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EU-Japan Free Trade Agreement: No Red Tape Reduction for U.S. Companies

By Karen Lynch

Companies outside the trade bloc being formed under the EU-Japan free trade agreement are grappling with a new reality. For their competitors within the bloc, the pact aims to reduce red tape and ease the flow of goods, services, and investment – but not for outsiders.

This reduction in non-tariff barriers is significant for many reasons. For one thing, the EU-Japan free trade agreement, signed in July 2018, covers nearly 30 percent of the global economy.1 For another, non-tariff trade measures – the aforementioned red tape – at times can be more costly and prohibitive than tariffs. “With the exception of a few sensitive products where tariffs remain high, it is non-tariff barriers that are the real impediment to international trade today,” according to the Institute for Government, a U.K. think tank.2

 

What are the provisions of the EU-Japan free trade agreement? And what are their implications for small and midsize enterprises (SMEs), whether in the U.S. or in other countries outside the new trading bloc?

 

Details of the EU-Japan Free Trade Agreement

 

In negotiations since 2013 “to contribute to the harmonious development and expansion of international trade and investment by removing obstacles,” the EU-Japan free trade agreement is wide ranging.3 “The agreement will go a long way in facilitating the access of EU companies to the highly regulated Japanese market,” the European Commission said.4 European leaders compare this agreement with their existing trade pact with South Korea, which helped increase EU exports to that country by 55 percent in the first five years.5

 

Examples of the deal’s benefits include: “the most advanced provisions on movement of people for business purposes … that the EU has negotiated so far,” the Commission said. The agreement also aims to ensure a level playing field between EU courier services and their Japanese competitors. EU companies should be able to participate on an equal footing with Japanese companies in public procurement bids. The agreement should reduce the need for retesting and recertifying cars exported from Europe to Japan. Other provisions would ease the flow of medical devices, textiles, electronics, pharmaceuticals, chemicals, and new financial and payment services. “Reliance on international standards will be helpful for easier and less costly compliance of food products with Japanese labelling rules,” the Commission said.6

 

Digital trade is eased, if not entirely, according to DigitalEurope. The lobbying group welcomed the mutual recognition of data protection as equivalent in each jurisdiction, which addresses the cybersecurity of personal data transferred between trading partners. However, the business group expressed disappointment on remaining cross-border data flow issues surrounding privacy.7 As described by the Financial Times, “The omission in the Japan deal, and one of the most important holes in the EU’s trade strategy, is the absence of a substantive binding reciprocal agreement on the free flow of data. The global move to data localization – requiring that information be held in-country – is a clear and present danger to global integration.”8

 

SMEs are singled out in the deal, with specific efforts being made to inform smaller companies about its myriad details. “Lack of access to information can represent a trade barrier, particularly for smaller firms,” the Commission said.9

 

The EU-Japan Free Trade Agreement comes into force by 2019; meantime, both parties continue to negotiate trade deals with additional partners. For instance, Japan is an active member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (variously known as CPTPP or TPP-11), which is undergoing ratification in its 11 member nations. The EU is also pursuing international trade deals worldwide.

 

Competitive Implications of the EU-Japan Free Trade Agreement

 

The EU-Japan free trade agreement will likely mean tougher competition for U.S. import-export businesses trading with EU countries and Japan. Analysts note that it is difficult to pinpoint or average the cost of non-tariff barriers, compared to the black-and-white numbers involved in tariffs. To describe the magnitude of non-tariff barriers, however, the Institute for Government has provided an example of EU car sales to the U.S. Non-tariff barriers added 26-27% to the cost of selling cars to the U.S. in recent years, the Institute said, compared with a 1.25% tariff.10

 

There’s more to non-tariff barriers than cost, however. “While a tariff might make a product more expensive, it usually does not actually prevent access to the market,” according to World Trade Organization (WTO) Deputy Director-General Alan Wolff. “A product that does not meet a requirement set out in a regulation may not enter at all. Or perhaps worse: a product might actually comply with all the necessary requirements but because the importer lacks a means of demonstrating conformity through certification, testing, etc., the product may nevertheless not gain access.”11

 

European and Japanese companies will benefit from reductions in “the cost of red tape, of unnecessary licensing and form-filling, of blocked markets, of goods sitting in warehouses when they could be on the shelves,” according to European Trade Commissioner Cecilia Malmström.12

 

“This will very quickly reduce U.S. market share and sales,” wrote Matthew Rooney, managing director of the George W. Bush Institute-SMU Economic Growth Initiative.13

 

The question is whether U.S. initiatives to forge better trade conditions with the EU and with Japan will dampen the impact, observers say, and how companies can steel themselves in the midst of uncertainty.14 In July 2018, European Commission President Jean-Claude Juncker and U.S. President Donald J. Trump announced a verbal agreement to improve trade relations. Japan and the U.S. were planning ministerial-level trade talks in August 2018.15

 

Steps to Mitigate Impact

 

