What potential does the EU-Japan EPA/FTA hold?

Legislation | | MIC Customs Solutions |

The EU continues to lay down the groundwork for a new free trade agreement with Japan, a deal that could yield significant economic benefits for both regions.

Japan remains one of the most economically important nations in the Asian continent, representing an affluent, developed market and a major investor in international trade in Asia and beyond.

Over the last few years, the European Union has been making efforts to strengthen its commercial links with the country, in the hope of negotiating a new free trade deal that will establish more efficient, transparent and bureaucracy-free channels of commerce between European and Japanese businesses.

In recent months, these negotiations have made some significant progress, creating a strong hope that the proposed Japan-EU Economic Partnership Agreement (EPA)/Free Trade Agreement (FTA) could soon be finalized and ratified.

The background to the new deal

Currently, Japan is the EU's second biggest trading partner in Asia after China, with the EU and Japan accounting for more than one-third of the world's GDP between them. Imports from Japan to the EU consist mainly of machinery, motor vehicles, optical and medical instruments, and chemicals, with a similar flow of products - plus pharmaceuticals - flowing in the opposite direction.

Though the regions recognize each others' importance as trade and investment partners, historic trade relationships between the EU and Japan have been characterized by significant surpluses in favour of Japan. The Asian nation remains a challenging place for overseas companies to operate and invest due to unique societal and economic conditions, despite rebalancing efforts in recent years.

As such, negotiations over the EU-Japan EPA/FTA were officially launched in March 2013, following the release of an impact assessment of the deal in July the previous year. A strategic partnership agreement is being negotiated in parallel with the FTA, underlining the importance being placed on reforming the EU-Japan relationship.

Key priorities for the EU and Japan

The aim of the EU-Japan EPA/FTA will be to promote trade and investment by eliminating tariffs and updating legislation, while bolstering economic growth, creating employment and strengthening business competitiveness.

Japan has laid out a number of key priorities for the deal, including the removal of prohibitively high duties on industrial products, such as the ten per cent tariff on cars and the duty on electrical machinery, which can reach as high as 14 per cent. This will improve competitive conditions for Japanese products in the European market, while efforts will also be made to address regulatory issues facing Japanese companies in Europe.

The EU, meanwhile, is also seeking the elimination of tariffs on its main export products to Japan, as well as addressing non-tariff measures impeding the sale of automobiles, chemicals, electrical machinery, food safety, processed food, medical devices and pharmaceuticals, among others. Opening the door for easier European access to Japanese government procurement projects, such as railway development, will also be discussed.

Progress on the new FTA

The Japanese government has expressed confidence that an economic partnership agreement between these two advanced market economies would "contribute to the stable growth of the world economy and to global rule-making in trade and investment", a position the EU backs.

As such, 16 rounds of negotiation have been held over the last three years, with the most recent talks taking place in Tokyo in April 2016, addressing issues such as trade in goods, services and trade barriers, as well as investment and public procurement. The next round will be held in Brussels in September this year.

Meanwhile, the May G7 Summit in Ise-Shima saw the release of a  joint statement calling for a prompt end to the discussions, signed by many of the most important leaders from the respective regions, including Japanese prime minister Shinzo Abe, European Council president Donald Tusk, European Commission president Jean-Claude Juncker, French president Francois Hollande, German chancellor Angela Merkel, Italian prime minister Matteo Renzi and UK prime minister David Cameron.

It said: "Recognizing the strategic importance of the Japan-EU EPA/FTA, we remain committed to creating a free, fair and open international trade and economic system, which will promote stronger, sustainable and balanced growth and contribute to the creation of more jobs and economic opportunity in Japan and the European Union and to the increase of our international competitiveness."

The leaders made a pledge to reach agreement in principle on the deal as early as possible in 2016, creating a sense of optimism that talks will result in a mutually beneficial conclusion in the not-too-distant future.