Japan, Europe Buck The Tariff Trend

Europe and Japan create the world's largest free trade zone.

Several years in the making, the largest open trade zone in the world came into being early last month, a welcome contrast to the ongoing trade tensions between the US and China.

“Europe and Japan are sending a message to the world about the future of open and fair trade,” Jean-Claude Juncker, president of the European Commission, said in a statement. “We are opening a new marketplace, home to 635 million people and almost a third of the world’s gross domestic product, bringing the people of Europe and Japan closer together than ever before.” The Economic Partnership Agreement (EPA), as it is dubbed, removes 99% of the tariffs applied by the EU and up to 97% of those imposed by Japan.

The agreement was hailed as proof that the US-Chinese tit-for-tat rivalry gives other players an opportunity to profit. The EU and Japan both could use the boost.

“They like to state that it is about anti-protectionism and pro-globalization, but it has taken years of wrangling and negotiation for Japan and the EU to get to this point,” says Chris Rowley, professor at London’s Cass Business School. “The Japanese economy, despite Abenomics, remains mired in the doldrums, and now the EU itself, already economically outpaced by much of Asia, is hitting the buffers with forecasts of slowing growth.”

Under the agreement, most agri-food products, including wine (among EU’s biggest exports), will be allowed to enter Japan entirely duty-free. Firms selling business, financial, telecommunication, distribution, and transport services will also benefit. Japan, whose principal interest was increasing auto industry exports, will see the current 10% duty on its cars sold in the EU reduced to zero by 2027. In the long run, the EPA is projected to increase Japan’s real GDP by about 1% and employment by approximately 0.5%, or 290,000 jobs. The EU is expected to reap up to 0.14% of additional GDP and about €13 billion of extra exports to Japan, each billion corresponding to around 14,000 jobs supported across the continent.