EU trade ministers overcame resistance from the car industry on Thursday (29 November) and agreed to start negotiations to create a free-trade pact with Japan, Europe's most ambitious step so far in a strategy to tie up deals with the world's biggest economies.
Agreement was reached only after France and Italy secured safeguards for carmakers that are already cutting jobs because of falling demand at home and worry a deal could lead to greater Japanese imports and damage the industry.
EU negotiators were told they should pull the plug on the talks – expected to last two or three years – if Tokyo failed to remove the barriers to trade that Europeans say make it hard to do business in Japan.
The country already has low or zero import tariffs, with no duty on Scotch whisky or French cognac for instance, and the real prize for Europe is removing special regulations on everything from music to imported cars.
"Let's not be anxious, Europe is not naive, Europe is going into this negotiation with our eyes wide open," EU trade chief Karel De Gucht told a news conference.
Struggling to resolve a three-year debt crisis, Europe's push for an accord is part of its ambition to supplement stagnant domestic consumer demand with free-trade pacts with major economies.
A deal with South Korea came into effect last year, one with Canada is near completion, and preliminary talks are underway for an agreement with the United States.
Japan was the European Union's seventh-largest trading partner in 2011, accounting for €116 billion in goods trade. The EU and Japan are together responsible for a third of global economic output.
The Japanese business group Keidanren welcomed the deal.
"We want negotiations to start rapidly in order to agree a deal quickly," it said in a statement. "We want [the Japanese government] to continue to put into effect regulatory and structural reform."
European carmakers suspicious
The European Commission says a Japan trade deal could boost EU output by up to 1.9%, or €320 billion, by 2020, thanks to increased exports including food, drink and luxury goods. It says that could create 400,000 jobs.
But the EU carmakers' association ACEA estimated a trade deal with Japan would cost the European auto industry up to 70,000 jobs.
"I don't believe the Japanese have any intention to remove their barriers to our vehicles," Ivan Hoda?, ACEA secretary general, said. "It is not clear at all how these safeguard clauses would work."
On the surface, the EU car market has more barriers than Japan's, with a 10% tariff on imported Japanese cars and 22% on trucks, compared to Japan's zero import tariffs.
But EU carmakers say numerous barriers hinder exports, such as Japan's category of "light" cars. These benefit from tax breaks, but most small European cars do not fit the category's demanding criteria on size and power.
Such rules particularly annoy France and Italy, whose automakers specialise in smaller cars.
France reeling from South Korea trade deal
France recently requested the Commission monitor the import of South Korean cars, after the trade deal with Seoul was accompanied by a surge in European sales for Korean car brands.
Still, France agreed to negotiations after the Commission's assurances that EU tariffs would only be lowered if Japan's non-tariff barriers were removed.
French Trade Minister Nicole Bricq said the safeguards against excessive Japanese car imports were tougher than those in the South Korea accord, though she did not specify how they would be implemented.
"The Commission must take into account the needs of sensitive sectors – carmakers," she told reporters in Brussels, warning that Paris would fight to defend its industry during negotiations.
Trade chief De Gucht cited victories over Japanese regulation that the EU had achieved in preliminary talks, such as the granting of new liquor licenses to European companies.
British Trade Minister Stephen Green said the complexity of the European and Japanese economies meant the negotiations would be very difficult.
"There was a clear recognition that this will be a long and painful process," he told reporters.
For Japan, a trade deal with the EU could boost economic output by 0.7%, according to the EU estimate.
"Given the potential of the Japan-EU [free-trade pact] to contribute to economic growth of both sides, Japan will continue to work towards a high level" agreement, Japanese Foreign Minister Koichiro Genba said in a statement.
But the plan stirs little passion in Tokyo, where officials are focused on the proposed Trans-Pacific Partnership that would link Asia, the United States and Australia.
The country is also distracted by a general election next month, which looks likely to return to power the long-dominant Liberal Democratic Party, which has been vaguer about its trade agenda than the current Democratic Party of Japan government.
Nicole Bricq, French minister for commerce, said any trade agreement with Japan "should lead to an increase in our exports towards this great market." In a statement, she said France had placed two conditions on the deal:
- The commitment by Japan to "eliminate the numerous non-tariff barriers that limit access to the Japanese market" including the public procurement market.
- The "recognition of the automotive sector as sensitive" and the establishment of a "safeguard clause to prevent an increase in imports that would undermine European industry". The activation of this clause would allow a return to the initial tariffs.
BusinessEurope, the EU employer's organisation, said it hoped Japan "will prove its strong commitment and ability to open the Japanese market by removing long-standing barriers to trade and investment."
"Particular focus must be given to the removal of non-tariff barriers. The agreement must create a level playing field between the two economies,” said Philippe de Buck, director general of BusinessEurope.
Other long-standing obstacles for European companies in Japan include tariffs, services, procurement, investment, competition and intellectual property rights. BusinessEurope said it wanted those "effectively removed in the negotiations".
ACEA, the European carmakers association, maintained that a free trade agreement with Japan "will have a negative impact on the European automobile industry".
“Independent studies have shown that this deal is a one-way street as far as the automobile industry is concerned,” said Ivan Hoda?, secretary general of ACEA. “This has already been our experience with the free trade agreement with South Korea which entered into force last year.”
ACEA cited a study by Deloitte, which concluded that an increase in EU imports from Japan will not be offset by an increase in European exports to Japan.
"This study demonstrates that EU car exports could go up by a mere 7,800 units by 2020, compared with additional Japanese exports to the EU amounting to 443,000 units. The consequent reduction in automobile production in the EU by the same amount would lead to between 35,000 and 73,000 job losses."
ACEA regretted that the decision to open trade talks with Japan had not been seen from an industrial policy perspective, despite a recent Commission communication on the matter.
Decisions on whether to enter into new trade negotiations should be assessed in accordance with their impact on competitiveness, ACEA said. “Unfortunately this was not the case for this FTA,” said Ivan Hodac. “It is now time that the EU starts moving from words to actions in order to defend its industry more strongly.”
Syed Kamall, a British Conservative MEP who is in charge of following the EU-Japan trade talks for the European Conservatives and Reformists group in the European Parliament, welcomed the agreement in the council.
"We are finally making progress on this important trade deal for the EU," he said in a statement. "We must maintain the pressure to move beyond selfish obstructionism and entrenched interests and go the extra mile needed to get a deal. The overall benefits of this deal would massively outweigh any unfortunate short term pain for less competitive industries.
"Free Trade Agreements are a crucial element of the EU's contribution to returning our economies to growth. It must cast off protectionist siren voices and get on with the task."
Japan is the world's third largest national economy, accounting for around 1.9% of the world population and around 9% of world GDP.
With exports in 2010 to Japan of €44 billion, 3.2% of total EU exports, Japan is the EU's sixth largest export market after the USA, Switzerland, China, Russia and Turkey. EU exports to Japan are mainly in the sectors of machinery and transport equipment (31.3%), chemical products (14.1%) and agricultural products (11.0%).
Imports from Japan are mainly in the sectors of machinery and transport equipment (66.7%) and chemical products (7%).
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Business & industry
- European Automobile Manufacturers' Association (ACEA): Statement on EU-Japan trade negotiations (29 Nov. 2012)
- BusinessEurope: EU-Japan FTA negotiations: Focus on the removal of non-tariff barriers (29 Nov. 2012)