EU-Japan FTA: Implications for U.S. Trade Policy

EU-Japan FTA: Implications for U.S. Trade Policy

Updated June 26, 2020
EU-Japan FTA: Implications for U.S. Trade Policy
Overview
began in June, with Japan insisting on an expedited timeline
In July 2018, the European Union (EU) and Japan signed a
to allow for its legislature’s approval this year. The UK and
free trade agreement (FTA) after 18 rounds of talks starting
Japan have pledged to use the EU-Japan FTA as the
in 2013. The deal entered into force in February 2019. The
baseline, but the proposed timeline may limit ambitions.
EU and Japan account for about 40% of global trade and
The UK also announced plans to join the regional TPP-11.
30% of global GDP. Japanese and EU officials respectively
Trade and Investment Ties
touted the FTA as the “world’s largest, free, industrialized
Drivers of the EU-Japan FTA included mutual desires to
economic zone” and “most important bilateral trade
agreement ever concluded by the EU.”
revitalize trade ties and recapture market share, in particular
Then EU Trade
given the progress of other major trade deals like TPP-11.
Commissioner Cecelia Malmström framed it in strategic
In the past decade, EU and Japanese shares of each other’s
terms as a “powerful signal” to the world that Japan and the
trade have declined, in part reflecting the rise of China.
EU stand together “to defend free and fair and sustainable
Japan is the EU’s sixth largest trading partner; the EU is
trade in a climate where that is not taken for granted.”
Japan’s third largest. Like the United States, the EU runs a
The FTA talks concluded at a time of uncertainty for
goods trade deficit with Japan, but a surplus in services.
regional trade integration efforts. After abandoning Obama-
The EU accounts for a quarter of Japan’s outward foreign
era initiatives, the Trans-Pacific Partnership (TPP)—that
direct investment (FDI), but Japan retains a small share of
included Japan—and the U.S.-EU Transatlantic Trade and
EU outward FDI. By contrast, the United States and EU are
Investment Partnership (TTIP), the Trump Administration
each other’s largest FDI source and destination ($5 trillion
notified Congress of new separate trade negotiations with
two-way FDI stock). The United States accounts for one-
Japan and the EU (and the United Kingdom, UK). The new
third of Japan’s outward FDI, the largest of any country.
talks were in part motivated by the EU-Japan FTA and
Figure 1. U.S., EU, Japan Trade in Goods, 2019
concerns over U.S. firms’ diminished competitiveness in
both markets. In late 2019, the United States completed
“stage-one” deals with Japan covering some market access
in agriculture and industrial goods (5% of bilateral trade),
and rules on digital trade. The agreements entered into force
in January 2020, and a next stage of talks on a more
comprehensive deal is planned for later this year. U.S. trade
talks with the EU have yet to progress, while UK talks
began in May. As part of the backdrop, the EU and Japan
have expressed concerns over recent U.S. tariffs imposed
on their products, U.S.-threatened tariffs on auto imports,
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.
Source: U.N. Comtrade accessed via International Trade Centre.
Notes: Figures reflect reporting country exports. UK included in EU.
As the EU-Japan FTA was implemented, the United States
faced increased pressure from stakeholders to secure
Key Elements of the EU-Japan FTA
comparable access to these important markets. The EU
The FTA covers major areas of commercial engagement. In
collectively is the largest U.S. trade partner and Japan the
contrast to U.S. FTAs, however, EU-Japan commitments do
fifth largest. The FTA eliminates tariffs on substantially all
not cover some U.S. priorities, while others are sensitive
EU-Japan trade and nontariff barriers in key sectors. Terms
issues for the U.S. bilaterally with the EU and Japan.
include market opening for EU agricultural products, while
Market Access
Japan will gain advantages for its competitive auto sector.
While EU and Japanese tariffs on average are relatively
The FTA not only has implications commercially for the
low, the elimination of tariffs on nearly all bilateral trade is
United States, but also for the U.S. role in shaping debates
expected to boost economic gains in key sectors. Japan will
over trade rules in areas central to U.S. competitiveness.
eliminate 97% of tariff lines upon full FTA implementation
The final FTA terms were subject to some uncertainty. One
(86% on entry into force); the EU will eliminate 99% (96%
concern was the pending withdrawal from the EU of the
on entry into force). Japan’s remaining tariffs for sensitive
UK—a top destination for Japanese investment. The FTA
products, primarily agriculture, will be reduced
applied to the UK while it was an EU member, but with the
incrementally or be subject to tariff-rate quotas (TRQs).
Brexit transition period ending in December 2020, the UK
(Rice, seaweed, and whale meat—banned in the EU—are
is rushing to complete new trade deals. UK-Japan talks
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EU-Japan FTA: Implications for U.S. Trade Policy
fully excluded.) Reduced nontariff barriers also aim to
investor-state dispute settlement (ISDS); the EU has
further market access (see below).
pursued an alternative new investment court system, as
per recent FTAs with Canada, Vietnam, and others.
The EU expects large relative trade gains in agri-food
 Intellectual Property Rights. The FTA reaffirms and
products (see text box), textiles and clothing, machinery,
expands on multilateral commitments, such as covering
footwear and leather products, among others, while Japan
trade secrets. Enhanced protection is also ensured for
expects gains in industrial sectors (e.g., autos, machinery,
geographical indications (GIs)—agricultural, food, and
and chemicals). In particular, the EU will cut its 10% tariff
beverage products of specific geographic origin—a
on passenger vehicles within 7 years, while most auto parts
major EU priority. Japan recognized 205 GI-protected
tariffs were eliminated immediately. Tariffs on trucks,
EU products; the EU recognized 56 Japanese products.
buses and tractors, and motorbikes are liberalized in stages.
 Digital Trade. FTA commitments include not to impose
duties on electronic transmissions or require disclosure
Highlights: Japanese Agriculture Commitments
of source code of software. Provisions on cross-border

