The EU finally agreed to launch FTA negotiations after several years of lobbying by Japan. Japan wants Europe to eliminate its 10 per cent tariffs on automobiles. If Japan gets its way, European duties will be phased out, to remedy the fact that the FTA between the EU and Korea, which came into force in 2011, puts Japanese carmakers at a disadvantage. But the mandate the Brussels-based Commission received from EU member states is defensive: it has conditioned any FTA with Japan on introducing safeguards against a surge of Japanese car imports. Further, it calls for negotiations to cease after one year if there are no guarantees on non-tariff barriers (NTBs) for European industrial exports ¾ such as non-recognition of technical standards or discriminatory procedures.
The EU has a deficit in goods trade with Japan (€20 billion), yet enjoys a surplus in services (€4.6 billion). An FTA could help boost these trade figures and economic growth. In 2000, Japan accounted for 9.3 per cent of the EU’s imports. By 2011, the figure was 4 per cent. The Japanese market is also becoming less important to European exporters and investors. Accounting for 5 per cent of the EU’s exports in 2000, exports to Japan were only 3 per cent of EU exports in 2011. The EU is also the biggest investor in Japan, led by France (€26 billion) and Germany (€12.6 billion). Yet, while US foreign direct investment (FDI) has flowed quickly into Japan in the last 10 years, European FDI has been stagnant.
Public discussions in Europe about the EU–Japan deal focus on the contentious yet important issue of tariffs and NTBs on industrial goods. The EU has much to gain if its exports of processed foods, chemicals, pharmaceuticals, healthcare, electronic equipment and other industrial goods are boosted. Yet both parties need to take on an even bigger issue: services.
Services are one of the EU’s comparative advantages. The EU accounts for roughly one quarter of world exports in this field: its insurers, banks, transportation and logistics, postal, energy, environmental, telecommunications, construction, and IT services providers, among others, are world leaders. Yet, in comparison to other countries, notably the United States (US), its services sector is working way under its potential at home especially in the key continental economies of France, Italy and Germany. This has a lot to do with their many anticompetitive regulations, oligopolistic structures, government monopolies and closed professions. The EU’s Single Market hardly applies to services. As a result, the services sector is less productive, competitive and outgoing than it could be. This must change if the EU wants to stay afloat in the global market. Japan has a rather weak services sector, accounting for 4.5 per cent of world trade in services less than India and China. Japan could benefit from European investments shaping up that sector and revamping its industry. But America, with its large and less-regulated domestic market, does much better and could end up becoming the dominant player in Japan, especially if Japan ends up joining the US-led Trans-Pacific Partnership negotiations.
Industry today is highly service-intensive. It needs the input from research and development labs, accountants, legal advisers and strategists, and designers. It also requires marketing, distribution, logistics, communications and IT systems, maintenance and many other services. Many of these ‘business services’ suffer from restrictions. If these restrictions are equated to tariffs, modelled estimates show that ‘business services’ other than insurance or finance are highly protected in France (35.6 per cent) and in Italy (32.6 per cent), but much less so in Sweden (13.3 per cent) and Germany (16.6 per cent). Japan’s restrictions are even higher than the most protected European economies (43.9 per cent). Notably, these restrictions involve those on foreign investment.
Both sides should explore ways to open up their services sectors to each other in a pragmatic way, by prioritising a few sectors while cooperating on their regulation. The aim is to secure real competition while maintaining the high standards citizens in both economies expect. A good place to start could be the energy and healthcare sectors. Japan’s energy sector will need a lot of investment in the post-Fukushima context. The European energy sector is facing rising costs and needs technological innovation. Both sides already have great know-how they could share with each other in this sector, where industry and services come together. Ageing, and the rising costs of healthcare, also create a good opportunity for these economies to link their respective services. Further, one services sector has been discussed publicly so far: rail transport. Japan’s frequent use of an ‘operational security’ clause in its public procurement rules to exclude foreign bidder is criticised in Europe for closing off the Japanese market. But critics do not always want to hear that no Japanese (or any other foreign) company has installed and operated trains on the EU mainland so far either
By shifting its focus to the services sector, the EU–Japan FTA could be more advantageous for both economies than if it remains focused on industrial goods. But it is time for the EU to start listening to its partner and taking a business-like approach.
Iana Dreyer is Analyst at the Institut Montaigne. The views expressed are her own and do not necessarily reflect the views of the institution.