The problem for many companies is that they have yielded some flexibility to focus on cost reduction in their supply chains over the last decade, according to Lora Cacere, Founder of Supply Chain Insights. “Today's supply chains lack agility to adapt in the face of market shifts,” she said. Only one in four public companies consider themselves capable of delivering the same cost, quality, and customer service given demand and supply uncertainty.16

 

“While in more stable times firms could prioritize efficiency and effectiveness, the new realities require a greater focus on flexibility,” according to Michael Mayer, Professor of Strategic Management at the University of Bath in the U.K. “Rather than consolidating manufacturing in the interest of economies of scale … firms should consider expanding their supply and manufacturing base internationally, increasing their ability to respond to shifting trade restrictions.”17

 

Other options he suggested include “multi-domestic” strategies, involving the creation of relatively complete supply chains on a regional or national basis – a model from the 1970s and 1980s. Taking such steps, and taking a longer view, could also require a change in mindset. “For example, it may involve a more substantial and longer-term commitment to support workers when manufacturing is shifted elsewhere as well as investments in support of local communities,” Mayer wrote. “It is becoming clearer that a wider sharing of the benefits of international trade is a very real investment in the future stability of international exchange and, therefore, the longer-term success of firms – regardless of the outcomes of high-level political talks.”

 

The

Takeaway:

The EU-Japan free trade agreement delivers many benefits to companies within the new trade bloc – especially by breaking down non-tariff barriers to trade. Companies outside the bloc are watching developments at the political level but are also being advised to develop more agility to respond to them.

Karen Lynch - The Author

The Author

Karen Lynch

Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.

Sources

1. “On the Economics of an EU-Japan Free Trade Agreement,” IFO Institute; https://www.cesifo-group.de/DocDL/ifo_Forschungsberichte_86_2017_Felbermayr_etal_EU-JapanFreeTrade.pdf
2. “Non-tariff Barriers,” Institute for Government; https://www.instituteforgovernment.org.uk/explainers/non-tariff-barriers
3. “Agreement Between the European Union and Japan for an Economic Partnership,” Japan Ministry of Foreign Affairs; https://www.mofa.go.jp/files/000382106.pdf
4. “Key Elements of the EU-Japan Economic Partnership Agreement,” European Commission; http://europa.eu/rapid/press-release_MEMO-18-3326_en.htm
5. “A New EU Trade Agreement with Japan – Factsheet,” European Commission; http://trade.ec.europa.eu/doclib/docs/2017/july/tradoc_155684.pdf
6. “Key Elements of the EU-Japan Economic Partnership Agreement,” European Commission; http://europa.eu/rapid/press-release_MEMO-18-3326_en.htm
7. “DigitalEurope Welcomes the Signature of Ambitious Trade Agreement Between EU and Japan,” DigitalEurope; http://www.digitaleurope.org/DesktopModules/Bring2mind/DMX/Download.aspx?Command=Core_Download&entryID=2718&language=en-US&PortalId=0&TabId=353
8. “A Measured Cheer for the EU-Japan Trade Deal,” Financial Times; https://www.ft.com/content/3c44a364-85fd-11e8-a29d-73e3d454535d
9. “Key Elements of the EU-Japan Economic Partnership Agreement,” European Commission; http://europa.eu/rapid/press-release_MEMO-18-3326_en.htm
10. “Non-Tariff Barriers,” Institute for Government; https://www.instituteforgovernment.org.uk/explainers/non-tariff-barriers
11. “DDG Wolff: International Regulatory Cooperation One Key to Managing Trade Frictions,” World Trade Organization; https://www.wto.org/english/news_e/news18_e/ddgra_19mar18_e.htm#fnt-2
12. “The Benefits of an EU-Japan Free Trade Agreement,” European Commission; http://trade.ec.europa.eu/doclib/docs/2017/july/tradoc_155745.pdf
13. “The EU and japan Just Made a Trade Agreement Without Us,” National Review; https://www.nationalreview.com/2018/07/eu-japan-trade-deal-america-was-wrong-to-sit-on-sidelines/
14. “Uncertainties in International Trade: How Can Firms Respond? CGTN; https://news.cgtn.com/news/3d3d414d3259544d79457a6333566d54/share_p.html
15. “Japan and U.S. to Hold First Minister-level Trade Talks on Aug. 9,” Nikkei Asian Review; https://asia.nikkei.com/Economy/Trade-tensions/Japan-and-US-to-hold-first-minister-level-trade-talks-on-Aug.-9
16. “Global Tariffs: Why Whirlpool’ Earnings Miss Will Be the First of Many,” Forbes; https://www.forbes.com/sites/loracecere/2018/07/26/global-tariffs-be-careful-what-you-ask-for/#744f71248a5e
17. “Uncertainties in International Trade: How Can Firms Respond? CGTN; https://news.cgtn.com/news/3d3d414d3259544d79457a6333566d54/share_p.html

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