The EU's Trade Relationship with Japan

15 July 2009
by inadim -- last modified 08 July 2011

As a highly developed economy and major global trader and investor, Japan is an important partner for the EU. Japan is the world's third largest national economy, accounting for around 1.9% of the world population and around 9% of world GDP.

After a decade of stagnation in the nineties, the Japanese economy is steadily growing at a slow average rate of growth. This process was only temporarily interrupted by the financial crises but now faces the further challenge of reconstruction and recovery following the devastating earthquake and tsunami which struck Eastern Japan on 11 March 2011. In addition, Japan still faces a number of serious headwinds to sustained growth, notably entrenched deflation and shortfall of demand. The large government budget deficit is the highest in the OECD area.

In 2009, Japanese imports and exports of goods amounted to €382 and €389 billion respectively, representing 5.7% and 6.1% of the world flows.

Over the past four decades, Europe and Japan have emerged together as leading world economic powers.

Trade in goods and services

There are enormous potential trade opportunities for European business in Japan. However, over the period from 2006, EU exports in goods to Japan have been in modest decline, complicated by a major drop in 2009 [-14.7%] as a result of the global economic situation, followed by a substantial recovery [+21.3%] in 2010. EU total world exports have, on the other hand, shown more regular growth.

With exports in 2010 to Japan of €44 billion, 3.2% of total EU exports, Japan is the EU's sixth largest export market after the USA, Switzerland, China, Russia and Turkey. EU exports to Japan are mainly in the sectors of machinery and transport equipment (31.3%) , chemical products (14.1%) and agricultural products (11.0%). With a 4.3% 2010 share of the EU import market, represented by €65 billion, Japan is the six largest source of imports into the EU after China, the USA, Russia, Switzerland and Norway. Imports from Japan are mainly in the sectors of machinery and transport equipment (66.7%) and chemical products (7%). Japan remains overall a major trade partner of the EU, in 6th place, without taking into account factors such as Japanese production in China.

Europe is equally a very important market for Japan. In 2010, the EU was ranked 3rd in Japan's imports [11.1%] and exports [13.3%]. In 2010, EU imports and exports of commercial services from and to Japan were 12.7 and 17.2 billion euro.

Investments

The trend in flows of FDI has been quite dynamic over the past 4 years, with a substantial rebalancing of investment flows, from a balance of -17.8 billion euro in 2006 (the EU invested 16.2 billion euro and Japan disinvested 1.6 billion euro) to a positive balance of 1.1 billion euro in 2009 (the EU disinvested 23 million euro and Japan disinvested 1.15 billion euro).

Japan is a major investor in the EU. At the end of 2009, 5.0% of the EU inward FDI stock came from Japan. Over the past 5 years, the EU has become an important investor in Japan. At the end of 2009, 2.3% of EU outward FDI stock was in Japan. Japan's inward FDI has increased markedly since the mid-1990s, but remains very low in comparison with other OECD countries.

Evolution of trade relations

The trade relationship between Europe and Japan has traditionally been characterized by strong trade surpluses in favour of Japan. Trade figures have become much more balanced recently, but Japan continues to be a country where, for specific structural features of Japanese society and the economy, doing business or investing is often particularly difficult. As with the USA, a potential for trade disputes has existed in the past. However, the EU's economic relationship with Japan has been positively affected in the last decade by the less favourable evolution of the Japanese economy and the slowdown of economic growth. Since the early 1990's, and especially since its "financial bubble" collapsed, Japan has to a certain extent begun to accept that it has to make special efforts to open its economy to international competition and embark on structural reforms.

This new situation has brought about a more co-operative era in the EU-Japan relationship.

Instruments for strengthening bilateral partnership

Both partners have created a number of informal "dialogues" in a number of areas, in addition to ministerial meetings and Government level yearly Summits. A "Joint Declaration on Relations between the European Community and its Member States and Japan" was signed on 18 July 1991. At the 10th EU-Japan Summit held in Brussels in December 2001 a ten-year Action Plan, to reinforce EU-Japan partnership and move it from consultation to joint action, was adopted.

One of the four objectives of the plan for a stronger partnership is "the strengthening of the Economic and Trade Partnership" in bilateral relations and on the international scene, including the WTO. Since the adoption of the Action Plan, opportunities for dialogue and exchange of ideas with the Japanese counterpart have multiplied.

At the EU-Japan Summit in Tokyo, on 22 June 2004, Japan and the EU reconfirmed the importance of forging a solid strategic partnership. In the economic area, noting that economic relations between Japan and the EU are thriving, they recognised the need to strength trade and bilateral investment links further to help spread prosperity more widely. With this objective, they endorsed a Cooperation Framework aimed at promoting two-way investment via concrete actions in areas such as establishment of new regulations; regulatory transparency; standards and conformity assessment; facilitation of conditions for foreign residents. Additionally, they recognised the value of continuing the current Intellectual Property Rights dialogue, including in the area of Geographical Indications, and presented a joint initiative to promote protection and encourage enforcement of Intellectual Property Rights in Asia. They also noted the importance of continuing the cooperative dialogue on government procurement and on Private Finance Initiatives and Public Private Partnerships.

