On July 6, Japan and the EU reached an "agreement in principle" on a future "Economic Partnership Agreement". The partnership has been hailed by the European Commission as "the most important bilateral trade agreement ever concluded by the EU" and is dedicated not just to reducing tariffs and non-tariff barriers, but also commits both parties to develop sustainability, including implementation of the Paris climate agreement. Shinzo Abe, Japan's prime minister, spoke of "the birth of the world's largest free, industrialised economic zone," which is not an overstatement, given that between them they represent 19% of global GDP and 38% of goods export.
The deal, which has been hammered out in 18 meetings since the beginning of 2013, hopes to reduce or eliminate tariffs and harmonise standards for food and drink going from the EU to Japan, and the same for automobiles and consumer electronics coming from Japan to the EU, phasing the tariff reductions over the next 15 years. It is often referred to as a "cheese for cars" agreement.
It is hoped the "agreement in principle" will be elaborated into a fully working detailed agreement within this year, and will be in effect by 2019, having been ratified by the European Parliament and the EU's 28 member nations, along with both houses of the Japanese parliament. However, given the EU's negative experience ratifying the free trade agreement with Canada last year, where the Belgian province of Walloon almost single-handedly prevented that agreement from going ahead, ratification can hardly be viewed as a fait accompli.
In January, Donald Trump withdrew the USA from the ambitious TPP free trade agreement, which the Obama administration had been working on for 8 years. Had it remained in force, it would have represented a free trade agreement between 12 countries that collectively had 40% of the world's GDP between them. But Trump's administration believes that a series of bilateral trade agreements will be more beneficial to America than one multilateral agreement. This was a setback for Japan, who had presented the TPP deal as one of the centrepiece structural reforms of the Abenomics programme. Interestingly, very quickly after this happened, rather than focussing on reanimating TPP with only 11 members (which would have been a not insignificant FTA covering 15% of global GDP) Japan very quickly diverted all their efforts towards EU-Japan negotiations, which had until that point progressed relatively slowly. It is clear that that the EU and Japan are keen to occupy the vacuum left by America's protectionist policies, and take to the reins on the goal of liberalising the globe. Shinzo Abe stated that he hopes the progress made on the EU-Japan deal will revive American interest in TPP. Given that when Japan and America do eventually formalise their bilateral trade agreement, the US will have to compete in negotiations with the form of the EU-Japan agreement, and that American companies will be behind the Europeans in their expansion into the Japanese market – this may not be such a bad idea.
For the EU, even in its nascent form, this deal is important in demonstrating they are a dynamic bloc, capable of engaging globally, and not the cumbersome bureaucracy they have sometimes been portrayed as. Indeed, the deal seems to undermine the Brexiter argument, that the best way to reach new markets and create a "Global Britain" is through leaving the bloc. It is not even clear if the UK will be able to benefit from this agreement. If ratified while the UK are a member, the UK may be able to grandfather with some tweaks. Otherwise, if not a party to the agreement, and if unable to replicate it post-Brexit, there is a “likely scenario that the EU and Japan would be better [economically] integrated than the EU and UK… Under such a scenario, we can easily assume that the Japanese investments currently going to the UK would flow to the single market or Turkey instead" (Hosuk Lee-Makiyama, co-author of the European Commission's Trade Sustainability Impact Assessment on the agreement).
Norio Maruyama, spokesperson for the Japanese government has confirmed that the agreement was drafted on the basis that it was with all 28 member states; and that it was still "too hypothetical" to say if any adjustments to the agreement will need to be made in light of the Brexit vote, noting, "we cannot predict at this stage what is the real effect of Brexit."
In theory, the EU-Japan agreement could be used as a basis for Brexit negotiations. Still, it should be pointed out that this is a bespoke agreement between Japan and Europe which targets mainly agriculture and the automotive industry. It would be inadequate as a means of protecting the UK's service industry, for example.
The EU-Japan EPA is by no means a done deal. There is the hurdle of ratification, and there are some issues which they have not been able to agree on, the most significant, perhaps, the issue of investor protection. In the former case, the EU is pushing for the disputes to be heard before a dedicated investor court, whereas Japan favours the traditional "investor state-dispute settlement" tribunal, which places investors on the same footing as countries. Lee-Makiyama suspects Japan may be wary that if they were to agree to this, they would be establishing a template for future deals, in which state-appointed judges might rule on claims by Chinese or Korean companies against Japan's government. Given the highly desirable political goals associated with the agreement, to say nothing of the economic gains, it is not surprising that they have carved out this chapter from the agreement, and will make that issue the topic of another separate agreement.
UK trade deal discussions in Tokyo fail to impress in Europe
Last week, the UK and Japan did agree to negotiate a "new economic partnership" post-Brexit, based on the final terms of the EU-Japan deal.
The UK-Japan joint statement states: "Japan and the UK are each other's closest security partners in Asia and Europe respectively" and "Japan and the UK are global strategic partners". Whilst British national newspapers tend to present this outcome as a UK victory, views on the continent are not so generous to the UK.
French newspaper Le Monde noted this morning that: "[May] barely saves face by obtaining a formal promise from Japan that an agreement will be reached post-Brexit […] For Japan, the European market, far larger than the British market, is the priority". It goes on to say that there is no question of parallel discussions between Japan and the UK taking place before every detail of the European Economic Partnership Agreement is ironed out. The Japanese decision to negotiate with the UK on the basis of the EU's final agreement with Japan is interpreted by Le Monde as an admission of the UK's failure to negotiate trade deals on its own terms.
The European institutions, on the other hand, are keeping their own trade agenda in sight. Jean-Claude Juncker has proposed splitting EU trade agreements according to the EU's exclusive competence with the aim of finalising EU trade deals without having the risk of the eleventh-hour interventions by regional parliaments that dogged the signing of the EU-Canada deal last year.