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

Updated June 26, 2020

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

Overview

In July 2018, the European Union (EU) and Japan signed a

free trade agreement (FTA) after 18 rounds of talks starting

in 2013. The deal entered into force in February 2019. The

EU and Japan account for about 40% of global trade and

30% of global GDP. Japanese and EU officials respectively

touted the FTA as the “world’s largest, free, industrialized

economic zone” and “most important bilateral trade

agreement ever concluded by the EU.” Then EU Trade

Commissioner Cecelia Malmström framed it in strategic

terms as a “powerful signal” to the world that Japan and the

EU stand together “to defend free and fair and sustainable

trade in a climate where that is not taken for granted.”

The FTA talks concluded at a time of uncertainty for

regional trade integration efforts. After abandoning Obamaera initiatives, the Trans-Pacific Partnership (TPP)—that

included Japan—and the U.S.-EU Transatlantic Trade and

Investment Partnership (TTIP), the Trump Administration

notified Congress of new separate trade negotiations with

Japan and the EU (and the United Kingdom, UK). The new

talks were in part motivated by the EU-Japan FTA and

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 TPP11 without U.S. participation, ratifying the deal in 2018.

As the EU-Japan FTA was implemented, the United States

faced increased pressure from stakeholders to secure

comparable access to these important markets. The EU

collectively is the largest U.S. trade partner and Japan the

fifth largest. The FTA eliminates tariffs on substantially all

EU-Japan trade and nontariff barriers in key sectors. Terms

include market opening for EU agricultural products, while

Japan will gain advantages for its competitive auto sector.

The FTA not only has implications commercially for the

United States, but also for the U.S. role in shaping debates

over trade rules in areas central to U.S. competitiveness.

The final FTA terms were subject to some uncertainty. One

concern was the pending withdrawal from the EU of the

UK—a top destination for Japanese investment. The FTA

applied to the UK while it was an EU member, but with the

Brexit transition period ending in December 2020, the UK

is rushing to complete new trade deals. UK-Japan talks

began in June, with Japan insisting on an expedited timeline

to allow for its legislature’s approval this year. The UK and

Japan have pledged to use the EU-Japan FTA as the

baseline, but the proposed timeline may limit ambitions.

The UK also announced plans to join the regional TPP-11.

Trade and Investment Ties

Drivers of the EU-Japan FTA included mutual desires to

revitalize trade ties and recapture market share, in particular

given the progress of other major trade deals like TPP-11.

In the past decade, EU and Japanese shares of each other’s

trade have declined, in part reflecting the rise of China.

Japan is the EU’s sixth largest trading partner; the EU is

Japan’s third largest. Like the United States, the EU runs a

goods trade deficit with Japan, but a surplus in services.

The EU accounts for a quarter of Japan’s outward foreign

direct investment (FDI), but Japan retains a small share of

EU outward FDI. By contrast, the United States and EU are

each other’s largest FDI source and destination ($5 trillion

two-way FDI stock). The United States accounts for onethird of Japan’s outward FDI, the largest of any country.

Figure 1. U.S., EU, Japan Trade in Goods, 2019

Source: U.N. Comtrade accessed via International Trade Centre.

Notes: Figures reflect reporting country exports. UK included in EU.

Key Elements of the EU-Japan FTA

The FTA covers major areas of commercial engagement. In

contrast to U.S. FTAs, however, EU-Japan commitments do

not cover some U.S. priorities, while others are sensitive

issues for the U.S. bilaterally with the EU and Japan.

Market Access

While EU and Japanese tariffs on average are relatively

low, the elimination of tariffs on nearly all bilateral trade is

expected to boost economic gains in key sectors. Japan will

eliminate 97% of tariff lines upon full FTA implementation

(86% on entry into force); the EU will eliminate 99% (96%

on entry into force). Japan’s remaining tariffs for sensitive

products, primarily agriculture, will be reduced

incrementally or be subject to tariff-rate quotas (TRQs).

(Rice, seaweed, and whale meat—banned in the EU—are

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

fully excluded.) Reduced nontariff barriers also aim to

further market access (see below).

The EU expects large relative trade gains in agri-food

products (see text box), textiles and clothing, machinery,

footwear and leather products, among others, while Japan

expects gains in industrial sectors (e.g., autos, machinery,

and chemicals). In particular, the EU will cut its 10% tariff

on passenger vehicles within 7 years, while most auto parts

tariffs were eliminated immediately. Tariffs on trucks,

buses and tractors, and motorbikes are liberalized in stages.

Highlights: Japanese Agriculture Commitments

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Beef: 38.5% tariff reduced to 9% over 15 years;

Dairy (e.g., cheese): Hard cheeses tariffs up to 29.8%

eliminated over15 years; soft, fresh cheeses given dutyfree TRQs that expand over time;

Pork: 4.3% tariff eliminated and 482¥/kg specific duty

reduced to 50¥/kg over 10 years;

Processed foods (e.g., pasta, chocolates): Tariffs

ranging up to 30% eliminated over 10 years;

Wine: 15% tariff eliminated on entry into force.

