Europe’s finding better trade deals as US reneges on pacts
As global trade tensions rise, triggered by new tariffs and scrapped trade deals by the administration of US President Donald’s Trump, the European Union continues to forge ahead with agreements to eliminate or lower barriers. Its latest move is a free trade agreement (FTA) finally signed with Japan that will phase out duties on Japanese cars into Europe and agricultural products into Japan. It is being hailed as a breakthrough that creates the world’s largest free trade bloc.
Europe and Japan are now allied in bolstering multilateral trade after Japan took a leadership role in rescuing the 11-member Trans-Pacific Partnership. The deal was in question after Trump pulled the US out of the agreement negotiated under the Obama administration.
Despite entrenched opposition at home, Japanese Prime Minister Shinzo Abe was finally able to push the new FTA through. The agreement will now have to be ratified by EU member states.
“We underline the crucial role of the rules-based multilateral trading system with the World Trade Organization (WTO) at its core and continue to fight protectionism,” Japan and the EU said in a joint statement issued in Tokyo. “In giving full effect to this agreement, Japan and the EU are sending a powerful message to promote free, fair and rules-based trade, and against protectionism.”
Carlo Filippini, Emeritus Professor of Economics at Bocconi University in Milan, says, “The FTA is an economic agreement that is also a political statement against protectionism. It is a positive thing.”
The deal follows EU’s efforts to forge new trade pacts with Mexico and Canada. Further agreements are under negotiation with South America’s trade bloc, Australia and Southeast Asia that together would represent a significant portion of the world economy. If we consider only the EU and Japan, together the two generate about 30 per cent of world GDP.
But as with all trade deals, the agreement is complex and sometimes controversial at home.
Fabrizio Onida, Professor Emeritus in International Trade at UniBocconi in Milan, notes that Japan has a significant imbalance.
“It is a strong investor overseas as Japanese multinationals went abroad, but Japan has not accepted foreign companies. Until today it has been a closed market toward foreign companies,” says Onida.
The new FTA will mean long-protected Japanese agricultural producers will face stiff competition.
“This agreement will increase trade for some food products by 100 per cent,” says Filippini. “Food is one of main components of this agreement, which has been symbolically defined as ‘cheese versus automobiles’.”
The deal is expected to boost Japan’s economy by about one per cent and add about 290,000 jobs, according to Japan’s Ministry of Foreign Affairs.
A 10 per cent EU import duty on cars from Japan will be phased out over the course of eight years after the deal takes effect, the ministry said. It comes as the US president has threatened a 25 per cent tariff on Japanese car imports.
But the EU might benefit more as the majority of €1billion in duties paid on products exported to Japan annually will be removed, benefiting makers of cheese, wine, beef and pork, according to the European Commission.
The big winner in Japan is certainly the car industry with Toyota as leader, says Onida. He thinks European machinery, mechanical and electronic components, optics, medical instruments, pharmaceuticals and computer technology could benefit even more than the food sector.
In hidebound Japan, European leather goods will now pose a threat to Japanese leather, which has traditionally been produced by a specific minority. “Now Abe has promised a lot of money to the leather workers and also to farmers who are very few — instead of pandering to a large farmers’ lobby,” says Filippini.
Some are calling the timing of the EU-Japan trade pact an act of political theatre, coming as it did on the eve of a G20 summit in Hamburg, Germany in early July that included members of the Trump administration.
But FTAs are not a panacea. “Theoretically all these agreements lead to an increase in GDP but then we have to see how they are actually implemented,” says Filippini. “They generate macro-economic benefits for the country, but
FTAs are not a panacea. Theoretically all these agreements lead to an increase in GDP but then we have to see how they are actually implemented.
we must not delude ourselves that they represent advantages for every company in every sector. Non-competitive companies will not earn anything from them.”
EU free trade efforts could now open even more new markets. “Europe’s trade with Asean countries is still very small,” says Filippini. “With Vietnam, we are finishing for an agreement. With Singapore, an interesting free trade agreement was signed. Singapore is the number one for trade with Europe, followed by Thailand, Malaysia, the Philippines, Vietnam and Indonesia.”
In today’s topsy-turvy world, when the former champion of free trade — the US — continues to impose or threaten a range of protectionist measures, it appears the centre of rational gravity has shifted.
“Although some are saying that the time of isolationism and disintegration is coming again, we are demonstrating that this is not the case,” Donald Tusk, President of the European Council, said about the EU-Japan deal. “The world really doesn’t need to go a hundred years back in time. Quite the opposite.”