Towards a Free Trade Agreement with Japan?

The European Commission has asked for a negotiation mandate for an EU-Japan FTA and presented the favourable Commission’s Impact Assessment Report (CIAR, 2012) in July 2012. Here, this proposal and the CIAR are analysed and critically discussed.

Concerning the rationale for a FTA, Japan does fit moderately into the new EU FTA strategy. Japan is a very large and highly developed market, there seems to be the opportunity for a deep and comprehensive FTA and the modest current trade relation appears to promise significant potential for improvement. However, the low growth and the closed nature of the Japanese economy as well as the high relevance of de facto barriers (non-policy related) raise the basic question, how large the export and investment gains for the EU could realistically be.

Japanese Non-Tariff Measures (NTMs) are central to the debate, because the EU will reduce its tariffs, once and for all, in a clearly measurable and enforceable way – in exchange for a potentially significant improvement in Japan’s regulatory framework which, however, is much more difficult to monitor and enforce in the long term. Even though the Japanese governments’ attitude towards regulatory changes seems to have improved significantly over time, there is a general demand for Japanese prior action on effective NTM reductions before FTA negotiations are started – and also some dissatisfaction about the progress already achieved in this respect. Some doubts remain whether reform ownership is sufficiently strong in Japan. The Commission’s strategic approach to deal with this problem – NTM-Roadmap, threat to end negotiations after one year, EU tariff reduction conditioned on Japanese NTM reduction – seems fairly sensible, but still lacks some important underpinning.

The CIAR expects significant gains in output and employment. It is the most optimistic, but also the most up-to-date study – with a more comprehensive data set than other analyses. However, due to optimistic assumptions and the black box character of trade models, results have to be interpreted with some caution. Moreover, there is the general question of whether standard trade models are adequate to cope with the peculiarity that due to the high relevance of non-policy barriers, Japan’s economy is more closed than similar economies.