EU-Japan deal for an open trade zone is in stark contrast to the tariffs Washington is slapping on trading partners
Japan now holds a good card before it sits down with the United States for trade talks later this month.
On July 17, Japan and the European Union signed a wide-ranging trade deal that will eliminate nearly all tariffs. The economic partnership agreement, or EPA, that Japan signed with the EU is in stark contrast to the new duties the US has imposed and will slap on its trading partners.
Japanese Prime Minister Shinzo Abe hailed his country and the EU for taking the lead in the world as “flag bearers” for free trade.
The EU-Japan EPA will create a free trade zone that includes 29 countries with a total population of about 600 million, and accounts for roughly 30 percent of the world’s GDP and 40 percent of global trade.
The EU and Japan, as European Council President Donald Tusk said in Tokyo, sent a clear message on a united front against protectionism.
In a show of closer ties, the EU and Japan also signed a strategic partnership agreement, a framework that aims to strengthen the two sides’ cooperation on a broad range of bilateral and multilateral issues, including security, cybercrime and climate change.
The EU and Japan became the targets of recent US import tariffs of 25 percent on steel and 10 percent on aluminum products. Still, their carmakers have reasons to worry because the US Commerce Department has launched a national security investigation to check if imports of cars and parts threaten national security. The US may heap hefty tariffs on cars and parts from foreign countries.
During his recent visit to Europe, US President Donald Trump rattled European leaders by labeling the EU one of the greatest “foes” of the US in trade. To address the US trade deficit with Japan, Washington has pressured Tokyo to have bilateral trade talks to extract concessions advantageous to the US.
Japan needs the massive trade deal with the EU as a shot in the arm for its economy and as a tool to counter the US’ protectionism.
In the latest World Economic Outlook report released by the International Monetary Fund (IMF) on July 16, the forecast for Japan’s economic growth this year was lowered to 1 percent — a 0.2 percentage point downgrade — following weak private consumption and investment in the first quarter. Japan will record the slowest growth rate among advanced nations.
The Japanese economy shrank 0.6 percent on an annualized basis in January-March, marking an end to eight consecutive quarters of growth. Private consumption, which accounts for more than half of the country’s GDP, fell 0.1 percent in the first quarter of this year from the previous quarter.
Depopulation in Japan has led to a decrease in manpower and consumers. Domestic consumption constitutes 60 percent of the country’s GDP.
Japan’s population is declining due to decades of one of the world’s lowest birthrates and a rapidly aging society.
A severe labor shortage has forced the Japanese government to adopt an economic plan that would allow entry of more foreign workers with certain levels of expertise and skills. Under the plan, Japan would relax visa requirements in sectors that face severe labor shortages, such as nursing care, agriculture, construction and transport.
Japan has been actively pushing for bilateral and multilateral free trade agreements to shore up its own alliances in Europe and the Pacific Rim, and find cheap products and large markets.
After Mexico, Japan became the second country to ratify the revised Trans-Pacific Partnership trade deal, the TPP-11, on July 6. The TPP-11 agreement will come into effect 60 days after it is ratified by six member countries.
After Trump pulled the US out of the original deal, the remaining 11 nations — Australia, Brunei, Canada, Chile, Japan, Mexico, New Zealand, Singapore, Malaysia, Peru and Vietnam — renegotiated and sealed the trade agreement. The TPP-11 covers a population of 490 million, or about 6.8 percent of the world’s population, 15 percent of world trade and 13.4 percent of the global economy.
Japan and 15 other East and Southeast Asian countries have confirmed that they will seek broad agreement on the Regional Comprehensive Economic Partnership (RCEP) by the end of the year. The RCEP countries — all the members of the Association of Southeast Asian Nations, as well as Australia, China, India, Japan, New Zealand and South Korea — account for about half of the global population as well as 30 percent of the world’s economy and trade.
The bilateral and multilateral trade deals such as the Japan-EU EPA and the TPP-11 will push domestic reforms in Japan and create investment opportunities overseas for Japanese companies. It may also increase Tokyo’s bargaining power in other trade negotiations.
The escalating trade frictions set off by Trump’s protectionist policies are taking a toll on Japanese business sentiment, which turned negative for the first time in a year.
The current threats made by the US and its trading partners risk lowering global growth by as much as 0.5 percent by 2020, or about US$430 billion in lost GDP worldwide.
Greater use of protectionist measures, the IMF put it, could hinder business investment, disrupt global supply chains, slow the spread of productivity boosting technologies and raise the price of consumer goods. Although all economies would suffer from further escalation of trade disputes, the US would find itself “as the focus of global retaliation” with a relatively higher share of its exports taxed in global markets.
After signing the EPA with Japan, European Commission President Jean-Claude Juncker tweeted that it makes a statement about the future of free and fair trade. “The agreement puts fairness and values at its core. There is no protection in protectionism — and there is no unity where there is unilateralism,” he said.
The US is isolating itself from the rest of the world. Trump’s protectionism will make the US vulnerable rather than great.
The author is China Daily’s bureau chief in Tokyo.