Railways derailing EU-Japan talks?

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Railway lines [Gary Neave/flickr]

Since the mid-2000s, the EU has made the opening of public procurement markets one of its key priorities in the World Trade Organization (WTO) and in the bilateral agreements it negotiates with the US and Japan.

In this context, the Japan-EU negotiations are crucial because they raise all the key problems to be faced. First and foremost, they involve firms with very different legal and economic status. Most of the EU railway companies are public and heavily indebted. The three largest Japanese railway companies were totally privatized in the 1990s and are profitable. These three alone have the size equivalent to 60% of the entire EU28 rail passenger market—it took some time in the EU to realize these key differences. The reason for the healthy situation in Japan is that, since the late 19th century, the Japanese railways companies have worked as true urban planners—connecting their tracks and large modern retail centres and department stores—something that the EU railways companies have started to do only a decade or so ago (and only at a very small scale).

Of course, it is impossible to include private firms under public procurement rules in international law. The free trade talks between EU-Japan offer an option that could satisfy both negotiating partners: the drafting of a “railways” chapter with a “public procurement section” covering most of the EU rail companies and the few Japanese firms of similar statute and with a “private section” covering the private Japanese firms and the (possibly increasing number of) EU firms of similar statute. Drafting different but equivalent concessions for the two sections is not to be so difficult because the Japanese rail sector is as large as the whole of EU28, and because a progressive and balanced deal could be designed on a firm to firm basis, covering both private and public railway companies and equipment makers.

Such a simple solution seems currently rejected by a few vested interests—led by the French rail equipment-maker Alstom. These interests are opposing letting Japan to delist Japanese railway companies that are 100% privatized from the list of public companies established under the GATT aegis a long time ago, and the EU is alone in the world to do so. Yet, opposition by vested interests is not a new thing in trade negotiations. But this one is particularly astonishing for four reasons.

First, France has massive offensive interests in getting a Japan-EU agreement concluded. For instance, such a deal is the only insurance policy to protect her agro-food exports in Japan (Japan is France’s 3rd largest export market in the world) against the conclusion of the Trans-Pacific Partnership which includes all the key competitors of French agriculture (Australia, Canada, Chile, the US, New Zealand). Bowing to Alstom means creating huge troubles for the French farmers and agro-food business. Indeed, it is a strange political and economic arithmetic to prefer the 27,000 people of Alstom Transport worldwide to the hundreds of thousands of French farmers and tens of thousands of French jobs in agribusiness in France alone.

Second, French consumers need more competition in the rail equipment. SNCF has been able to buy French because of massive subsidies. The bad state of the French public finance means that such a mechanism is over for a very long time. And SNCF will not be allowed to raise its prices for political reasons. The only option for SNCF—and the host of French commuters using daily local and inter-city trains—is to get better deals when buying its equipment. This situation is not new: it happened with Air France buying Boeing aircraft at the beginning of the air liberalization. And it should not create fears: it has not prevented both Air France and Airbus to prosper since then.

Third, the Japanese rail passengers companies have the same problem than SNCF: getting cheaper equipment thanks to more competition. It happens that the Japanese equipment market is huge. For instance, the three major private Japanese rail companies own 23,000 electric railcars, whereas SNCF owns 3,000. So there are huge opportunities for French rail equipment makers, as recently shown by a contract granted by the largest Japanese rail passenger company (JR East) to the French equipment-maker Thales on one of the busiest Japanese train tracks.

Last but not least, the golden market for the next two or so decades is the Chinese market. For instance, in 2012, there have been 145 billion passenger-kilometers of fast-speed trains in China, compared to 51 in France and 79 in Japan. This market is much too big and grows much too quickly for Alstom alone. Alstom needs to join forces with rail equipment companies which enjoy a great reputation in Asia and which know already well the Chinese markets. Japanese firms are the only ones to master well these two cards.

So, why to make troubles when the pros and cons are so clear? Is it the traditional French trade negotiating tactic that consists in playing the “naughty kid” up to the last minute in order to get a few short-term (often minimal) advantages—at the costs of building long-term resentment among our EU partners and in the rest of the world? Or, is it the inability of the French government to make the French national interest prevail over narrow vested interests?