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The Economics of Origami

By Lena Muxfeldt, Matthias Götz

16 December 2015

 In recent decades, it has become a mantra that the EU-Japan relations are full of significant untapped potential. Now, with the negotiations for a free trade agreement (FTA; officially: Economic Partnership Agreement) underway, there is momentum to believe that this untapped trade potential will finally be unfolded like a delicate origami. However, we argue that the FTA under negotiation is unlikely going to be a “game-changer” for EU-Japan economic relations, but only a first step to increase bilateral trade. More specifically, we put forward that while an FTA can strengthen existing trade flows, it can neither address nor – in the short- to medium-term- overcome many of the underlying challenges of deeper EU-Japan economic relations. Addressing these underlying challenges would, however, be necessary to truly unfold still untapped potential of the bilateral economic relations between the EU and Japan.  

Since 25 March 2013, the EU and Japan are negotiating an “ambitious and mutually beneficial” FTA with the aim to liberalise trade in goods, services and investments as well as to eliminate tariff and non-tariff barriers. Currently, the EU ranks as Japan’s third largest trading partner after the United States (US) and China. Meanwhile, Japan is the seventh biggest trading partner of the EU. Impact assessments forecast that an ambitious FTA could increase EU exports to Japan by 32.7% and Japanese exports to the EU by 23.5% (European Commission, 2012: 38). The negotiations over an FTA with Japan fall into a broader ambition of the EU to strengthen its trade relations with countries in the Asia-Pacific region. This ambition is further pushed by the recent conclusion of the Trans-Pacific Partnership (TPP), a mega-regional trade agreement including the US and Japan. To strengthen its trade relations with the region, the EU has already concluded FTA’s with the Republic of Korea, Singapore and Vietnam and is negotiating a Bilateral Investment Treaty with China. Besides, the new trade strategy “Trade for all” presented by the European Commission in October 2015 proposes the launch of FTA negotiations with New Zealand and Australia and showcases ambition to open or reopen negotiations with selected countries of the Association of Southeast Asian Nations (ASEAN).   

The negotiating priorities of both the EU and Japan for a bilateral FTA imply in which sectors the EU and Japan hope to strengthen trade flows the most. The EU puts special emphasis on removing Japanese non-tariff barriers, especially in the automotive sector (tax subsidies of small kei-cars), and opening up the Japanese public procurement market, especially for railway industries. Japan particularly focuses on tariff liberalisation on manufacturing export goods, including automotive, machinery and electronics (for a more comprehensive review see Kleimann, 2015). A concluded trade deal is thus likely to improve notably the market position of producers from these industries in the other respective market and increase competition. Depending on the degree and extent to which both the EU and Japan commit themselves to reducing non-tariff barriers, this increase in competition will be more or less strong and symmetric. With the exception of railway industries- and to a limited extent- EU automotive producers, these industries, however, already trade between the EU and the Japan. The benefits of better market access as a consequence of a concluded FTA are – especially in the short-term- thus likely to concentrate on firms (many of them multinational firms) which are often already active in EU-Japan trade today. Small- and medium-sized enterprises (SMEs) may to some extent benefit from improved market access for large firms as suppliers

An FTA does and can, however, not address trade barriers which are not immediately related to trade policy. To truly unfold untapped potential, an FTA would also have to improve market opportunities for firms which are not yet involved in bilateral trade between the EU and Japan.

An FTA per se can thus neither address differences in business culture nor resolve a lack of international connectivity. Studies demonstrate that these trade barriers are a relatively strong impediment for trade relations between EU and Japanese firms. A study conducted by the EU-Japan Centre for Industrial Cooperation thus indicates that European SMEs often struggle with the unique Japanese business culture (EU-Japan Centre for Industrial Cooperation, 2012). Different cultural customs such as prolonged business negotiations caused by consensus decision-making rules and detail-orientation may lead to misunderstandings and loss of interest among European businesses. Moreover, bilateral trade relations are impeded by language barriers. In contrast to Hong Kong or Singapore, Japan does not have a pool of English language speakers from which companies could easily source. Limited levels of English language skills make it especially difficult for Japanese SMEs to do business with European counterparts. Business communities on both sides hope, however, that the Tokyo 2020 Olympic Games may create a momentum to overcome cultural challenges and language barriers and give rise to an open-for-business environment and an atmosphere of internationality.

