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It’s not the clash of civilizations, but it’s no doubt the clash of opposing philosophies when it comes to trade. The European Union and Japan sign a free trade agreement on 5 July 2018. The core of the agreement aims to increase the flow of Japanese cars to Europe and of European food to Japan. The Europeans are expected to scrap a 10 percent tariff on passenger cars made in Japan, over a period of seven years. Duties would come down more rapidly for some car components. EU firms already export over 58 billion Euro in goods and 28 billion Euro in services to Japan every year.
The agreement that would lower barriers on virtually all the goods traded between them, is a pointed challenge to President Donald trump. As Japan and the European Union sign a free trade agreement, the United States was busy holding a hearing on the possibility of imposing tariffs on European and Japanese car imports.
Though the agreement still needs further negotiation and approval before it can take effect, it represents an act of geopolitical theatre. At this year meeting of G-20 in Hamburg, Germany in March, Steven Mnuchin, the United States Treasury Secretary of the United States pointedly declined to endorse a statement in favour of 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”, Donald Tusk, the President of the European Council, said at a news conference in Brussels. Prime Minister Shinzo Abe of Japan on his part said the deal signified the creation of “the world’s largest free, advanced, industrialised economic zone.”
Angela Burton of the Atlantic Council stated that at stake, though, is more than just what taxes may or may not be levied. A successful conclusion to the trade pact between the European Union and Japan could also herald possibilities for deepening relations more broadly between the two sides that could decrease the United states’ influence on the global stage.
It is true that the Japan-European Union 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% 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. Angela Burton argues that 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 healthcare.
For Japan, the timing of the Free Trade Agreement couldn’t be better as the deal will take place in early 2019, which is when Britain is expected to leave the European Union. 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 UK.
Japanese Prime Minister Shinzo Abe had lobbied hard to persuade the British leadership to remain in the European Union, cautioning that Brexit would also lead to an exodus of the 1,100 Japanese companies based in the UK to shift their operations to the continent. By signing the Free Trade Agreement with the European Union, Japan’s future in Europe will no longer be as dependent on how Britain grapples with its internal turmoil over Brexit.
Kim Bizzarri, a researcher at Center for Research on Multinational Corporations and Transnational Institutions stated that still, the biggest achievement of the Japan-European Union Free Trade Agreement is that it goes in the exact opposite direction that the United States is heading. Having pulled the United States out of the Trans-Pacific Partnership agreement within the first week of taking office in 2017, the administration of President Trump has pursued a unilateral approach to trade.
According to Kim Bizzarri, 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 USD 200 billion of Chinese imports. Kim Bizzarri further noted that 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 USD 430 billion, according to the IMF.
At the same time, the administration of President Trump 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.
Financial Times reported that late in July, the United States Department of Commerce will hold a hearing on the implications of imposing a 25% tariff in the name of national security against autos and auto parts from the European Union, Japan, Mexico, Canada, Taiwan, Turkey, Malaysia, and South Africa. Foreign industry groups have argued that such tariffs would ultimately hurt United States consumers and workers, since it would raise prices and cost jobs across the United States.
Jamie Gorman, Senior Fellow at Center for Economic Policy Research stated that, by moving forward with the bilateral trade deal, Japan and the European Union are making clear that the global appetite for trade deals outside of the United States remains strong. Japan remains staunchly committed to ensuring that the Trans-Pacific Partnership (TPP) moves forward even without the United States, while it also continues to press ahead with the Regional Comprehensive Economic Partnership agreement in Asia which also includes China.
The European Union, 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 United States tariffs, United States is in danger of isolating itself from the global trend of encouraging free trade, and not closing itself to it.