EU and Japan Summit: A Strong Signal for Free Trade

While Donald Trump seems to dump one trade pact after the other, the EU and Japan have made a strong case for free trade and against protectionism ahead of the G20 meeting later this week: both sides achieved a political agreement at the EU-Japan Summit in Brussels today.

Japan’s Prime Minister, Shinzo Abe, President of The EU Commission, Jean-Claude Juncker, and Donald Tusk, President of the EU Council, appeared to be satisfied: At the EU-Japan Summit in Brussels on July 6, 2017, they announced a political agreement on the EU-Japan Free Trade Agreement. This is a big success, given that negotiations have been ongoing since 2013 with periods of only sluggish progress. US-President Trump bears large parts of the responsibility for this success: His retreat from TPP and negligence of TTIP has shocked Japan and the European Union into action. Both sides pushed for finalizing the trade pact on the political level prior to the upcoming G20 meeting, which takes place from July 8th-9th in Hamburg, Germany. Just in time, their political agreement demonstrates that, vis-á-vis a protectionist US president, two of the world’s most important economic powers are willing to join hands in their efforts to keep global trade free and world markets open.

It remains to be seen whether this will help to pressure Donald Trump into agreeing to a G20 final statement in favor of free trade. The G20 financial minister meeting earlier this year failed to achieve this due to US opposition. However, it is the explicit goal of Germany as host country to make a strong case for free trade during the meeting. President Trump’s stance will be crucial here.

Meanwhile, the political agreement between the EU and Japan does not at all mean that negotiations are over. Sensible issues, such as the investment court system proposed by the EU, still have to be discussed. The political agreement only means that both sides commit themselves fully to completing the trade pact. One might put it this way: there is hardly a way back now. But remaining details of the contract are left to the technical staff for negotiations and wording. It has been suggested that completion might already happen in fall this year or at least in early 2018. This schedule could prove to be ambitious when considering that a political agreement on CETA was achieved in 2014 but it took two more years to fine-tune and finish the text of the trade pact. The ratification process, too, is still ongoing.

Nevertheless, the trade agreement between the EU and Japan is a big deal: it accounts for 27.6 percent of world GDP, and 8.7 percent of the world’s population live in this huge free trade zone. A deep agreement would have significant wealth effects as well. Japan’s GDP would be some 1.6 percent higher each year than it would be without the agreement. In the EU, the effects would range from 0.1 percent (e.g. Greece and Romania) to 1.4 percent for Ireland. Germany, meanwhile, could still expect an increase in GDP by 0.7 percent – around EUR 20 billion.

A more detailed analysis of the economic effects of the EU-Japan FTA is available for download here.