AUTOMOBILES FOR CHEESE

The European Union signed an agreement on the establishment of the largest free trade zone in its history (FTZ), which will account for almost a third of the world's GDP and 40% of world trade. This is the Economic Partnership Agreement (EPA) with Japan, which is the third (after the US and China) economy of the world.

The document, signed on July 17, provides for a gradual reduction to zero or immediate cancellation of customs duties on a wide range of goods and services - from agricultural products, pharmaceuticals to light and heavy engineering. European companies annually export more than 58 billion euros of goods and 28 billion euros of services to Japan. Japan exports approximately the same amount of goods and services to the EU. Experts estimate that the agreement will allow both companies not only to save more than 1 billion annually due to the absence of customs duties, but also to increase mutual exports by 30-35%.

Revolutionary step

Sometimes the EPA is jokingly called a “car for cheese deal”. For the EU, the main goal was to reduce customs tariffs for meat, wine and dairy products; Tokyo also managed to lift barriers on the supply of its cars and spare parts to Europe. At present, Japanese has high duties on food: from 15% for wine to 30-40% for cheese. In turn, the customs duty in the EU on imported cars is 10% (in the US, for example, it is 2.5%). And now, it will be gradually decreased for Japan until it is completely abolished in the next ten years.

Japan expressed a wish that the UK after Brexit should also be a party to the agreement with the EU. However, no one knows how to implement this yet. The EPA applies to territories, which are part of the EU Treaty. EU member states are not independent parties to this agreement between the EU and Japan, and they do not sign it themselves. How this agreement will be applied in the UK after Brexit remains unclear. It would be possible to include in it special clauses, but this has not been done yet. Britain should not count on signing a separate agreement on free trade with Japan under the same conditions, since the market of this country is incommensurably smaller than the European Union and, therefore, less attractive.

The EPA has already been recognized as a revolutionary step in the history of bilateral agreements, because there are no restrictions on concluding conventional agreements on several specific products or tariffs. It not only includes provisions on workers' rights and environmental impact, but also affects broader geopolitical issues, such as investment courts and climate change.

It is expected that the agreement will enter into force in the spring of 2019, as it will not need ratification in almost 40 national and regional parliaments of the European Union. To avoid this, Japan and the European Commission have sought to exclude from the EPA provisions with a “mixed” competence that require the approval not only of the EU, but of national and regional parliaments. In particular, the negotiators did not include in the EPA a mechanism for settling investment disputes and investment protection standards. The parties agreed to resolve these issues separately at a later date. As a result, the process of ratification in the EU will include only the approval of the European Council (which includes the leaders of the EU member states) and the European Parliament.

Therefore, the EPA is different from the EU free trade agreement with Canada (CETA). Negotiations were completed in 2014, the document was signed on October 30, 2016, but only partially came into force, as not all countries have yet ratified it.

A changing world

A free trade agreement is useful to both parties not only from the economic, but also from the political point of view. The EU once again positions itself as a strong interstate alliance advocating free trade and progressive globalization, and Japan demonstrates that it is becoming an increasingly important player in world trade.

The agreement between Japan and the EU also points to the change in global trade and political ties. Donald Trump’s sharp statements against the closest allies of the United States (the EU, Great Britain, Japan and Canada), actions aimed at weakening the UN and WTO, withdrawal from the Trans-Pacific Partnership (TTP), refusal to sign the Paris agreement on climate and so on worry many about the stability of the post-war global order. Toughened American customs policy in relation to a wide range of imported goods is perceived only as the beginning of a trade war.

Negotiations on the EPA began in 2013 and have significantly accelerated after the election of Donald Trump. Concerns about the turbulent situation in the world are indicated in the joint statement signed in Tokyo by the President of the European Commission Jean-Claude Juncker, President of the European Council Donald Tusk and the Japanese Prime Minister Shinzo Abe: “By signing this agreement, the EU and Japan send a clear signal to the world that we are committed to keeping the world economy working on the basis of free, open and fair markets with clear and transparent rules fully respecting and enhancing our values, fighting the temptation of protectionism.”

According to the director of the Hamburg Institute of World Economy (HWWI) Professor Henning Föpel, we can see “a new world economic order” emerging before our eyes. The United States, once the initiators of almost all global projects, is locked in on itself, losing not only initiative and influence, but also friends and supporters.

This explains Japan's decisive actions to reform the TTP already without the US (signed by 11 countries in February this year), the activity in the preparation of a free trade agreement (APEC) between 10 ASEAN members, as well as Australia, India, China, New Zealand, the Republic of Korea and Japan (the signing is expected this year).

A day before meeting in Tokyo, the EU leaders met with the President of China, Xi Jinping, in Beijing to sign several memorandums of understanding concerning cooperation in the areas of trade, investment and regulation. In spring 2018, the EU reached another deal with Mexico by signing a new free trade agreement. The European Commission reported that virtually all trade operations with Mexico would be duty-free. EU also started talks on the same issues with the South American trade bloc Mercosur, which includes Argentina, Brazil, Paraguay, and Uruguay.

The African continent, which is not far from the world's political and economic centres, also signed an agreement on the creation of the Free Trade Area (CFTA) in March, which could become the largest in the world if all 55 countries join it (only 44 countries signed the document yet).

The U.S. is out

Not only may the accelerated establishment of free trade zones leave the U.S. behind, but they complicate the task of achieving bilateral trade deals for the White House administration in the future. After all, the number of countries joining any of the free trade zones is growing each day. And each of such countries is obliged to comply with the rules common to all parties of the agreement. Thus, even in a possible bilateral trade deal with the United States, all parties should share the obligations equally. In other words, it is very likely that the U.S. will not be the only state dictating the conditions of the deal. Perhaps, President Trump does not consider this factor.

Bilateral agreements do not make life easy for the United States either. For example, according to the EPA concluded between the EU and Japan, the gradual and mutual reduction of tariffs within this free trade zone will make American products less competitive both in the EU and in Japan.

American automakers, which currently have to deal with 10% tariffs on their exports to the EU, will become even less competitive in the European and Japanese markets. But that is not all. European safety standards for cars are much stricter than in Japan and the United States. The EPA stipulates the adoption of European standards, which means that the U.S. automobile industry will have to spend a lot more to compete with, say, BMW and Audi in the Japanese market.

No doubt that the EU and Japan will monitor the compliance with trademark rights of their producers. This means that Japan will close the doors for American products bearing names borrowed from Europe (parmesan and feta cheese, Californian wines sold as “champagne”, “burgundy”, etc.).

Given that free trade zone agreements already exist or will be concluded soon almost on all continents with the U.S. left behind, we can assume the future awaiting the country, whose president claims that “trade wars are easy to win” and “America first of all”.

In fact, what we see is a real global battle between two views on the world of the future - protectionism or free trade. The strongest will win, as always. This is the reason behind the interest in free trade deal. It is easier to win together.