February 7, 2019
EU-Japan FTA: Implications for U.S. Trade Policy
Overview
required in addition to the European Parliament. These con-
In July 2018, the European Union (EU) and Japan signed a
siderations could impact approaches in the U.S. trade talks.
free trade agreement (FTA) after 18 rounds of talks since
2013. Following ratification in December, the agreement
Trade and Investment Ties
entered into force in February 2019. The EU and Japan
Drivers of the EU-Japan FTA included mutual desires to
account for about 40% of global trade and 30% of global
revitalize trade ties and recapture market share, in particular
GDP. Japanese and EU officials respectively touted the
given the progress of other major trade deals like TPP-11.
FTA as the “world’s largest, free, industrialized economic
In the past decade, EU and Japanese shares of each other’s
zone” and “most important bilateral trade agreement ever
trade have declined, in part reflecting the rise of China.
concluded by the EU.” EU Trade Commissioner Cecelia
Japan is the EU’s sixth largest trading partner; the EU is
Malmström framed it in strategic terms as a “powerful
Japan’s third largest. Like the United States, the EU runs a
signal” to the world “that Japan and the EU are partners”
goods trade deficit with Japan, but a surplus in services.
and stand together “to defend free and fair and sustainable
The EU accounts for a quarter of Japan’s outward foreign
trade in a climate where that is not taken for granted.”
direct investment (FDI), but Japan retains a small share of
EU outward FDI. By contrast, the U.S. and EU are each
The FTA talks concluded at a time of uncertainty for
other’s largest FDI source and destination, with cumulative
regional trade integration efforts. After abandoning Obama-
FDI flows of over $5 trillion. The U.S. is Japan’s largest
era initiatives, the Trans-Pacific Partnership (TPP)—that
country destination, accounting for a third of outward FDI.
included Japan—and U.S.-EU talks on a Transatlantic
Trade and Investment Partnership (TTIP), the Trump
Figure 1. U.S., EU, Japan Trade in Goods, 2017
Administration recently notified Congress of new separate
trade negotiations with Japan and the EU (and the UK). The
new talks, which some analysts see as partly motivated by
EU-Japan cooperation, could begin in early 2019. As part
of the backdrop, the EU and Japan have expressed concerns
over recent U.S. tariffs imposed on their products and the
perceived waning in U.S. support for the multilateral
trading system. Japan also advanced the TPP-11 without
U.S. participation, ratifying the deal in 2018.
As the EU-Japan FTA is implemented, the United States
will be under increased stakeholders’ pressure to secure
comparable access to these important markets. The EU
collectively is the largest U.S. trade partner and Japan the
Source: U.N. Comtrade accessed via International Trade Centre.
fifth largest. The FTA eliminates tariffs on substantially all
Notes: Trade figures reflect reporting country exports.
EU-Japan trade and nontariff barriers in key sectors. Terms
include market opening for EU agricultural products, while
Key Elements of the EU-Japan FTA
Japan will gain advantages for its competitive auto sector.
The FTA covers major areas of commercial engagement.
The FTA not only has implications commercially for the
Some issues prioritized in past U.S. FTAs are not covered,
United States, but also for the U.S. role in shaping debates
however. Several FTA commitments are sensitive issues for
over trade rules in areas central to U.S. competitiveness.
the U.S. bilaterally with the EU and Japan.
The FTA’s final terms were subject to some uncertainty.
Market Access
One concern was the pending withdrawal from the EU of
While EU and Japanese tariffs on average are relatively
the UK—a top destination for Japanese investment. The
low, the elimination of tariffs on nearly all bilateral trade is
FTA applies to the UK while it remains an EU member, but
expected to boost economic gains in key sectors. Japan will
a future UK-Japan deal would be contingent on outcomes
eliminate 97% of tariff lines on full implementation of the
of the Brexit negotiations. Unlike other EU FTAs, such as
FTA (86% on entry into force); the EU will eliminate 99%
with Canada, the Japan deal faced few delays and political
of tariffs (96% on entry into force). Japan’s remaining
controversy during ratification. Because the deal sticks to
tariffs for sensitive products, primarily in agriculture, will
provisions under the “exclusive competence” of the EU
be reduced incrementally or be subject to tariff-rate quotas
(e.g., by omitting certain investment issues), ratification by
(TRQs). (Rice, seaweed, whale meat—banned in EU—are
member states’ national or regional parliaments was not
fully excluded.) Reduced nontariff barriers also aim to
further market access (see below).
https://crsreports.congress.gov
EU-Japan FTA: Implications for U.S. Trade Policy
The EU expects large relative trade gains in agri-food
investor-state dispute settlement (ISDS); the EU has
products (see text box), textiles and clothing, machinery,
pursued an alternative new investment court system, as
footwear and leather products, among others, while Japan
per recent FTAs with Canada, Vietnam, and others.
expects gains in industrial sectors, including autos,
Intellectual Property Rights. The FTA reaffirms and
machinery, and chemicals. In particular, the EU will cut its
expands on multilateral commitments, such as covering
10% tariff on passenger vehicles within 7 years, while most
trade secrets. Enhanced protection is also ensured for
auto parts tariffs are eliminated immediately. Tariffs on
geographical indications (GIs)—agricultural, food, and
trucks, buses and tractors, and motorbikes are liberalized in
beverage products of specific geographic origin—a
stages.
major EU priority. Japan recognized 205 GI-protected
EU products; the EU recognized 56 Japanese products.