FTA commitments also cover services, investment, and

public procurement. Services are liberalized on a

“negative list” basis (i.e., obligations apply to all sectors

except those specified), with special attention to ensuring a

level playing field in postal and courier services, financial

services, and telecommunications. Other provisions aim to

facilitate easier movement of company personnel between

countries (known as “mode 4”). The FTA also ensures nondiscriminatory treatment for investments and prohibits

performance requirements—claimed by the EU as the most

comprehensive list among FTAs to date. Procurement

access goes beyond multilateral commitments, covering

new municipalities and notably, Japan’s railway sector.

Standards and Regulatory Cooperation

Reducing nontariff barriers (NTBs)—e.g., divergent

standards, technical requirements, and certification

procedures—and regulatory cooperation were major EUJapan priorities. The FTA has a separate chapter on

regulatory cooperation, a first for the EU, which sets up a

joint body. Several provisions promote greater transparency

of regulations and mutual alignment with international

standards—in particular for medical devices, textiles

labeling, pharmaceuticals, and autos. For autos, Japan

agreed to align its regulations with all standards of the

United Nations Economic Commission for Europe

(UNECE); as a result, motor vehicles will no longer need to

be retested and certified upon export. A safeguard permits

the snapback of tariffs if Japan reintroduces auto NTBs.

Regarding agricultural products, sanitary and phytosanitary

(SPS) provisions aim to simplify approval and import

procedures and determine equivalence of measures.

Rules

EU-Japan FTA rules affect key areas increasingly important

to commercial ties. Some question whether their approaches

could set precedents for other FTAs. Features include:

 Investment. While provisions to promote FDI are

included, investment protection and a related dispute

mechanism are not, but are subject to ongoing talks.

Japan’s FTA approach has been to maintain use of

investor-state dispute settlement (ISDS); the EU has

pursued an alternative new investment court system, as

per recent FTAs with Canada, Vietnam, and others.

 Intellectual Property Rights. The FTA reaffirms and

expands on multilateral commitments, such as covering

trade secrets. Enhanced protection is also ensured for

geographical indications (GIs)—agricultural, food, and

beverage products of specific geographic origin—a

major EU priority. Japan recognized 205 GI-protected

EU products; the EU recognized 56 Japanese products.

 Digital Trade. FTA commitments include not to impose

duties on electronic transmissions or require disclosure

of source code of software. Provisions on cross-border

data flows are not included, however, unlike in Japan’s

TPP-11, but both sides plan to review inclusion within 3

years. A separate 2018 agreement recognizes the

adequacy of EU-Japan data protection standards to

facilitate digital trade and complement the FTA.

Other rules cover state-owned enterprises (SOEs), corporate

governance, small and medium-sized enterprises, and trade

and sustainable development, including labor standards. For

the first time in an FTA, both parties reaffirmed U.N. and

Paris Agreement obligations related to climate change.

Potential Issues for Congress

Commercial Impact. In the absence of a comprehensive

U.S. FTA with either major economy, certain U.S.

industries could face competitive disadvantages or lost

market share—e.g., those facing higher relative tariffs or

regulatory hurdles—as the EU and Japan enjoy preferential

access to each other’s markets. These concerns were partly

assuaged by the U.S.-Japan stage-one deal, which helped

level the playing field, with regard to tariffs, for U.S.

agriculture. But the United States may continue to face

disadvantages, due to the lack of other provisions on biotechnology, GIs, SPS, and other NTBs if Japan were to

align its requirements more closely with the EU or TPP-11,

and broader areas not covered like auto trade and services.

Objectives in Trade Talks. EU-Japan FTA outcomes

likely influenced negotiating priorities and debates about

U.S. trade talks with both partners. The scope of the talks

remain uncertain, however—for example, in the U.S.-EU

case, whether agriculture and auto sectors should be

included or subject to staged talks, and in the U.S.-Japan

case, what will be included in next stage talks this year.

Differing approaches on politically sensitive areas, such as

autos and rules of origin, NTBs and regulatory issues, data

flows, and currency are likely to be sticking points.

Leadership in Global Trade Rules. The EU-Japan FTA is

the latest in an expanding EU FTA network, putting a

growing share of global trade under EU FTA rules. For

Japan, the deal was a strategic priority, after concerted

leadership to finalize TPP-11. Observers question whether

such FTAs will set precedents for future deals and will

affect U.S. influence on the trading system. Differing U.S.EU approaches—e.g., on regulatory issues, standards, scope

of intellectual property protections, and data flows—may be

consequential for shaping the direction of trade rules. At the

same time, recent U.S.-EU-Japan efforts related to new

subsidies and SOEs rules and plurilateral efforts on digital

trade could be signs of other avenues for joint cooperation.

https://crsreports.congress.gov

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