The €147 billion in shared gains from an EU-Japan economic integration agreement
Until eight years ago, Japan was the second-biggest foreign market for goods manufactured in the European Union. Burgeoning trade with the emerging economies of China, Russia and Turkey has since pushed Japan into fifth place, but that alone doesn’t explain Japan’s slide down the trade rankings. Rather, its decades’ old regulatory barriers are still stunting trade between the world’s largest and third-largest economies.
Remove those rules, predicts a November report, for the European Commission, on trade and investment by economic consultancy Copenhagen Economics, and exports to Japan would surge by a half, or €29 billion. Remove tariffs as well and EU exports to Japan would jump another €14 billion. With an estimated further €33 billion increase in EU national income, the benefit to the EU could be an astonishing €76 billion.
That’s why most European businesses in Japan are urging EU officials back home to begin meaningful talks with Japan on an economic integration agreement, a pact to do away with unnecessary testing and restrictions that former president of the European Business Council in Japan, Richard Collasse, describes as “old fashioned, and lacking in transparency.”
As a tool to keep out foreign competition, the regulatory fence has worked well. As a percentage of all goods sold in Japan, those made overseas account for a mere 6% of the total, much lower than the corresponding 17% of products consumed in the EU, says Copenhagen Economics. The cost of complying with local regulations adds up to a de facto tariff of as much as 70% for food makers, 30% for medical device suppliers and 10% for carmakers, the team of economists estimates.
Eliminate them, and European pharmaceutical companies, medical device makers, service industries and food makers, among others, stand to gain handsomely, reckons Collasse, a 40-year veteran of Japan who is president of Chanel’s Japan unit.
Michel Lachaussée, president of animal health firm Merial Japan, is frustrated by the added cost that duplicate testing imposes on companies doing business in Japan. Like drugs and devices used on human patients, animal health products that have already passed a battery of safety tests in Europe must undergo similar trials in Japan. His company, he quips, “needs a van” to send dossiers of information requested by Japanese health officials. And the time it takes to complete the testing can impede medical advances in Japan for years.
Eprinex is one those delayed improvements. A treatment developed to kill roundworm, lungworm, mites, lice and other parasites in cattle without tainting the meat or milk from dairy cows, it won approval in Japan last year more than a decade after sales began in Europe. Until then Japanese farmers had to do without, explains Lachaussée, former chairman of the EBC Medical Diagnostics Committee and the EBC Animal Health Committee.
For vaccines, the testing hurdle is even higher, says Lachaussée. It can take years of testing and cost half a million dollars, making it “nearly impossible to bring some of them in,” he says. It’s why Merial, which is Japan’s second-largest seller of animal health products with a 9% share of a $1 billion market, focuses mostly on other pharmaceuticals.
But, Merial’s persistence is more the exception than the rule, according to Collasse. “There are manufacturers who do not attempt to deal with the non-tariff barriers. They simply focus on easier markets,” he says. Copenhagen Economics agrees, estimating that 60% of European firms doing business in Japan offer a smaller range of goods here than they do in other Asian markets.
The limited range of European foods on offer is one example. As wells as tariffs such as 38.5% on beef and up to 40% on cheese, EU food exporters have to contend with a range of non-tariff barriers. As a result, Japanese consumers aren’t spoilt for choice when they visit their local supermarket, says Benoît Chauvel, president of food importer Nichifutsu Boeki. Complex regulations governing the use of additives deter most EU food companies from bothering to sell in Japan. Those that do limit themselves to simple products, which explains why it’s easy to buy European jams, chocolates and tomato sauces in Japan, but near impossible for consumers to get a taste of anything like ready-to-eat meals.
Even importers who take great care to meet Japan’s food rules can run into trouble. Six years ago Chauvel had to recall thousands of red curry meals after they tested positive for polysorbate, which came from inside one of the ingredients but hadn’t been declared by the supplier. It cost the company and its supplier €130,000 to fix. What made the episode more ludicrous and annoying for Chauvel was that Japan approved the common emulsifier as safe just three years later. Harmonising the rules on food additives would, Chauvel says, lower costs, dissipate risk and give Europeans full access to Japanese supermarkets. “The EU should offer to make Japan the 28th member state,” he jokes.
Change on the way?
Yet, there are signs of change. Japan, it seems, is no longer the trade bugbear it once was. Its domestic market is contracting as a greying population saps consumer demand. Meanwhile, Japan’s businesses and government have been transformed into eager backers of economic integration. The lure of extending trade ties with the 27 EU member states covering a market of 500 million people has made the Japanese more willing than ever to lower their own access barriers in exchange.
Copenhagen Economics predicts a trade pact would add as much as €25 billion to the value of goods Japan ships to EU member states if tariffs are fully removed, plus €28 billion if non-tariff barriers are removed, and €18 billion in welfare savings – €71 billion in total.
