New Japan-EU Free Trade Agreement takes effect: What will be the impact on world trade?

Legislation | | MIC Customs Solutions |

The Japan-EU Free Trade Agreement has now taken effect, so what changes can we expect to see from an economic point of view?

The new Japan-EU Free Trade Agreement (Jefta), the largest free trade agreement ever seen between the two blocs, came into effect on February 1st 2019.

One of the world's latest economic treaties, it aims to eliminate some of the trade barriers that both European and Japanese businesses faced when attempting to import and export that had made it hard for them to compete.

Jefta has acted to remove these barriers, shape global trade rules in line with the shared values of the two partners - and send a powerful signal that these economies are proponents of open trade, not protectionism.

Paving the way for Jefta

The roots of Jefta can be traced back to 2013, when EU governments instructed the European Commission to begin negotiating with Japan.

However, it was not until December 8th 2017 that negotiations were finalised, with the European Parliament giving its consent for entry into force in December 2018.

As of February 1st 2019, the Strategic Partnership Agreement between the EU and Japan applies on a provisional basis and the rules of Jefta can finally begin to have an impact.

Japanese prime minister Shinzo Abe said last year that he hopes the free trade agreement "will be a model of an economic order in the international community in the 21st century".

What Jefta does

Under Jefta, most of the customs duties and trade barriers between the EU and Japan have been eliminated. Indeed, almost 99 per cent of products exported from Japan and 94 per cent of products exported from the EU will now be duty-free.

This is great news for EU companies, farmers and consumers, as well as their counterparts in Japan, who should now start to reap the rewards of simpler and faster trade.

Some consumers in Japan have already been reporting lower prices on items from the EU such as wine and cheese, something that could act to further boost consumption.

In addition, Japan previously had complex and difficult customs rules, which had been off-putting to EU exporters. Jefta has changed all this and should mean smoother trade for both importers and exporters.

For the automotive industry, Jefta is to eliminate customs duties within eight years - and more than 90 per cent of duties on car parts have already been scrapped.

The electronics sector is also to benefit from the elimination of tariffs over the coming three to five years.

Japan hopes to raise mutual direct investment and increase the competitiveness of Japanese brands, while the EU aims to see growth in exports and better job security for people in Europe.

Jefta in future

When Jefta achieved consent to come into force last year, Mr Abe called it a "new era" for Japan and Europe, while EU trade chief Cecilia Malmstrom labelled it "the biggest trade agreement we have ever negotiated" and "a powerful message in defence of open trade based on global rules".

Proponents of the agreement certainly hope that it will act as a template for cooperation over protectionism and a way of tackling global challenges by breaking down trade barriers.

It will be interesting to see what benefits Jefta will deliver for companies and citizens in Europe and Japan going forward.

Unfortunately, Jefta would not apply to the UK in the event of a no-deal Brexit, as it is only party to the agreement as a member of the EU.

However, the British government hopes to use Jefta as a precedent and a way for the country to enjoy a similar relationship with Japan after it leaves the European bloc.

This latest free trade agreement may indeed prove to be a useful template for global negotiations in the future.