1. EU, Japan FTA: Why it provides credible alternative to China plans to serve its interests

EU, Japan FTA: Why it provides credible alternative to China plans to serve its interests

EU and Japan recently reached political conclusion on an economic partnership agreement. The European Commission has described it as the ‘most important’ bilateral trade agreement concluded by the EU.

By: | Published: July 11, 2017 6:39 AM
The EU-Japan FTA can mark the beginning of a new phase of rule making in global trade. (Reuters)

EU and Japan recently reached political conclusion on an economic partnership agreement. The European Commission has described it as the ‘most important’ bilateral trade agreement concluded by the EU. Once implemented, the agreement will have far-reaching impact on various aspects of global trade. These would be felt on the leadership of global trade, the course of economic globalisation and the crafting of future global trade rules. The effects would also extend to the geostrategic spheres in Asia and Europe.

For some time now, globalisation is under attack for having created numerous losers and left-behinds. The anti-globalisation narrative has acquired considerable political legitimacy and led to tumultuous outcomes like Brexit in the UK and triumph of Donald Trump in the US presidential elections. It has also pushed the TPP into an uncertain future after the withdrawal of the US—the largest economy—from the agreement. Anti-globalisation sentiments in the US, Europe and several parts of the developed world allowed China to emerge as the vanguard for global trade. Nowhere was this more evident than the World Economic Forum earlier this year, when Chinese president Xi Jinping was the toast of the global business community.

China hasn’t hesitated to express its eagerness in salvaging globalisation and leading the charge against protectionism and inward-looking policies in world trade. But its efforts to recharge globalisation through geopolitically motivated connectivity plans like the One-Belt-One-Road (OBOR) have created doubts among many countries about China’s sincerity in shepherding a truly participative economic globalisation and global trade. Ongoing trade negotiations involving China, such as the RCEP, have been clouded by worries over China’s efforts to fashion regional trade rules suiting its sovereign interests. The EU-Japan FTA is a significant advancement in this context as it puts the EU and Japan in commanding positions to lead globalisation and world trade by providing a credible alternative to China’s plans.

EU has always been a major actor in global and regional trade. This is evident from the large number of trade agreements it has with various countries and regions of the world. It has the most notified trade agreements in force and is involved in the largest number of trade negotiations across the world. The US withdrawal from a prominent leadership role in global trade should have had the EU filling up the vacuum ‘naturally’. But the setback over Brexit and the growing prominence of anti-globalisation political voices in different parts of the continent gave rise to the impression that Europe would retreat from the pro-trade, outward-oriented policies it has followed for decades. The worries were substantially put to rest by the results of the recent French presidential elections that had Emmanuel Macron’s pro-globalisation campaign overthrowing the challenge of the far-right anti-globalisation opposition. It’s clear now that the EU remains committed to free trade and its leadership is ready to tread a path different from that preferred by the US. The political conclusion of the EU-Japan FTA affirms the commitment.

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Apart from being significant in economic size, the EU-Japan FTA can mark the beginning of a new phase of rule making in global trade. Three issues are notable in this regard. The agreement upholds the commitment of both Europe and Japan to the Paris agreement on climate change. This is a ‘first’ for bilateral deals given that while some existing US and EU FTAs have environmental standards, none have as specific commitment to climate change as this deal. By taking the Paris climate action commitments within its fold, the FTA has set an example for other deals being negotiated. Many future FTAs, particularly those being negotiated by India and other G20 members committed to the Paris action plan might incorporate climate change.

The second important point to be noted is the approach of the EU-Japan FTA towards investment issues. There is a conscious effort to move away from the contentious investor-state-dispute-settlement (ISDS) provisions in various BITs to a framework that emphasises more on liberalisation of foreign investment in each other’s territories as opposed to investment protection. The FTA is expected to follow the EU’s framework of an Investment Court system with judges being appointed by both countries for deciding disputes. This might again become the norm for many future FTAs uncomfortable with binding ISDS provisions. Finally, the FTA has maintained high data protection standards, which, again, has been a point of contention in agreements like TPP where some countries have been reluctant to lower data protection standards for enabling greater cross-border data flows. Of course, it remains to be seen how the FTA eventually enables effective digital trade notwithstanding high data protection.

The new approach to trade rule making is in particular contrast to the US mode of negotiating FTAs. The investment and data rules are different from those that the US has been advocating in its own FTAs, including the TPP. The distance of the EU-Japan FTA from the US worldview on trade has increased through its commitment to climate change. The new approach and framework also steals the thunder from China’s efforts to contribute significantly to trade rule making, as China would need to search for a more acceptable alternative. Finally, geopolitically, the FTA shows that the world can work very well on free trade and globalisation without the US, and also without China.

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