Your cars in exchange for my cheese

Monday, 6 august 2018 | Redacción CEU

The first signature of a free trade agreement to eliminate tariffs between the European Union and Japan has not come to public attention with an intensity which lives up to its magnitude. It is true that this alliance has not been ratified by the Japanese Diet or the European Parliament yet -although everything seems to indicate that no obstacles will be posed in the way to its final approval. That is not to say that the impact that its effective implementation could have on the global economy is less significant: the joining of their strength is equivalent to 27.8% of the world’s gross domestic product and 36.8% of the trade in goods. How can this treaty change the global economic scenario? What are the keys to understanding this alliance?

 

It is not the first time that this free trade agreement captures the attention of our newsroom. As we have recently analyzed, this agreement has a direct impact on the automotive industry. Its implementation will involve the progressive elimination of duties on Japanese cars in a period of seven years (currently there is a 10% tax on these vehicles). However, limiting the analysis of this alliance only to this sector would mean adopting a reductionist approach of the treaty. This is the reason that has led us to the writing of this article.

The agri-food sector, the great European winner

When analyzing the headline of this article some readers may perceive a degree of delusion in its writer. Although we do not deny that it may be true, it should be noted that this treaty is popularly known as the "cars for cheese" agreement. This name responds to the impact that this pact could have on the European agri-food sector. With its implementation, Japan will mainly benefit from the commercialization of its vehicles in the Continent and the European Union will be favored by the reduction of rates in some food products like beef meat (tariffs may fall from 18.5% to 9% in fifteen years) and the elimination of duties in other products such as cheese and wine. In all, the agreement will help the marketing of 205 agricultural products with an European origin, of which 42 are Spanish products.

This agreement may allow the access of the agri-food sector to a market with 127 million consumers. The European Commission has indicated that its application will mean savings of up to €1 billion per year in tariffs and, according to a study carried out by the London School of Economics, this alliance will favor the growth of 33% of European exports. On its behalf, the Japanese government believes that, once the total reduction of duties occur, its economy will grow 1% annually.

More than a matter of tariffs

This treaty stands out for the volume of its participants, the EU and Japan are two of the four largest economies in the world. The level of ambition in this deal is also noteworthy, the elimination of tariff barriers can reach a liberalization between 90% and 99% of the products that both markets trade with each other. Nonetheless, the most striking thing about this alliance is not that aspect, but rather the fact that it transcends the commercial sphere, and goes a step further.

The agreement between Japan and the European Union reflects the mutual recognition of their data protection systems. In other words, this agreement aims at creating the largest global area of data transfer. The treaty also establishes a strategic framework so that these markets can cooperate in fields like climate change, migration and security. To accomplish this, it considers the harmonization of the legislation that regulates sectors such as cars, health and cosmetics.

 

Your cars in exchange for my cheese

A clear message to protectionist policies

The meeting between the leaders of EU and Japan, which took place last month in Tokyo, was full of allusions to the protectionist policies:

- "It is a clear message against protectionism" - Donald Tusk,  the president of the European Council

- "We are showing that we are stronger and better off when we work together. And we are leading by example, showing that trade is about more than tariffs and barriers. It is about values, principles and finding win-win solutions for all those concerned" - Jean-Claude Juncker, the head of the European Commission

- "At a time when protectionist measures are gaining steam globally, the signing of the Japan-EU deal today will show the world once again our unwavering political will to promote free trade"-  Shinzo Abe,  Japanese Prime Minister

This free trade agreement aims at combating this type of policies. In fact, it may have been able to influence, in some way, the change of course in the relationship between the United States and the European Union. It seems that the president of the USA, Donald Trump, has decided bury the hatchet, and put an end to the commercial battle that he was fighting with Europe, at least for the moment. Last week, Trump and his EU counterpart, the Luxembourger Jean-Claude Juncker, met to discuss this dispute. At the meeting, the leaders reached an agreement and managed to reduce the tension. The threat of the tariff imposition on European cars has disappeared.

The result of this meeting is a commercial truce; Trump has even come to suggest a future scenario of "zero tariffs". For the moment, this reconciliation is a starting point. The leaders have talked about a possible agreement on the elimination of the duties for European steel imports and the trading of liquid gas and soybeans from the United States. Perhaps this could be the first draft of a new international treaty: "your soybean and your gas in exchange for my metals".

At The CEU IAM Business School, we believe that in the business world it is important to work on two pillars: ethics and leadership. These have been the premises that have guided us when we designed our Executive MBA: a program aimed at those leaders of tomorrow who will be the ones in charge when it comes to facing the challenges which are posed by an increasingly complex and global scenario.