Business

Cheaper goods in store as Japan-EU free trade pact enters into force amid U.S.-China tariff war

by Noriyuki Suzuki

Kyodo

Japan’s economic partnership agreement with the European Union entered into force Friday, creating a free trade area that covers about a third of the world’s economy.

The pact will eliminate tariffs on most reciprocal trade, encourage business investment and ensure the protection of intellectual property rights, as Japan and the European Union hope to provide a strong counter to creeping protectionism amid a U.S.-China tariff war.

Under the pact, which was signed in July and ratified in December after five years of negotiations, consumers will gain access to cheaper imported food items, while the elimination of duties on industrial products will help curb costs for exporters.

In all, Japan will scrap tariffs on around 94 percent of agricultural and industrial products and the European Union will end duties on around 99 percent of imports.

Prime Minister Shinzo Abe has pinned his hopes on the pact, along with an 11-member trans-Pacific free trade agreement that took effect in December, as a growth driver for the world’s third-largest economy.

Preparing for the immediate removal of a 15 percent tariff once the deal takes effect, Japanese retailers Aeon Co. and Seven & I Holdings Co. have already promised to cut prices on imported wines from the European Union — home to major wine-producing countries like France, Italy and Spain.

The elimination of tariffs promises to be good news for winemakers in the 28-member union. Years of competition with Chile has increased the South American nation’s market share in Japan, with its affordable wines gaining a foothold thanks to a Japan-Chile free trade pact.

The Japanese cheese market is also poised to see an influx of cheaper products from the European Union, a headwind for domestic natural cheesemakers but an opportunity to enhance global competitiveness.

The existing 29.8 percent tariff imposed by Japan on hard cheeses like Gouda and cheddar will be reduced to zero in stages over a 16-year period. For soft cheeses like mozzarella, Japan will set a quota and the tariff will be removed completely over the same time span.

Japanese automakers, which exported over 640,000 vehicles in 2017 to the European Union, are likely to reap benefits from the pact as the current 10 percent import tariff will be reduced to zero over 8 years.

Intellectual property rights protection is another key feature of the agreement.

Japan and the European Union will each protect product names associated with their origin, called “geographical indications,” such as Kobe beef and Japanese sake.

According to a Japanese government estimate, the trade initiative will give a roughly ¥5 trillion ($45.7 billion) boost to the economy and lift Japan’s real gross domestic product by nearly 1 percent. When combined with the revised Trans-Pacific Partnership agreement, the economic impact is estimated at around ¥13 trillion.

Still, Japanese farmers are worried that they will be threatened by inflows of cheaper products, even though some key agricultural products, such as rice, will be protected.

Japan and the European Union — together accounting for about 30 percent of the world’s GDP — are separately planning to start negotiations with the United States as President Donald Trump pushes for bilateral deals to fix what he considers imbalanced trade relationships.

While Japan scrambled to salvage the original TPP following an abrupt departure by the United States in 2017, it also stepped up negotiations with the European Union to conclude their own free trade agreement.

The entry into force of the trade deal is a major achievement for Japan and the European Union as they strive to promote free trade, but the U.K.’s planned exit from the bloc is casting a shadow of uncertainty over the future, trade experts say.

The U.K., where many Japanese companies operate, is seen as willing to take part in the revised TPP, formally called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

The current members have said the CPTPP is open to all economies that can meet its high standards, while setting procedures for more countries to join.