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Editorial: Japan-EU pact can light the way to far broader free trade

  • July 13, 2017
  • , Nikkei Asian Review , 10:00 a.m.
  • English Press
  • ,

The free trade agreement Japan and the European Union recently outlined will have great significance in a world where protectionism is on the rise.

Japanese Prime Minister Shinzo Abe and the EU’s top executives announced the agreement in principle in Brussels on July 6. The pact, once it takes effect, will link economies accounting for about 30% of the world’s gross domestic product, making it one of the largest free trade zones. This, in turn, could help push other proposed trade deals to the finish line.

 

The U.K.’s vote to leave the EU, Donald Trump’s election and his subsequent decision to withdraw the U.S. from the Trans-Pacific Partnership all reflect growing popular sentiment against economic globalization — specifically the inflows of foreign goods and workers that come with it. But now, a little more than four years after they embarked on negotiations, Japan and the EU are countering protectionism not only with words but also actions. This is laudable.

 

The two have set a comparably high bar to the TPP. The Japan-EU pact will remove tariffs on more than 95% of traded items. Tokyo will establish a low-tariff import quota for European cheese, and the tax rates will be lowered gradually. Tariffs on pork will also be cut over time, while levies on European wine will be eliminated immediately.

 

The EU, for its part, will phase out tariffs on imported Japanese cars over seven years, once the deal takes effect. The bloc will also remove tariffs on Japanese green tea and sake. On the whole, it is fair to say the partners have found balanced solutions for dealing with tariffs.

 

They are also looking beyond tariffs, just as the TPP members did. Japan and the EU intend to set rules on everything from services and intellectual property to e-commerce and corporate governance. As a result, their pact is poised to become a model for comprehensive, transparent trade agreements in the decades to come.

 

One European study said the deal would boost the EU’s GDP by up to 0.8%, and Japan’s by up to 0.3%, over the long term. Ideally, the two sides would quickly finalize the terms, so that they can move ahead with ratification and implementation.

 

Starting point

 

Now is the time for Japan and the EU to widen the scope of global free trade, using their partnership as a starting point.

 

Japan is well-positioned to press the remaining 11 TPP signatories to conclude an alternative deal without the U.S. Tokyo should work to build unity and enthusiasm among the group, laying the groundwork for a summit on a final agreement, possibly in November.

 

Meanwhile, negotiations on another proposed multilateral pact — the Regional Comprehensive Economic Partnership — are making little headway in Asia. This would bring together the 10 members of the Association of Southeast Asian Nations plus Japan, China, South Korea, India, Australia and New Zealand, but both Beijing and New Delhi remain cautious about trade liberalization.

 

On this front, too, Japan should continue helping less-developed Southeast Asian economies to move forward, while making the case for setting high standards and rules.

 

There is still the question of how to respond to President Trump’s trade strategy.

 

If Washington calls for a U.S.-Japan free trade agreement, Tokyo should coolly cite the terms of the planned EU deal and the TPP. Japan would have some leverage: After all, if Japanese tariff cuts boost agricultural exports from Europe and Australia, American farmers would be at a disadvantage.

 

Tokyo should tell Washington that it cannot top the concessions it has already made for Europe and the TPP. Japanese negotiators should urge the U.S. to either accept a bilateral deal with similar terms to the TPP, or rejoin the TPP itself.

 

The EU, for its part, is eyeing a renegotiation of its free trade accord with Mexico, as well as talks with members of the Mercosur South American free trade zone, which includes Brazil and Argentina. And sooner or later, there is likely to be a push to revive talks on the stalled EU-U.S. Transatlantic Trade and Investment Partnership.

 

One concern is that the Trump administration is considering curbs on steel imports, arguing that dependence on foreign steel threatens national security. Higher tariffs — as allowed under Section 232 of the U.S. Trade Expansion Act — would deal a serious blow to steelmakers in Asia, Europe and Canada.

 

If steel exporters respond by filing complaints with the World Trade Organization, they would risk sparking a tit-for-tat cycle of retaliation. Moreover, if emerging economies were to follow the U.S. example and abruptly restrict imports, it would shake the world trade system and possibly trigger a bout of global stagnation.

Japan and Europe should take a firm stand against protectionism, and their broad agreement on an economic partnership is an important first move. Now, their task is to steadily widen the world’s free trade areas.

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