The progress of EU – Japan free trade deal

July 2017 marked the opening of a new chapter of the Strategic Partnership between the European Union and Japan. The parties reached an agreement in principle regarding the main elements of an economic partnership agreement. This is the most important bilateral commercial agreement ever signed by the EU and will include, for the first time, a specific commitment with the Paris Agreement on climate change. The conclusion of the agreement was announced by the President of the European Commission, Jean-Claude Juncker, the President of the European Council, Donald Tusk, and Japan’s Prime Minister, Shinzo Abe. For the railway sector, the elimination of the Operational Safety Clause (OSC) is a stimulus, but there are still many steps to take to guarantee access to the Japanese market and to ensure competitiveness.

Japan is the second biggest trade partner of the EU in Asia, after China, and the two countries together form more than one third of the world’s GDP. At the same time, Japan is the 6th biggest trade partner of the EU at global level and the 4th biggest economy in the world (based on the GDP). EU and Japan benefit from active trade connections, thus EU exports to Japan amount to over EUR 80 billion a year (EUR 58 billion in goods and EUR 28 billion in services). Also, over 600,000 jobs in the EU are closely related to exports to Japan, while Japanese companies account for more than half a million employees. Japan’s imports from the EU are dominated by machines, electric machines, motor vehicles, optical and medical instruments and chemicals; EU’s exports to Japan are dominated by motor vehicles, machines, pharmaceutical products, medical instruments and electric machines. With 127 million citizens, Japan has a huge potential for European companies in the export activity and more, but these companies are facing trade barriers in their export activity to Japan, such as expensive import charges, procedures and standards not compliant to international ones, all these elements affecting competitiveness. In fact, the main obstacles that European companies are facing when trying to access the Japanese market are Japan’s norms and regulations which are very much different from international standards and practices, resulting in higher costs for European companies. For example, according to EC, some companies believe that these obstacles make exports to Japan 10-30% more expensive. Consequently, EU wants improvements in over 70 areas where Japanese barriers impose difficulties to European exporters. In this context, by signing the agreement with Japan, EU plans to eliminate hindrances and both parties want to contribute to setting global trade regulations and to send a strong message that the two big economies of the world reject protectionism.

Key aspects of the agreement

Negotiations to reach the agreement in principle about an economic partnership were initiated in 2013. 18 rounds of intense negotiations have been held so far and even more technical and political reunions. “Through this agreement, the EU and Japan uphold their shared values and commit to the highest standards in areas such as labour, safety, environmental or consumer protection. Working towards mutual adequacy decisions, we also make a strong commitment to uphold the fundamental right of data protection. Together, we are sending a strong message to the world that we stand for open and fair trade. As far as we are concerned, there is no protection in protectionism. Only by working together will we be able to set ambitious global standards”, EC President Jean-Claude Juncker said. For the European Union, the economic partnership agre-ement will determine the elimination of a major part of the customs charges paid by European companies worth EUR 1 billion per year, will open the Japanese market to exports of EU agricultural products and will provide broader opportunities for more economic segments. Under the agreement, the highest standards are set in areas such as labour rights, safety, environment and consumers, the protection of services, as well as a chapter dedicated to sustainable development. It relies on the consolidation of high standards for personal data protection for both the EU and Japan which have recently included them in their own data protection law. “The Japan-EU Economic Partnership Agreement (EPA) is an important pillar of Abenomics. It also has great significance for promoting global free trade. We will press forward assertively in areas where we should, while protecting what must be protected, to reach an agreement on the EPA’s [Economic Partnership Agreement] fundamental elements,” Japan Prime Minister said. The economic partnership agreement will help increase EU exports, develop opportunities for European companies, their employees and consumers. Thus, the value of EU exports could increase by up to EUR 20 billion generating economic growth and the establishment of new opportunities. In principle, the agreement will stimulate the commercial activity of freight and services, generating new investment opportunities and will improve the EU exporters and importers position in the Japanese market, including warranties for the protection of EU standards and values. Customs charges of over 90% of EU’s exports to Japan will be eliminated when entering the economic partnership (in 2019) and, once the agreement will be in force, Japan will eliminate customs charges for 97% of the EU-imported goods, while the rest of charges will make the subject of partial liberalisation by means of tariff quotas or tariff cuts. This will help save EUR 1 billion per year from the customs charges for EU exporters. The agreement in principle treats most aspects of the economic partnership agreement. However, some chapters with technical details need to be solved, while others, such as the protection of investments rest outside the application > > area of the agreement in principle. Also, EU proposed its reformed jurisdictional system in terms of investments and will discuss with all its partners, including Japan, to advance in the direction of establishing a multilateral investment control body. Next to approaching a series of sectors and segments where problems arise in the market accession process (such as agriculture and food products, industry products), the economic partnership agreement includes general norms regarding certain types of non-tariffing barriers that will contribute to setting fair competition conditions for European products and increase of transparency. Regarding the technical barriers of the commercial exchanges, the agreement relies on mutual commitment to ensure that technical standards and regulations are based on international standards. In terms of service trade, the agreement includes provisions that shall apply horizontally to all commercial exchanges. This reiterates the right of the authorities of the EU Member States to keep public the public services and shall not force the governments to privatize or deregulate in any way the national and local public services. The authorities of the EU Member States shall also preserve their right to bring into the public sector any services provided by the private sector. In terms of public procurement, European companies will be able to take part on equal footing with the Japanese companies in the public procurement tenders in 48 Japanese “main cities”, with 300,000 – 500,000 inhabitants. At the same time, the agreement removes hindrances regarding the procurement in the railway sector. The EU objective is to complete the process, by mid-2018, so that the agreement should enter into force at the beginning of 2019.

