A big moment

Agreement on the Japan–EU Economic Partnership Agreement reached

Text by Gavin Blair

The exchange of two daruma dolls by EU trade commissioner Cecilia Malmström and Japanese Minister of Foreign Affairs Fumio Kishida on 5 July marked the announcement of an agreement in principle on the Japan–EU Economic Partnership Agreement (EPA). Daruma dolls symbolise perseverance and good fortune, and the EPA is a deal that has taken years of persevering and has the potential to deliver considerable fortunes to both sides. The EPA will create a free-trade zone accounting for nearly a third of global GDP.

Although the current negotiations have been going on since 2013 — and aren’t finished yet — the moves towards a deal began long before that.

“We have been fighting for this for almost 20 years,” says Richard Collasse who was chairperson of the European Business Council (EBC) in Japan from 2002 to 2009. “The EBC tried to convince Japan that we have the same view of capitalism, one with a human face. It is more than just an economic agreement, but one that protects our values.”

There were numerous battles along the way as European companies struggled to gain fair access to the Japanese market, according to Collasse.

“We had to fight with the Ministry of Health, Labour and Welfare because they were trying to impose GMP [Good Manufacturing Practice: an international standards system for medical products] on even the bolts in a CT scanner, which was disgraceful,” recalls Collasse.

While cars and camembert were making headlines during the recent negotiations, there were other major sticking points. Market access, rules of origin and public procurement were three of the final hurdles, according to Timo Hammaren, head of the Trade and Economic Department at the European Union Delegation to Japan.

“Rules of origin are very important,” explains Hammaren. “For example, if parts for cars come from another country, do the cars still qualify as Japanese? From the European side, rules had to be established for products, such as chocolate, that use cocoa from outside the EU.”

Public procurement has long been a source of friction between the two sides, but agreement has finally been reached.

“This included access to local cities and prefectures, which have a lot of independence in their procurement, and was very complicated and sensitive,” says Hammaren. “There was a commitment from the Japanese side for a non-discriminatory regime in procurement for 48 core cities with populations of more than 300,000.”

One point that has yet to be agreed upon is the settlement of investment disputes. Japan is in favour of private arbitration courts, a solution adopted in the moribund Trans-Pacific Partnership agreement (TPP). However, in the EU, using private arbitration to settle investor-to-state disputes has been strongly criticised by civil society organisations as something that demonstrates a shift in power from nation states to corporations. This opposition led the European Commission to switch to an investment court system with publicly-appointed judges, a system applied in the CETA agreement between the EU and Canada, and now suggested for the agreement with Japan, as well.

Despite the bumps in the road, the recent withdrawal of the US from the TPP and the looming Brexit appear to have provided extra impetus and urgency for Japan to conclude an agreement with the EU.

“This is a chance for Europe and Japan to step up at a time the world is not doing so well in terms of protectionism,” says Danny Risberg, chairperson of the EBC since 2014. “With around €150 billion in combined trade, the agreement could add 2.6% to combined GDP, as Japan is struggling to get out of stagnation, as well as better prices and choice for consumers.”

There is a clear precedent for the economic benefits the agreement can deliver, believes Hammaren.

“If you look at the experience we had with South Korea, after five years of that trade agreement, we had a more than 50% increase in exports. In certain sectors, such as cars, we had a 200% increase,” Hammaren points out.

“There are currently 600,000 jobs in the EU that depend on exports to Japan, and Japanese companies now employ more than 500,000 people in the EU,” he adds. “We have calculated that every extra €1 billion of exports will bring 14,000 more jobs. In processed food alone, we believe that over time, exports may increase by €10 billion.”

There is, however, some way to go before the potential benefits can be unlocked. Once the final text of the agreement is in place — ideally at the end of the year — there will be a process of so-called “legal scrubbing” where lawyer-linguists will examine the language for consistency. It will then be translated into Japanese and the 24 official EU languages.

This process could be finished by autumn 2018, when it will be sent to the European Council and then to the European Parliament for approval. There is also a possibility it will have to be sent to all the national and regional parliaments for ratification, depending on whether the agreement is classified as falling partially under the competence of the EU member states. In the best case, the EPA would then come into effect in early 2019.

Implementation will provide its own challenges. And while the reduction and elimination of tariffs are relatively easy to monitor, other elements will not be so simple.

“One hurdle is to ensure that the Japanese side accepts their part of the agreement,” says Collasse. “Non-tariff barriers are more difficult to assess as there are ways to fiddle around with those. The EBC will have a new role now to follow through on this.”

Risberg also acknowledges the challenges ahead, but sees light at the end of the tunnel.

“Everybody can’t be perfectly happy in such a comprehensive agreement and we need to educate the public on both sides,” he says. “There is a lot of work still to be done, but this is a big moment for everybody.”  •