The EU/Japan Trade Agreement Sends Strong Signal to World's Protectionists
Both Japan and the EU have been rocked by the growth of protectionism and nationalism among their trade and investment partners: The EU by Brexit and stalled trade talks with the United States; Japan by the U.S. decision to walk away from the Trans Pacific Partnership. But the EU-Japan free trade deal set to be announced Thursday sends a strong signal that the global liberal trade order is very much alive – and kicking back.
More than ever, American business leaders and investors are sure to regret President Trump’s decision to walk away from the Trans-Pacific Partnership and turn his back on free trade. The advantages of global trade are as strong as ever: Economies of scale allow firms to spread production costs over a wider and larger market.
Comparative advantage encourages national economies to specialize in those industries in which they are most efficient. Wider trade networks facilitate technological spillover. The opportunity to import enhances competition and reduces the potential for monopoly power by domestic firms. But despite these inherent strengths, free trade has been under assault recently, even in traditionally liberal countries like the United States, by a short-sighted lunge to protectionism and mercantilism. During a high-level meeting in Baden-Baden in March, for example, Treasury Secretary Steven Mnuchin broke with the long-time U.S posture by refusing to join in a statement in favor of free trade.
The EU-Japan Free Trade Agreement, set to be announced on the eve of the G20 talks in Hamburg, represents a major turn against the nationalist trend. The agreement is a mammoth one, opening up trade between two jurisdictions that account for a combined one-third of global GDP – rivalling the size of NAFTA and threatening to isolate the United States in important industries like automobiles.
The road to an EU-Japan Free Trade Agreement has not been quick or easy, and seemed to run out of steam late last year. At times, the two jurisdictions seemed to hit roadblocks, over autos, cheese and other agricultural products, and investment protection. But an EU statement on Wednesday said the two sides had reached a political agreement on a deal. Of course, as trade negotiators often point out, the devil is in the details, and many will have to be worked out within the broad outlines of the pact. However, word from negotiators in the days before the deal was concluded indicated it would lead to significantly more open markets, including elimination of the 10 percent duty that the EU imposes on Japanese car imports, while removing obstacles that European automakers face in Japan.
One of the most important benefits will be the political momentum the agreement generates for trade in both countries. In fact, recent setbacks for both jurisdictions actually served as a spur to negotiations. Post-Brexit, EU leaders were under pressure to demonstrate that membership still has benefits. Their Japanese counterparts felt a strong need to demonstrate the effectiveness of economic reform after the collapse of the TPP.
The agreement also gives new impetus to the goal of free trade beyond the borders of the two countries. We could see the revival of the TPP, with or without U.S. participation, and South Korea’s trade negotiations with China may result in a deal that undermines efforts by the Trump Administration to pressure Seoul.
Perhaps the most important aspect of the bilateral deal is its global political impact. It raises questions about the Trump Administration’s protectionist posture at the G20, where Trump is likely to argue for the need to protect markets, especially in steel. The EU-Japan agreement demonstrates that rules-based, transparent trade deals in which both sides win are quite feasible, compared to the current win-lose view among some top U.S. policy makers. By demonstrating the willingness and ability of Tokyo and the EU to reach out to other countries and blocs to achieve agreements, the deal could put renewed pressure on Washington to come back to the TPP and EU negotiating tables – or the world’s largest national economy could find itself left out in the cold.
The stage is now set for debate within the United States on whether to try to chart a mercantilist course when other leading economies are moving in the direction of liberalized trade arrangements.