Besides, to unfold untapped potential, an FTA would have to create new investment flows between both regions. We consider it as unlikely, however, that an FTA between the EU and Japan will strongly shift investment patterns of either EU or Japanese firms. Given the low growth performance of the Japanese economy during the last decades, EU firms are unlikely to redirect their investments towards Japan even once an FTA is concluded. Likewise, Japanese firms are unlikely to shift their investment towards the EU as growth and return-on-investment prospects in the Union are for now hardly more promising. Besides, taking advantage of geographical proximity and auspicious growth opportunities, Japanese companies have strongly invested into Southeast Asian countries and built up regional supply chains, most of these with a long-term focus. According to the Japan External Trade Organisation’s (JETRO) 2015 Global Trade and Investment Report, Japanese outward Foreign Direct Investment (FDI) has exceeded $100 billion for four consecutive years. Furthermore, the report indicates that Japanese outward FDI in ASEAN was worth $20.4 billion, which is nearly three times as much as the amount invested in China $6.8 billion. An FTA between the EU and Japan is unlikely to shift the growing regional integration of Japanese firms in the Asia-Pacific region towards Europe. On the contrary, with the recent conclusion of TPP, these regional supply chains, in particular with Vietnam and Malaysia, are very likely to become even stronger.

To conclude, we do not deny that an FTA between the EU and Japan will create both additional market opportunities and growth prospects for firms from either side. Indeed, now that Japan has concluded negotiations over TPP, the negotiations of the EU and Japan may well resolve some long-standing trade issues between both sides. Yet, we argue that to truly unfold the economic potential of the bilateral trade relations, an FTA would also have to enable the participation of currently non-trading firms and create new investment flows. We believe that for now, neither is particularly likely. If both policy-makers and businesses understand an FTA as a starting point rather than the finalisation of bilateral trade policy, it may, however, trigger closer relations and further convergence in the future. It is then that the economic origami of EU-Japan relations can truly start to unfold.

 

Links:

Delegation of the EU to Japan (2015): Trade and Investment Relations [Online] Accessible under http://www.euinjapan.jp/en/relations/trade/ (Accessed 04 December 2015).

EU-Japan Centre for Industrial Cooperation (2012): In Search for Growth: Towards a New Role for SMEs in EU-Japan Relations [Online] Accessible under http://www.eu-japan.eu/sites/eu-japan.eu/files/In%20Search%20for%20Growth%20-%20Towards%20a%20New%20Role%20for%20SMEs%20in%20EU-Japan%20Relations.pdf (Accessed 04 December 2015).

European Commission (2012). Impact Assessment Report on EU-Japan Trade Relations. Working Staff Document. [Online] Accessible under http://trade.ec.europa.eu/doclib/docs/2012/july/tradoc_149809.pdf (Accessed 06 December 2015).

JETRO (2015): JETRO Global Trade and Investment Report 2015 - New efforts aimed at developing global business [Online] Accessible under https://www.jetro.go.jp/en/news/2015/ea96c87efd06f226.html (Accessed 04 December 2015).

Kleimann, D. (2014) Negotiating in the Shadow of TTIP and TPP: The EU-Japan Free Trade Agreement. German Marshall Fund of the United States, Asia Program, Policy Brief, June 2015 [Online] Accessible under www.gmfus.org/file/6173/download (Accessed 06 December 2015).

 

 

Matthias Götz studied European Political Economy at the London School of Economics and is now PhD Candidate at the Cologne Graduate School in Management, Economics and Social Sciences, University of Cologne.

 

Lena Muxfeldt studied Political Science and International Relations at Leiden University and was previously a Visiting Research Fellow at the EU-Japan Centre for Industrial Cooperation in Tokyo.