Highlights: Japanese Agriculture Commitments
Digital Trade. The FTA includes commitments not to
impose duties on electronic transmissions or require
Beef: 38.5% tariff reduced to 9% over 15 years;
disclosure of source code of software. Provisions on the
Dairy (e.g., cheese): hard cheeses tariffs up to 29.8%
cross-border flow of data are not included, however,
eliminated over15 years; soft, fresh cheeses given duty-
unlike in Japan’s TPP-11, but both sides plan to review
free TRQs that expand over time;
inclusion within 3 years. The EU and Japan reached a
Pork: 4.3% tariff eliminated and 482¥/kg specific duty
separate agreement in 2018 recognizing the adequacy of
reduced to 50¥/kg over 10 years;
each other’s data protection standards to facilitate digital
Processed foods (e.g., pasta, chocolates): Tariffs
trade and complement the FTA.
ranging up to 30% eliminated over 10 years;
Wine: 15% tariff eliminated on entry into force.
Other rules cover state-owned enterprises (SOEs), corporate
governance, small and medium-sized enterprises, and trade
FTA commitments also cover services, investment, and
and sustainable development, including labor standards. For
public procurement. Services are liberalized on a
the first time in an FTA, both parties reaffirmed U.N. and
“negative list” basis (i.e., obligations apply to all sectors
Paris Agreement obligations related to climate change.
except those specified), with special attention to ensuring a
level playing field in postal and courier services, financial
Potential Issues for Congress
services, and telecommunications. Other provisions aim to
The EU-Japan FTA could have several implications for
facilitate easier movement of company personnel between
congressional oversight of U.S. trade policy.
countries (known as “mode 4”). The FTA also ensures non-
discriminatory treatment for investments and prohibits
Commercial Impact. In the absence of a U.S. FTA with
performance requirements—claimed by the EU as the most
either major economy, certain U.S. industries could face
comprehensive list among FTAs to date. Procurement
competitive disadvantages or lost market share—e.g., those
access goes beyond multilateral commitments, covering
facing higher relative tariffs or regulatory hurdles—as the
new municipalities and notably, Japan’s railway sector.
EU and Japan enjoy preferential access to each other’s
markets. In particular, U.S. agriculture has expressed such
Standards and Regulatory Cooperation
concerns regarding Japan, the U.S. fourth largest export
Reducing nontariff barriers (NTBs)—e.g., divergent
market. Per USDA analysis, certain market segments, such
standards, technical requirements, and certification
as pork, a top EU farm export, could face larger impacts.
procedures—and regulatory cooperation were major EU-
Objectives in Trade Negotiations. EU-Japan FTA
Japan priorities. The FTA has a separate chapter on
outcomes likely will influence negotiating priorities and
regulatory cooperation, a first for the EU, which sets up a
debates about pending U.S. trade talks with both partners,
joint body. Several provisions promote greater transparency
the scope of which remains uncertain—for example,
of regulations and mutual alignment with international
whether agriculture and auto sectors in the U.S.-EU case
standards—in particular for medical devices, textiles
should be included or subject to staged talks. Differing
labeling, pharmaceuticals, and autos. For autos, Japan
approaches on politically-sensitive areas, such as autos and
agreed to align its regulations with all standards of the
rules of origin, agriculture, NTBs and regulatory issues,
United Nations Economic Commission for Europe
digital trade, and currency are likely to be sticking points.
(UNECE); as a result, motor vehicles will no longer need to
Leadership in Global Trade Rules. The EU-Japan FTA is
be retested and certified upon export. A safeguard permits
the latest in an expanding EU FTA network, putting a
the snapback of tariffs if Japan reintroduces auto NTBs.
growing share of global trade under EU FTA rules. For
Regarding agricultural products, sanitary and phytosanitary
Japan, the deal was a strategic priority, after concerted
(SPS) provisions aim to simplify approval and import
procedures and determine equivalence of measures.
leadership to finalize TPP-11. Observers question whether
such FTAs will set precedents for future deals and will
Rules
affect U.S. influence on the trading system. In particular,
differing U.S.-EU approaches—e.g., on regulatory issues,
EU-Japan FTA rules will affect key areas increasingly
standard setting, scope of IP protections, such as for GIs
important to commercial ties. Observers question whether
and pharmaceuticals, and data flows—may be
these approaches could set precedents for other FTAs.
Selected features include:
consequential for shaping the direction of trade rules. At the
same time, recent U.S.-EU-Japan efforts related to new
Investment. While provisions to promote FDI are
subsidies and SOEs rules and plurilateral efforts on digital
included, investment protection and a related dispute
trade could be signs of other avenues for joint cooperation.
mechanism are not, but are subject to ongoing talks.
Japan’s FTA approach has been to maintain use of
https://crsreports.congress.gov
EU-Japan FTA: Implications for U.S. Trade Policy
Cathleen D. Cimino-Isaacs, Analyst in International Trade
and Finance
IF11099
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https://crsreports.congress.gov | IF11099 · VERSION 2 · NEW