Beef: 38.5% tariff reduced to 9% over 15 years;
data flows are not included, however, unlike in Japan’s

Dairy (e.g., cheese): Hard cheeses tariffs up to 29.8%
TPP-11, but both sides plan to review inclusion within 3
eliminated over15 years; soft, fresh cheeses given duty-
years. A separate 2018 agreement recognizes the
free TRQs that expand over time;
adequacy of EU-Japan data protection standards to

Pork: 4.3% tariff eliminated and 482¥/kg specific duty
facilitate digital trade and complement the FTA.
reduced to 50¥/kg over 10 years;
Other rules cover state-owned enterprises (SOEs), corporate

Processed foods (e.g., pasta, chocolates): Tariffs
governance, small and medium-sized enterprises, and trade
ranging up to 30% eliminated over 10 years;
and sustainable development, including labor standards. For

Wine: 15% tariff eliminated on entry into force.
the first time in an FTA, both parties reaffirmed U.N. and
FTA commitments also cover services, investment, and
Paris Agreement obligations related to climate change.
public procurement. Services are liberalized on a
Potential Issues for Congress
“negative list” basis (i.e., obligations apply to all sectors
Commercial Impact. In the absence of a comprehensive
except those specified), with special attention to ensuring a
U.S. FTA with either major economy, certain U.S.
level playing field in postal and courier services, financial
industries could face competitive disadvantages or lost
services, and telecommunications. Other provisions aim to
market share—e.g., those facing higher relative tariffs or
facilitate easier movement of company personnel between
regulatory hurdles—as the EU and Japan enjoy preferential
countries (known as “mode 4”). The FTA also ensures non-
access to each other’s markets. These concerns were partly
discriminatory treatment for investments and prohibits
assuaged by the U.S.-Japan stage-one deal, which helped
performance requirements—claimed by the EU as the most
level the playing field, with regard to tariffs, for U.S.
comprehensive list among FTAs to date. Procurement
agriculture. But the United States may continue to face
access goes beyond multilateral commitments, covering
new municipalities and notably, Japan’s railway sector.
disadvantages, due to the lack of other provisions on bio-

technology, GIs, SPS, and other NTBs if Japan were to
Standards and Regulatory Cooperation
align its requirements more closely with the EU or TPP-11,
Reducing nontariff barriers (NTBs)—e.g., divergent
and broader areas not covered like auto trade and services.
standards, technical requirements, and certification
Objectives in Trade Talks. EU-Japan FTA outcomes
procedures—and regulatory cooperation were major EU-
likely influenced negotiating priorities and debates about
Japan priorities. The FTA has a separate chapter on
U.S. trade talks with both partners. The scope of the talks
regulatory cooperation, a first for the EU, which sets up a
remain uncertain, however—for example, in the U.S.-EU
joint body. Several provisions promote greater transparency
case, whether agriculture and auto sectors should be
of regulations and mutual alignment with international
included or subject to staged talks, and in the U.S.-Japan
standards—in particular for medical devices, textiles
case, what will be included in next stage talks this year.
labeling, pharmaceuticals, and autos. For autos, Japan
Differing approaches on politically sensitive areas, such as
agreed to align its regulations with all standards of the
autos and rules of origin, NTBs and regulatory issues, data
United Nations Economic Commission for Europe
flows, and currency are likely to be sticking points.
(UNECE); as a result, motor vehicles will no longer need to
be retested and certified upon export. A safeguard permits
Leadership in Global Trade Rules. The EU-Japan FTA is
the snapback of tariffs if Japan reintroduces auto NTBs.
the latest in an expanding EU FTA network, putting a
Regarding agricultural products, sanitary and phytosanitary
growing share of global trade under EU FTA rules. For
(SPS) provisions aim to simplify approval and import
Japan, the deal was a strategic priority, after concerted
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. Differing U.S.-
EU-Japan FTA rules affect key areas increasingly important
EU approaches—e.g., on regulatory issues, standards, scope
to commercial ties. Some question whether their approaches
of intellectual property protections, and data flows—may be
could set precedents for other FTAs. Features include:
consequential for shaping the direction of trade rules. At the
 Investment. While provisions to promote FDI are
same time, recent U.S.-EU-Japan efforts related to new
included, investment protection and a related dispute
subsidies and SOEs rules and plurilateral efforts on digital
mechanism are not, but are subject to ongoing talks.
trade could be signs of other avenues for joint cooperation.
Japan’s FTA approach has been to maintain use of
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EU-Japan FTA: Implications for U.S. Trade Policy

IF11099
Cathleen D. Cimino-Isaacs, Analyst in International Trade
and Finance

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https://crsreports.congress.gov | IF11099 · VERSION 4 · UPDATED