Commentary / Japan

When a trade agreement represents a global vision

by Shihoko Goto

The Globalist

It’s not the clash of civilizations, but it’s no doubt the clash of opposing philosophies when it comes to trade. As Japan and the European Union signed a free trade agreement last week, the United States held a hearing on the possibility of imposing tariffs on European and Japanese car imports.

At stake, though, is more than just what taxes may or may not be levied. A successful conclusion to the trade pact between Brussels and Tokyo could also herald possibilities for deepening relations more broadly between the two sides that could decrease Washington’s influence on the global stage.

The Japan-EU Free Trade Agreement is certainly an ambitious one. Together, the two sides will account for nearly one-third of global GDP and the deal will eventually lift all tariffs across the board, which will allow European agricultural goods to penetrate the world’s third-largest economy, and Japanese autos to be free of 10 percent tariffs.

In addition, there will be a lifting of non-tariff barriers, which will allow the two sides to cooperate on aligning standards and regulations. Because of the deal, Japanese companies will be able to invest more readily in European companies, while European companies will be able to bid more easily for Japanese projects including the public sector and hitherto closed industries such as health care.

For Japan, the timing of the FTA couldn’t be better as the deal will take place in early 2019, which is when Britain is expected to leave the EU. Since the late 1980s, Britain has been the gateway to the European continent for the majority of Japanese companies, with Japan being the fourth-largest source of foreign direct investment in the United Kingdom.

Prime Minister Shinzo Abe had lobbied hard to persuade the British leadership to remain in the EU, cautioning that Brexit would also lead to an exodus of the 1,100 Japanese companies based in the U.K. to shift their operations to the continent.

By signing the FTA with the EU, Japan’s future in Europe will no longer be as dependent on how Britain grapples with its internal turmoil over Brexit.

Still, the biggest achievement of the Japan-EU FTA is that it goes in the exact opposite direction that the U.S. is heading. Having pulled the U.S. out of the Trans-Pacific Partnership agreement within the first week of taking office in 2017, the Trump administration has pursued a unilateral approach to trade. Its single biggest objective is to reduce its trade deficit, which is currently around $500 billion. Its biggest deficit is with China, and the White House has been aggressively imposing tariffs against $200 billion of Chinese imports.

With Beijing expected to retaliate in kind, an impending trade war between the biggest and second-biggest economies in the world could potentially cost global GDP to lose about $430 billion, according to the IMF.

At the same time, the Trump administration is seeking to impose tariffs against its long-standing political allies. It has already done so by imposing tariffs on steel and aluminum imported from key partner nations including Japan through enacting Section 232 of the Trade Expansion Act of 1962 which allows the president to adjust import levels in order to protect the nation.

Last Thursday, the U.S. Department of Commerce held a hearing on the implications of imposing a 25 percent tariff in the name of national security against autos and auto parts from the EU, Japan, Mexico, Canada, Taiwan, Turkey, Malaysia and South Africa.

Foreign industry groups have argued that such tariffs would ultimately hurt U.S. consumers and workers, since it would raise prices and cost jobs across the U.S.

By moving forward with the bilateral trade deal, Japan and the EU are making clear that the global appetite for trade deals outside of the U.S. remains strong.

Japan remains staunchly committed to ensuring that the TPP moves forward even without the U.S., while it also continues to press ahead with the Regional Comprehensive Economic Partnership agreement in Asia which also includes China.

The EU, meanwhile, is still in the midst of negotiating deals with Australia, Chile, Canada and Mexico.

As the possibility of a trade war heats up as countries look to retaliate against U.S. tariffs, Washington is in danger of isolating itself from the global trend of encouraging free trade, and not closing itself to it.

Shihoko Goto, a senior associate for Northeast Asia at the Wilson Center’s Asia Program in Washington, is an expert on economics and politics in Japan, Taiwan and South Korea. www.theglobalist.com