In the context of the 2005 Summit, which took place in Luxembourg on 2 May, there was satisfaction with the steady growth in economic interaction. PM Koizumi restated Japan's willingness to boost inflow of foreign investment. It was also decided to continue with the ongoing bilateral co-operation on Intellectual Property Rights (IPR) and government procurement. The final declaration also included a rather bold statement on the Doha Development Agenda. At the 2006 Summit, which took place in Tokyo on 24 April, President Barroso and PM Koizumi confirmed their intention to boost inflow of foreign investment and to strengthen cooperation in fields such as intellectual property.

Another major pillar of bilateral EU-Japan relations is the two-way Regulatory Reform Dialogue aimed at reducing the number of unnecessary and obstructive regulations which hamper trade and foreign investment. Since 1995, the EU and Japan have participated actively in each other's regulatory reform efforts through dialogue and exchange of reform proposals. Over the last ten years, the EU has submitted a wide-range of regulatory reform proposals aiming at improving the climate for doing business and helping increase economic growth in Japan. Despite the complexities of administrative and economic reform in Japan, several EU proposals have been positively received by the Japanese government.

Given the importance of their partnership, it is both EU and Japan's global interests that trade flows in both directions are healthy and prosperous. Since 1979 the European Commission has encouraged European enterprises' efforts to penetrate the Japanese market and given them concrete assistance through the EXPROM programme (Relex promotion programmes).

The EU-Japan Summit held in Tokyo on 28 April 2010 entrusted a joint High-Level Group with the identification of options for the comprehensive strengthening of all aspects of the EU-Japan relationship and defining the framework for implementing it.

In light of this work, at the 20th summit on 28 May in Brussels, both sides agreed to start the process for parallel negotiations for:

• a deep and comprehensive Free Trade Agreement (FTA)/Economic Partnership Agreement (EPA), addressing all issues of shared interest to both sides including tariffs, non-tariff measures, services, investment, Intellectual Property Rights, competition and public procurement; and
• a binding agreement, covering political, global and other sectoral cooperation in a comprehensive manner, and underpinned by their shared commitment to fundamental values and principles.

Summit leaders decided, to this end, that the two sides would start discussions with a view to defining the scope and level of ambition of both negotiations. It is intended to carry out this as soon as possible and for the European Commission to seek the necessary authorization for the negotiation of these agreements on the basis of a successful scoping exercise.

Co-operation in multilateral fora

The EU and Japan have strong bilateral trade and investment links and, as global players, they have a common interest in the health of the world trading system. Bilateral co-operation has therefore naturally developed on multilateral trade issues, notably in the context of the WTO.

The EU and Japan launched a bilateral consultation process in 1998 to achieve common positions on issues relating to WTO negotiations. This dialogue has been particularly productive and has enabled both sides to identify a substantial number of areas of common interest. Since then, the two partners have maintained close relationships and drawn lessons, toward a successful conclusion of the ambitious multilateral trade Round agreed in November 2001 at the Fourth WTO Ministerial Conference in Doha, Qatar.

The EU and Japan continue to believe that a successful conclusion of this round may be beneficial to all WTO members. At the latest EU-Japan Summit in Tokyo, they recognised that the current multilateral, rule-based, trading system under the WTO remains the most effective and legitimate means to manage and expand trade relations between countries; and reiterated the importance of achieving progress in the Doha Development Agenda.

Bilateral agreements

Four important agreements have been finalized between the EU and Japan.

1. The EU-Japan Mutual Recognition Agreement which entered into force on 1 January 2002, permits acceptance of conformity assessment conducted in one Party according to the regulations of the other in four product areas (telecommunications terminal equipment and radio equipment, electrical products, Good Laboratory Practices for chemicals and Good Manufacturing Practices for pharmaceutical), an important step in facilitating market access.

2. An Agreement on Co-operation on Anti-competitive Activities was adopted by the EU Council on 16 June 2003. This agreement should facilitate both trade and investment by securing a level-playing field between in- and outsiders.

3. A Science and Technology Agreement between the EU and Japan was signed on 30 November 2009.

4. The Agreement on Co-operation and Mutual Administrative Assistance (CCMAA) between the EU and Japan entered into force on 1 February 2008.

Relations with the business community

In a world of increasing interdependence, neither partner can pursue its interests effectively without listening carefully to the needs of their business communities. It was for this purpose that the EU-Japan Business Dialogue Round Table was established in 1999 by merging two previous dialogues. By voicing the joint views of both business communities, the Round Table significantly contributes to the identification of mutually-beneficial initiatives and keeps close track of the progress achieved by both the European and the Japanese administrations. While much has already been done, the continuing reinforcement of the trade relationship between Europe and Japan is in the interests of the industry on both sides.

Future prospects

Japan and Japanese business have been pressing for closer economic ties, notably by way of a free trade agreement. On the EU side, a public consultation exercise, conducted via the Europa website, showed that the majority of EU stakeholders were also in favour of increased economic ties with Japan, provided the Japanese side should show goodwill in respect of making progress on existing trade barriers. EU stakeholders also mentioned the need for improvement over a broad range of areas, including notably access to Japan's public procurement market and the investment climate in Japan. NB The full results of the public consultation can be found here.

Following the decisions at the 20th summit on 28 May, both sides will now begin discussions to determine the scope and level of ambition for such an agreement.

Source: European Commission