Could the crisis be catalyst for a Japan-EU free trade deal?
by Francesco Guarascio
The European Union is set to start negotiations with Japan over a comprehensive free trade deal, which that is seen as a 'game-changer' that could have a huge impact on the economies of the two partners, reports PublicServiceEurope.com
Discussions have been ongoing for years, but with no breakthroughs. Both the European Union and Japan have bowed to protectionist lobbies on a number of occasions. However, the dire economic situation of the two giants has finally pushed Brussels and Tokyo closer together -and towards common ground on overcoming the pressures against a free trade deal. Japan is struggling to recover from the tsunami and the nuclear setback of the last year, while Europe is mired in the worst economic crisis since the Second World War.
Japan made the first move a few months ago by starting a sympathy campaign to convince EU member states. After much wavering, most political groups within the European Parliament this week gave their conditional backing to opening negotiations with Japan. Liberals, in keeping with their traditional policy lines, are the most open to the talks with Tokyo. "We should launch negotiations, but we should do it based on a clear timetable to overcome tariff and non-tariff barriers," says Metin Kazak. He is the liberal deputy in charge of steering a common resolution on the trade deal through the EP.
The Social-Democrats, the Greens and the Conservatives are also in favour of opening talks - as long as it remains possible to block the negotiations at any time, should Japan fail to deliver on European requests. Against the tide, the European People's Party - the main group in the parliament - is expressing concern. Some of the group's MEPs have raised doubts about the real advantages for Europe. They question the deal with a country, which has been extremely effective in raising barriers to foreign products and where local consumers are notoriously reluctant to buy imported goods.
European industries also fear robust and, possibly, unfair competition from Japan. The most evident opposition comes from the automotive sector. European carmakers are facing a massive and prolonged crisis due to the general economic downturn, unsustainable labour cost in Europe, increasingly stringent legislation to protect the environment and consumers' waning desire to buy cars. On top of these problems, producers of medium and small-sized cars - made by the likes of Fiat and Peugeot - also have to face growing competition from South Korean brands.
This is the consequence of those brands being boosted by a free trade deal between Brussels and Seoul, which entered into force last year. The top Korean carmakers, Hyundai and Kia, have increased their market shares in Europe steadily since then. The idea of a repeat performance with Japanese cars is particularly unappealing. To reassure the manufacturers, officials hint at 'fiscal incentives on cars' to be added to the deal. This would be a completely new feature for a trade agreement. How these incentives might work remains unclear, though. Supporters of the negotiations obviously have other cards to play.
They argue that trade pacts are always reciprocal and both parties stand to gain from them. Japanese consumption is still twice China's; therefore free access to the island's economy would mean a huge opportunity for European businesses. Moreover, it is true that the Japanese favour local brands but they also crave Western status-symbols. The luxury industry, for instance, would see an obvious benefit from a free trade deal with Tokyo. Many Japanese citizens are currently prevented from buying French or Italian jewellery, watches or luxury bags because of the exorbitant prices of these products - only made worse by heavy Japanese duties that are applied once they reach the island.
Lower duties would certainly favour a much larger volume of European exports, but market access barriers do not only take the form of tariffs. The Japanese have become skilled at designing a number of non-tariff barriers, mainly based on security standards. They have previously denied access to the local market for foreign products, even when they are at competitive prices. Those who support the free trade deal assure others that Japan has made huge progress during recent months to lift these legal hurdles. The country is set to continue down this path, argue those in the pro-camp.
But it remains to be seen whether the will of Japan's central government can prevail over the powerful local administrations, which have constitutional rights to block the sale of foreign products in their territory. "There will be engagements on facilitating the capacity of opening shops in certain areas of Japan," explains a commission official familiar with the dossier. "But we cannot overstep the powers of local authorities by way of an international agreement."
Despite the many uncertainties, the march towards a deal is already in motion. The European Commission will dedicate most of its meetings next week to discussing "the draft negotiating directives in view of a free trade deal with Japan," reveals an internal document. Not all commissioners favour the deal, but most recognise that giving it a chance is by far the wisest decision. European Commissioner for Industry and Entrepreneurship Antonio Tajani, who in the past has taken protectionist positions, declared himself in favour of the negotiations "as long as sufficient safeguards will be put in place".
Once the commission agrees on the negotiating mandate, member states will then have to give the deal a green light. "We expect to have the backing of the European Council," says a senior commission official. An EP resolution is also required. Talks may be launched next autumn, although despite all of the fine words - negotiations could take years. Trade deals are always somewhat of a bet and this particular wager would be the biggest gamble ever taken by Europe. Although the miserable state of the European economy could mean that there is not much to lose.