Stimulus for the European railway industry

The European railway industry had sales of 47 billion euro, that is 46% of the global market that is accessible for railway products. At the global level, estimations indicate an annual increase of the market of 2.6%, susceptible to reach 185 billion euro by 2021. According to UNIFE World Rail Market Study 2016, compared to 2014, the global rail industry market increased with 3%, and has been triggered by Asia Pacific. The industry had a record growth of EUR 159 billion. Per segments, between 2013-2015, the highest contribution to growth was triggered by the rolling stock and the services, both representing 72% of the total rail industry. Under these circumstances, commercial exchanges and the access to the international market becomes a vital element for the competitiveness of the European rail suppliers. As part of the negotiations of the Free Trade Agreement (FTA), the European Commission and the Japanese Ministry of Transport set up, in 2014, the EU-Japan Industrial Dialogue on Railways, including representatives of the public and private sectors. Its objectives are to promote cooperation and exchange of information among participants to facilitate bilateral trade in rail public procurement and mutual recognition of safety standards and monitoring of the mutual evolution of the markets. The EU-Japan FTA is a unique opportunity to approach the hindrances that the European companies face in their effort to access the Japanese market and “European suppliers want transparent, non-discriminatory procurement in Japan. They want visibility on investments to be made by railway operators. They want open tenders for projects that are commercially viable and technically feasible for companies that are not yet established in Japan. To put it simple – they want to be able to compete on an equal footing with their domestic competitors,” the European Rail Industry Association, UNIFE, explains to us. The agreement in principle regarding the economic partnership agreement reached by both parties on 6th July 2017 guarantees access to the public procurement markets from 48 big Japanese cities for EU companies and removes the hindrances in the public procurement in the rail sector. The EU-Japan joint statement stipulates that the Economic Partnership Agreement “will bring our two economies closer by addressing issues related to market access for goods, services and investment, procurement including railways, as well as those related to non-tariff measures and the protection of geographical indications as well as intellectual property rights.” The agreement is a step forward for the rail sector because the EC and Japan agreed upon the removal of the Operational Safety Clause (OSC), a major non-tariff hindrance, with impact upon the European rail industry. “This clause has effectively enabled for years Japanese public entities not to procure in a transparent, non-discriminatory manner,” UNIFE says. As a result of the July agreement, the removal of the OSC will take place during a transition time of maximum 1 year since the entering into force of the agreement. “The removal of the Operational Safety Clause is a win for our industry, but it also comes with a further opening of the EU public procurement market,” Philippe Citroën, Director General of UNIFE said. During the FTA negotiations, UNIFE intended to achieve the goals of the European rail industry, and 2014 saw a success due to the ‘one-year package’ of measures on railways, which were helpful to begin increasing transparency in procurement and facilitating market penetration by European suppliers. However, more needed to be done to level the playing field. When the agreement in principle was reached, we welcomed the long-awaited announcement of the removal of the Operational Safety Clause (OSC) within a reasonable transition period of maximum one year after entry into force of the agreement. This is nevertheless only a first step in the right direction,” UNIFE says. Japan is one of the largest rail markets, with huge opportunities for the European industry, but the penetration of the market by foreign companies remains low, especially in the rolling stock segment. Although a few European companies have managed to enter the Japanese rail market on specific market niches, at the level of components, most UNIFE members face major hindrances in entering markets. This situation is the opposite of the EU which has the most open and transparent public procurement market in the world, and the Japanese competitors won significant contracts. For this reason, helped by the European Commission, the UNIFE actively got involved in the FTA negotiations. However, UNIFE considers that the results regarding the public procurement can be limited. “UNIFE fears that coverage of rail and urban transport entities in the public procurement chapter of the FTA may indeed be limited. Further coverage would have compensated the delisting of several Japanese rail operators from the WTO Agreement on Government Procurement (GPA). Furthermore, the European railway industry is concerned about the enforcement of the commitments made by Japan and the actual changes in business practices. UNIFE considers that both parties should set up a strong and dedicated method to monitor the rail procurement, “otherwise we risk losing the momentum”. Furthermore, it is essential that private or non-covered entities abide by codes of conduct to guarantee transparent and non-discriminatory treatment of European rail suppliers. The European Commission is well aware of these issues.

by Pamela Luica

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