The European Union and Japan have formally agreed an outline free trade deal. This comes as something of a surprise at a time when protectionism led by US President Donald Trump seems to be in the air.
Japan was a central player in the failed Trans-Pacific Partnership, the 12 nation trade agreement, scuppered by Mr Trump’s America First policy, back in January. The timing of the announcement may be significant; it was made just 24 hours before the meeting of G20 nations in Hamburg, naturally attended by President Trump.
The outline plan was signed in Brussels after a meeting between the Japanese Prime Minister, Shinzo Abe, and European Commission president Jean-Claude Juncker. Donald Tusk commented that the agreement showed the EU’s commitment to world trade, and confirmed that the EU is becoming even more engaged globally. The European Commission European Council President added that the deal sends a signal to the rest of the world that two of its largest economies “are resisting protectionism”.
But there may be much more to the agreement than a desire to make a point to those assembled for the G20, and the President of the United States in particular.
What has been agreed?
The agreement itself is little more than a statement of intention, with all the details still to be hammered out.
So while the “agreement in principle”, paves the way for trading without tariff barriers between two of the world’s most important economic regions, few actual details were included in the announcement itself. International economic negotiations tend to be protracted, and refining the details of a full, workable agreement may take some time.
The commission, has agreed to open the 28 states of EU market, and more than 510 million potential customers to the world-leading Japanese car industry.
In return, Tokyo is scrapping barriers to all EU agricultural exports, such as diary produce.
How significant is the agreement?
The EU and Japanese economies combined account for more than a quarter of global output, making the trade deal one of the largest ever attempted. Japan is already the EU’s second largest Asian trading partner after China and the fourth richest economy in the world.
Japan’s thirst for milk and milk-based products is growing steadily, while the EU’s dairy farmers are struggling with falling demand and an ultra-competitive buying climate. They could potentially benefit hugely from access to the Japanese market.
With the Japanese economy static and the EU in a state of flux thanks to Brexit, this could be a powerful economic stimulus for both partners in the agreement.
However, the importance could be more than simply economic.
The impact on Brexit
Mr Tusk was at pains to point out that the deal countered the argument in favour of Brexit that the EU was unable to promote free trade: “Although some are saying that the time of isolationism and disintegration is coming again, we are demonstrating that this is not the case.”
He also took a swipe at British Eurosceptics who claimed that the UK would find it much easier to arrange international trade deals once it left the EU.
“In the context of the discussion about Brexit, we have heard statements claiming it isn’t worth being in the European Union, as it is easier to do global trade outside of the EU,” he said. “Today we have shown that is not true.”
He also tweeted ‘Global Europe’ in a clear dig at Theresa May’s intention to create a “Global Britain”, a nimble free trading nation able to strike deals free of the EU’s cumbersome bureaucracy.
The EU-Japan deal contradicts the Brexit argument that the best way to reach new markets is to break with the bloc. It could influence the Japanese car industry’s politically sensitive investment decisions, which currently favour the UK. Nissan, Toyota and Honda all have manufacturing operations in the UK, and under the deal might find they are best served moving to the continent.
As an EU member, the UK could benefit from the deal with Japan. But it could lose out after Brexit if it fails to make a similar deal.
The Brexit uncertainties seem to have become even more challenging.
What should you do?
If your own financial arrangements are due for a review in the light of Brexit, it makes sense to get some professional support. Please contact the specialist team at Continuum.