As Nippon Keidanren, Japan’s leading business lobby points out in a paper released in November, Japan has concluded economic partnership agreements that have lowered trade barriers with 11 other economies. Yet combined, they represent only 20% of Japan’s overall trade. An agreement with the EU alone would account for another 15%. In order to keep its economy growing, Japan must “ensure a liberal trade and investment environment,” the Keidanren paper states, adding that the EU “stands as an urgent challenge for Japan.” Contributing to that urgency is a trade pact agreed last year between the EU and regional rival South Korea, which the Keidanren worries will put Japanese companies at a “serious competitive disadvantage.”
With a 10-year action plan for cooperation drawing to a close, the EU and Japan have been circling each other’s wagons for a decade without any trade agreement to show. In the meantime, 70-odd bilateral trade agreements have been concluded among Asian economies as the region binds itself through economic cooperation. Japan knows it can no longer afford to be left behind by insisting on regulations that handicap Japanese companies in need of success overseas.
Gordon Hatton, who runs the construction management business of Bovis Lend Lease Japan, points to regulation that prevents Japanese contractors tapping growing demand for energy-efficient sustainable green buildings. Though competing standards exist, the United States green building system, dubbed Leadership in Energy and Environment Design, or LEED, is fast becoming the global standard, he explains. Talks aimed at bringing competing systems into line are already underway in Europe. Yet, Japan is sticking to its own green construction code and risks falling behind, says Hatton, who also serves as the chairman of the EBC Construction Committee. Harmonising regulations is, he says, “a two-way street.”
In addition to Japanese foot-dragging, European intransigence poses a serious obstacle to a trade pact – something that stems from the nature of trade between Japan and the EU.
Half of the Japanese goods shipped to Europe are cars, trucks and electronic devices. On the return journey, ships carry a more diverse cargo: medical devices, processed food, pharmaceuticals, cosmetics and machinery, among other products. To persuade the Japanese to lower their regulatory wall and grant more access to European food makers, drug makers and chemical conglomerates, the EU will have to give ground on Japan’s big-ticket item – namely, lowering or eliminating a 10% tariff that Japanese automakers pay on every car that passes through a European Union port.
Many European business people think it’s a price worth paying. “We will have to give ground in some sectors to gain ground in others,” says Merial’s Lachaussée. “There are a lot of benefits for us in giving up European tariffs on cars and electronics in exchange for mutual recognition of standards, norms and accreditations.” EU automakers could also gain, since Copenhagen Economics reports that non-tariff barriers add an extra 10% when vehicles are brought into Japan. Removing those barriers would help EU automakers expand their reach outside the limited luxury car market.
Nevertheless, the EU automakers don’t relish a change that could increase competition and lower car prices in Europe. Badly dented by the worst recession in most people’s memory, Europe’s carmakers are in no mood to accept a level playing field for their Japanese competitors. Car production in Europe is at its lowest level in 16 years, down 17% in 2009 from 2008. In a sign of the kind of resistance Japanese trade negotiators can expect, the powerful European Automobile Manufacturers Association is already busy fighting a rearguard battle to sink the trade deal provisionally signed by the European Commission and South Korea in October last year. The automotive lobby is calling on EU member states not to ratify the agreement, citing the risk it poses to the automotive sector “and their millions of employees.”
Trade talks also face a headwind of protectionism. Politicians under pressure to provide jobs are tempted to sacrifice the longer-term economic benefits of free trade for the short-lived political gains of erecting barriers to foreign competition. Global trade is already creaking under the weight of recession. In 2009 the movement of products around the world slumped by an unprecedented 12%.
The dead end of protectionism
Huddling behind a shield of protectionism would, however, be a mistake, warns Michio Ohkawa, who for two years led a taskforce of Japanese businessmen engaged in dialogue on trade with their European counterparts. Ultimately, “you can’t protect companies with tariffs,” he advises. In January last year, Ohkawa, a former senior executive at chemical manufacturer Toray and now advisor to the company, also headed a study group in Japan that was asked to come up with specific proposals for bolstering trade between Japan and Europe. The group concluded that harmonising standards is of “paramount importance”. But it also emphasised that eliminating tariffs remains “the most basic and important issue” for both sides.
Nonetheless, the Japanese business group recognises that the tariff deadlock will be difficult to resolve and wants to focus for the time being on “building trust,” says Ohkawa. To do so, it has proposed a series of pilot projects that for specific products would eliminate or lower Japanese regulatory hurdles. A future trade agreement could cover a wider range of sectors, from telecommunications, intellectual property rights and retail to taxation, shipping, medical equipment and even cut flowers. Those negotiations, believes Ohkawa, could probably be completed within a few years.
Sitting back in his seat, Ohkawa smoothes the lapel of his European suit between finger and thumb. “After all,” he muses, “the Japanese like European products.” Will he and his fellow Japanese be buying more of such products in the future? That may well depend on how much ground both Europe and Japan are willing to give to realise the huge shared potential for growth.