Japan-EU FTA; Ambitious, but work still to do.

Linking together the free flow of goods from Brunei to Canada, and from Peru to Vietnam was always an ambitious task, but had it succeeded, free trade in goods would have moved closer to being the global norm.

As it is, TPP seems likely to be remembered more as the first step in a Trump-lead retreat into protectionism and national preference on the part of the USA. Whereas a year ago, with TTIP, CETA and TTP beset with difficulties but still alive, it was still possible to talk of ‘omnilateralism’ in trade. On the other side of the Atlantic, activity – if any – now however seems far more likely to be focused around renewing NAFTA, which came into force 23 years ago.

For the EU, however, this slowdown may prove to be beneficial; in this context, it is possible to see the recent understanding reached on a Japanese- EU Economic Partnership Agreement (‘JEEPA’) as having been spurred on by this volte-face­ on the part of Washington. As Japan no longer had to consider, at least in the short term, that difficult concessions to the EU in the agricultural market would need to be replicated in a deal with other TPP partners, a window of flexibility opened which allowed the agreement to be made.

The early reactions to the announcement of an agreement-in-principle earlier this month were not slow to claim that, following four years of negotiations, this agreement would “send a powerful signal that two of the world’s biggest economies reject protectionism”, and that it was a reflection of the “shared values” of the EU and Japan. On further examination, it may be premature to call for the (DOP) Champagne quite yet; although agreeing to slash barriers to trade between two of the most advanced and wealthy economies in the world is undoubtedly a remarkable achievement, there are several aspects of the agreement which are yet to be satisfactorily resolved before a final deal can be struck.

Data Flows & Adequacy

Free flow of data is one such sticking point; while Japanese negotiators are apparently keen to include data transfers (one unnamed source in Politico described the issue as being “sine qua non” for the Japanese), the Commission does not yet consider Japan’s privacy laws to be sufficient to ensure protection of data at the same level as consumer’s enjoy in the EU. Accordingly, resistance from the Parliament was clear. In the words of Dutch MEP Marietje Schaake, “The European Parliament will not ratify an agreement that undermines data protection in the EU and the Commission knows this”. Likewise, some commentators have criticised the lack of enforcement in data protection issues in Japan, although changes have recently been introduced.

A decision on adequacy may be on the horizon however; In March Věra Jourová – Commissioner for Justice, Consumers and Gender Equality – released a joint press statement with her Japanese counterparts announcing that “[they were] now working to bridge our data protection laws and will work together towards an adequacy decision”. This was followed by a further press release on the 4^th of July, confirming the intention of both parties to reach an agreement on adequate levels of protection by early 2018. Convincing Parliament that that level of protection is indeed sufficient to assuage concerns of data protection and consumer rights may prove to be an arduous task before the final deal is ratified. 

Professional Services

Although trade in services is addressed in Chapter III of the draft text of the Agreement, little has been revealed in terms of sector specific changes. Instead, a fact sheet from DG Trade on the 1^st of July focused on reaffirming the EU’s commitment to the precautionary principle, and protecting public services and ‘sensitive economic sectors’, a lack of information described as “disappointing” by  Pascal Kerneis, Managing Director of the European Services Forum (ESF). 

The Multilateral Investment Court

Few observers will forget that that the inclusion of clauses allowing foreign investors to seek recourse to arbitration almost jeopardised the CETA treaty, with political fallout manifesting in Germany and Belgium. Nor has opinion 2/15 of the Court of Justice, effectively splitting direct and non-direct investment into exclusive and shared competencies, nullified the issue. In this light, the Commission’s desire to include recourse to a Multilateral Investment Court (MIC) may prove to be a considerable stumbling block, as it would require the final text to depart from recent trends, and specifically exclude non-direct – i.e. portfolio – investment in order for final agreement to be within the EU’s exclusive competence. Furthermore, the opinion also appears to say that the bare inclusion of an investor-state dispute settlement (ISDS) mechanism leads to the agreement requiring ratification by individual member states (and therefore, in some cases, ratification by their regional governments as well). Even if the member states did ratify such an agreement, there is little evidence that Japan is interested in accepting the MIC as opposed to established ISDS procedures such as ad-hoc tribunals convened under UNCITRAL rules. On the contrary, Borderlex claimed in December that;

“Japan has indicated that the ICS proposal as it stands now contains several shortcomings, such as the danger of a pro-state biased court and the proliferation of bilateral investment courts in the various FTAs that would increase inconsistency rather than improve uniformity of the investment law jurisprudence. These shortcomings would first have to be remedied before it could support the proposal of creating a multilateral investment court system.”

The Commission is thus far reticent on the issue, merely stating in its 6^th of July press release that it “will reach out to all our partners, including Japan, to work towards the setting up of a Multilateral Investment Court.”

In conclusion, the annual value of exports from the EU to Japan – estimated at circa €58billion in goods and circa €28billion in services – mean that even modest reduction of tariffs translate into significant gains in value for exporters, and ultimately consumers. Similarly, the steps taken to open up the previously unassailable Japanese agricultural market should not be understated, and likewise neither should the political signals sent by visible, tangible evidence of the EU taking the lead in continued commitment to globalisation be dismissed. To fully build on the climate of good will generated by July’s Agreement however, the Commission must deal fully and deeply with the issues outlined in this article.