Japanese side wants to especially see EU import tariffs being removed. Both sides agreed on a clear roadmap for the negotiations to monitor progress and to ensure that benefits are “symmetric”. Negotiations may be suspended if too little is achieved.
Japan is the third largest national economy. It is the EU’s second largest trading partner in Asia and one of the major investors in the European market. For the EU benefits from a comprehensive agreement with Japan are estimated to vary between 0.34 and 1.88% of GDP. For Japan, the range is between 0.27 and 0.67% of GDP (http://trade.ec.europa.eu/doclib/docs/2012/july/tradoc_149809.pdf).
Two big questions remain. Can negotiations be successfully completed and will they allow both sides to exploit the yet “untapped potential” in their bilateral economic relations. The lowering of import tariffs on the European side might be hard to negotiate, but such an agreement can easily be implemented and monitored. Implementation and monitoring is more difficult when it comes to non-tariff barriers and public procurement. Here the key will be transparency and governance mechanisms to effectively resolve conflict or otherwise provide for some sort of sanctioning.
At present, the more practical question is how the parallel negotiations for a Trans-Pacific Partnership (TPP) that Japan only recently joined will affect progress towards a Japan-EU FTA. Due to the size of the economic impact and the strong time pressure, TPP is given higher priority by the Japanese government. This might present an obstacle for reaching the milestones set by the EU-Japan roadmap. However, the EU-Japan negotiations might also benefit from concessions made by Japan under the TPP.
The successful completion of a EU-Japan FTA will not only bear positive implications in economic terms. It can also be expected to promote collaboration in the many other fields already envisaged by the Action Plan twelve years ago.