JAPAN PLANS TO CARVE OUT NEW ECONOMIC FUTURE WITH MEGA FREE TRADE PACT WITH EU
Prime Minister Shinzo Abe’s diplomatic skills were amply on display on December 8 when Japan and the European Union announced they had in principle reached a far-reaching agreement aimed at creating a free trade zone that would account for more than a quarter of the world’s economy. The agreement is expected to be signed as early as next summer, taking effect in the spring of 2019.
The announcement came nearly a year after Donald Trump withdrew the US from the Transpacific Trade Partnership (TPP) agreement, which was initially signed in 2016 by 12 Pacific nations after a decade of often stormy negotiations and eleventh-hour compromises.
America’s withdrawal led to a concern about the unity among nations advocating rule-based free trade, but the Japan-EU Economic Partnership (EPA) scheme has the rich potential to significantly offset the negative impacts of Trump’s decision to scrap the TPP.
The EPA will account for roughly 30% of the world’s gross domestic product (GDP) and 40% of total international trade. The largest free trade agreement Japan will join, the EPA will ultimately eliminate practically every tariff from industrial and agricultural products traded between Japan and the EU.
Take car exports from Japan, for instance, on which the EU now imposes a 10% tariff. Eight years after the agreement takes effect, the tariff will be eliminated completely. South Korea, which signed a free trade agreement with the EC in 2011, now exports cars and their parts tariff-free. After having been at a disadvantage against their South Korean counterparts for years, Japanese automobile manufacturers will finally be able to compete on an equal footing.
The US likely cannot afford to ignore the evolving situation. Under the previously negotiated TPP, a 2.5% tariff now levied on Japanese cars bound for the US was to be eliminated 25 years after the agreement took effect. The Japan-EU partnership agreement clearly will be far more favorable to the Japanese automobile industry.
Japan will have gained an obviously major advantage in car exports to the EU, but there will still be issues with the import of certain goods from the EC. As Kazuhito Yamashita, Chief Researcher at the Canon Institute for Global Studies, points out, while import tariffs on such items as cheeses and wines will be eliminated, Japanese consumers will still have to pay high prices, as the import quotas will be auctioned off to wholesalers before they eventually reach consumers.
Therefore, the Japan-EU agreement will not significantly affect the heavily protected Japanese dairy industry. Ordinarily, such an agreement ought to be a golden opportunity to enhance the foundation of the industry by exposing it to fierce international competition, but that is not going to happen. Over the long run, there remains a serious question as to whether the Japanese dairy industry should be allowed to continue functioning as it does today.
Huge Advantages for Both Parties
Under the new agreement, Japan’s exports to the EU are expected to increase by about 24% and its imports about 33%, benefiting both parties. But the agreement will offer more than just that. More notable are the high standards of transparency detailed in the agreement.
For instance, strict rules will be enforced to better manage the protection of intellectual property and e-commerce transparency. There will also be an increase in market access for government procurements such as railroads, more open trade in services, and improved corporate governance.
China and Russia are notoriously devoid of the transparency of rules of trade and other transactions. They willfully create situations by force to serve their national interests. Meanwhile, Britain has decided to pull out of the EU and America has scrapped the TPP.
Against such a backdrop, Japan and the EU have reached the partnership agreement after holding talks since 2012. The agreement reflects a strong determination on the part of the two parties to never allow free trade to slip backwards, and is a precursor of many international mega free trade deals to come.
What Abe achieved this time is particularly significant in view of the political and economic changes anticipated in the US in the not too distant future. In sum, Abe has created a new set of rules for economic activities that will support the nations of the world pursuing free trade with Japan playing a major role in promoting this objective.
Japan’s next goal should be to finalize a new TPP agreement among the 11 nations that remain following America’s withdrawal. Trump’s rejection of the TPP is said to be attributable to not only his preference of bilateral to multilateral deals, but to the fact that his predecessor, Barak Obama, had taken the lead in brokering the previous agreement.
If indeed Trump’s reasons for his rejection of the TPP are rooted in personal emotion, it will be very difficult to talk him into joining the TPP again. But then, what if Abe manages to complete a deal among the 11 remaining members—or among the 10, if Canada which raised a new demand at the last minute, is also out?
Last month, when ministers from the 11 TPP nations met in Da Nang, central Vietnam, on the understanding that their huge trade deal was about to be finalized, Canada abruptly raised a strong demand, putting the agreement in jeopardy. An angry Japanese minister of economic affairs, Toshimitsu Motegi, was quoted by the Japanese media as saying: “Isn’t this what is meant by ‘fraud’?” Abe reportedly is determined to seal a final agreement without Canada, if necessary, still aiming for an official signing early next year.
Here is what Yamashita predicted will happen when the TPP deal is finalized:
“With the TPP in effect, Japan will start importing beef from Australia paying a 9% import duty. Meanwhile, a 38.5% tariff will continued to be levied on American beef—obviously to the great disadvantage of the US which has rejected the agreement. The American beef industry may be altogether excluded from the Japanese market. The same thing may happen to dairy, wheat, and other products.”
American Pork and Wheat Will Be Affected
“There’s no question that the US will be adversely affected by the new agreement between Japan and the EU. I can say for sure that the same thing that will happen to American beef will happen to American pork and wheat one after another. No matter how much President Trump abhors the TPP, he will have no choice but want America to be invited back to the TPP again—if he really takes America’s national interests into consideration seriously. I think America will ultimately be compelled to request that.”
If all of the original 12 nations joined, the TPP would account for 38% of the world’s GDP. Without the US, the number will drop to roughly 13%, and further down to 11% without Canada. And yet, as mentioned earlier, it would still mean a lot for Japan to seal this deal by functioning as the central force among this group of nations advocating free trade.
The new TPP likely will create a situation under which America cannot but change its mind from a practical point of view. Meanwhile, the Japan-EU agreement will allow highly-developed democracies to remain committed to their treasured values. There will thus be two mega international economic partnerships bringing nations together that are committed to free trade, fair rules, democracy, and a resolution of issues under international law. The two agreements combined will mean that nearly half the world’s trade will be conducted within areas in which rules of high transparency will prevail.
Japan’s agreement with the EU is clearly different in its context from the economic and trade policies China announced in October on the occasion of the 19th National Congress of the Chinese Communist Party (CCP). Xi Jinping pledged that, in order to run a great socialist state with more than 1.3 billion people, every Chinese must acquire the necessary characteristics to qualify as a citizen of “a great socialist state with Chinese characteristics.” Xi declared that such characteristics must be nurtured by studying Marxism earnestly.
To carry out thorough control of China’s business sector, the CCP demands that all private corporations, Chinese and foreign alike, set up CCP cells in-house. About 70% of all foreign corporations in China allegedly have CCP cells today, which conceivably means that all corporate information is leaked outright to CCP headquarters.
In contrast to China’s system of repression and lack of transparent rules, it is especially reassuring to see the new multilateral deal with the EU, led by Japan.
Now is the time for Abe to forge further ahead in full force with his global diplomacy reflecting his “panoramic perspective of the world map.” What he should not forget at this juncture is that Japan’s economic activities must be securely underpinned by commensurate military might, and that a revision of its pacifist constitution holds the key to its future as a responsible leader of the democratic world.
(Translated from “Renaissance Japan” column no. 783 in the December 21, 2017 issue of The Weekly Shincho)