Media  Global Economy  2018.08.01

Cooperate with the EU and deal a blow to Trump's supporters - The key to changing US protectionism is the TPP11 and the Japan-EU Economic Partnership Agreement

The article was originally posted on Webronza on July 18, 2018

EPA with Japan valued by the EU

The Japan-EU Economic Partnership Agreement (EPA) was signed on July 17 (though called an economic partnership agreement, this is a free trade agreement like the TPP to promote trade and investment). Although Prime Minister Abe was to visit Europe to sign the Agreement in Brussels, he canceled it to oversee the government's response to the heavy rain disaster in western Japan and the Agreement was signed in Tokyo. From the EU, European Council President Donald Tusk attended the signing. This sends a clear message that the EU fully recognizes the importance of this Agreement.

The Japan-EU Economic Partnership Agreement is to cover countries and areas that account for 30% of world GDP. Now that the United States has withdrawn from the TPP, the Agreement is the largest mega-FTA (free trade agreement) in the world. Both the quality and level of liberalization indicated by the extent of tariff removal on goods are high.

President Tusk, who speaks for the leaders of 28 EU nations, came to Japan for the purpose of signing the Agreement. He would have wanted to demonstrate to US President Trump, twisting the world around with protectionism, that Japan and the EU are promoting free trade.

Domino effect of a free trade agreement

On top of that, a new domino effect can be expected.

The essence of a free trade agreement is "discrimination." If a country joins the agreement, the country can receive benefits including reduction or removal of tariffs and smoother investment or investment protection. On the other hand, if a country doesn't join, the country cannot receive these benefits and even suffers the disadvantage of being less favorably treated compared to other rival countries. Therefore, a free trade agreement attracts more countries or causes another free trade agreement. In the case of a mega-FTA, more countries tend to join. Thus, a free trade agreement has a domino effect.

Japanese industry originally prepared the Japan-EU Economic Partnership Agreement. EU tariffs on automobiles, etc. were high. Since South Korea signed a free trade agreement with the EU first, Japanese industry leaders were concerned about worsening competitive conditions in the EU market compared to South Korea with preferential treatments in tariffs. In other words, Japanese industry suspected that it would be discriminated against by the free trade agreement between the EU and South Korea.

Due to the domino effect of this agreement, Japan came to seek an economic partnership agreement (free trade agreement) with the EU.

The TPP moved the EU

The EU was initially indifferent to Japan's proposal. Most tariffs on Japanese industrial products had already been reduced to zero, so the EU judged that an economic partnership agreement with Japan would have few benefits.

However, the EU was forced to change its attitude because of Japan's participation in the TPP negotiations resulting in an agreement.

Although tariffs on Japanese industrial products were reduced to zero or a very low level, high tariffs on agricultural products remained a barrier. Nevertheless the EU has managed to export cheese, wine, pork, etc. to Japan.

However, tariffs against the United States, Canada, Australia and New Zealand, with which the EU had competed over agricultural exports to Japan, began to be reduced or removed through the TPP negotiations. Then the EU came to be "discriminated against."

Due to this "domino effect of the TPP," the EU shifted to a positive attitude toward an economic partnership agreement with Japan.

United States having itself to blame

The United States, which withdrew from the TPP, is to be discriminated against next.

Regarding wine, under the TPP11 and the Japan-EU Economic Partnership Agreement, etc., tariffs against top countries exporting to Japan other than the United States (Australia, New Zealand, Chile, France, Italy, Spain, etc.) are to be removed. High tariffs on pasta are also to be removed in the 11th year, so the competitiveness of American pasta will be significantly reduced.

The top three exporters of pork to the Japanese market in FY2017 were the EU with 300,000 tons, the United States with 290,000 tons, and Canada with 190,000 tons. The United States' share of the Japanese market is to be taken both by Canada under the TPP11 and by the EU under the Japan-EU Economic Partnership Agreement.

It was the United States that made Japan remove part of its tariffs on pork through the TPP negotiations. In the Japan-EU Economic Partnership Agreement, Japan accepts the same terms on EU pork as the TPP. The United States gave what they had got through efforts and negotiations to the rival countries of Canada and the EU or allowed the rivals to fish in troubled waters. Not only that, the United States actually came to be placed at a disadvantage. This is an "effect" of their withdrawal from the TPP. The United States has itself to blame.

Regarding soft natural cheeses, which were set to a low-tariff import quota, it is assumed that imports from the EU would neither increase nor would prices fall. EU cheeses, especially soft natural cheeses including Camembert cheese, do normally not compete with American processed or hard natural cheeses, so an increase in imports of EU cheeses would not affect imports of American cheeses. However, as to whey, a by-product of cheese production and an item in which the United States has export interest, tariffs against the EU are to be reduced, so imports from the United States will decrease.

Deal a blow to Trump's supporters

High tariffs can "discriminate against" countries that don't join a free trade agreement and generate a domino effect. Japan's high agricultural tariffs brought about an unintended effect of free trade promotion.

The news that the Japan-EU Economic Partnership Agreement was signed would be like water off a duck's back to President Trump, who only tries to put into practice policies and insistences that appeal to his supporters. It is ineffective to try to persuade him by using logic. Prime Minister Abe talked to President Trump about the importance of free trade and the geopolitical significance of the TPP, and unsuccessfully called for the US to stay in the TPP.

Though his sexual scandals are often reported and he execrated an opposing member as being of low IQ, President Trump's supporters are absolutely steadfast. He will change his insistences or policies only if his supporters change their minds. Conversely, if policies that directly and adversely affect his supporters are taken, it would be possible to change the Trump administration's policies.

If we can use the TPP11 and the Japan-EU Economic Partnership Agreement to deal a blow to the US farming industry, which has supported the Trump administration and the Republican Party, we may be able to make him realize the significance of free trade. It takes time for these agreements to come into force, so it may miss the midterm election this fall, but will be well in time for the presidential election in 2020.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on July 18, 2018.)