EU and Japan agree on a comprehensive trade pact

EM5 17 TM EU Japan FTAElimination of tariffs, quotas to benefit EU exporters

Combined, the EU and Japan have 9 percent of the world’s population, 28 percent of its GDP and 36 percent of its trade. Billions of euros’ worth of goods and services are traded between the two economies; hundreds of thousands of jobs are directly supported by this trade, and many more hundreds of thousands have been created by investment by the EU and Japan in each other’s economies. In seafood alone, two-way trade reached a record EUR395 million in 2016. Combined, the EU and Japan together account for over one-third of global seafood trade.

However, limiting even greater growth and economic benefits are barriers such as high tariffs (taxes applied only to imports, such as cars and machinery imported into EU member states and rice and foodstuffs imported by Japan, among thousands of other examples). In addition, trade barriers include quotas (annual quantity limits on imports), and divergent non-tariff/quota measures such as food safety regulations and labeling requirements. To address these issues and develop a framework for a trade deal, the EU and Japan started talks in 2013 to further the creation of a trade and investment agreement between the two economic powers.

On 6 July 2017, The European Commission and the Government of Japan announced an “agreement in principle” on the main elements of an Economic Partnership Agreement (EPA). The new EPA, as described by both sides’ governments, covers the following areas: 1) Trade in goods (including Market Access, and General Rules); 2) Non-Tariff Measures; 3) Rules of Origin; 4) Trade in Services; 5) Procurement; 6) Intellectual Property (including Geographical Indications); 7) Other issues (Institutions and Regulatory Cooperation).

Regarding seafood, the most significant result of the EU-Japan EPA will be the complete elimination by both sides of all import tariffs and quotas on fish and seafood trade between the two economies. For almost all products, these barriers will be removed immediately upon entry into force of the agreement, while for a few products the tariffs will be phased out over a few years.

High tariffs – in fact, all tariffs – to be removed

Looking at the seafood sector as a whole, it is clear that the EU market is protected by tariffs to a much greater degree than is the Japanese market. EU import tariffs on most seafood products are much higher – in some cases more than ten times higher – than Japanese rates for the same product lines. Overall, the volume-weighted average tariff on EU seafood imports from Japan (the average of all the tariffs divided by the volume of each product imported during 2012-2016) is 8.9%, while the weighted average tariff applied to EU seafood in Japan is 4.6%.

On both sides, there are some very high tariffs on individual seafood products. The Japanese tariff on imports of EU fresh “whole” trout is 35 percent of import value; dried, salted or in-brine fillets of many species are dutiable at 10.5 percent; and the tariff on canned fish of almost any species is 9.6 percent. On the other side of the coin, EU tariffs on Japanese canned fish (tuna, anchovies or mackerel), for example, range from 22.5 to 25 percent; the tariff on fresh or frozen tuna (“whole”) is 22 percent; and the tariffs on prepared or preserved eels, caviar and caviar substitutes, shrimps and prawns, and prepared or preserved molluscs, are all 20 percent of import value. These barriers to trade raise consumer costs and reduce consumption of seafood.

These tariffs and all others applied to the EU-Japan seafood trade are destined for elimination under the new agreement. The actual effects on businesses and consumers of removal of these tariffs depends on a lot of things, such as alternative sources and markets for such products, but the relative sizes of the two sides’ tariffs suggests a greater impact on Japanese markets than on EU consumers.

Possible impacts include cheaper Japanese seafood for European consumers

All this is encouraging news for Europe’s seafood export sector, particularly for countries such as Denmark and the Netherlands, whose trade with Japan has shown erratic growth over the past several years (see graph). According to the European Commission, EU exports to Japan grew by 18 percent in the last five years, from EUR 296.2 million in 2012 to EUR 348.3 million in 2016. By quantity, however, EU exports to Japan rose less quickly during this period, from 43.4 thousand tonnes in 2012 to 48.4 thousand tonnes in 2016, a gain of 12 percent. Since it is mainly export volume rather than value that determines job numbers, this means job creation in EU seafood exporting to Japan has been slow.

In the other direction, EU imports of fish and seafood from Japan grew by 60 percent in the last five years, from EUR 29.4 million in 2012 to EUR 47.0 million in 2016. By quantity, EU imports from Japan grew by 43 percent, from 3.04 thousand tonnes in 2012 to 4.35 thousand tonnes in 2016. As a share of world trade with the EU, Japan contributes a tiny share of total EU imports (0.2 percent by value in 2016), but purchases a much larger share of EU exports (7.8 percent by value in 2016). Some of the Japanese products imported into the EU are duty-free already (including frozen dogfish, crabs, live, fresh or chilled molluscs, and fresh mackerel), while others are subject to the tariff rates described above. On the other side of the coin, none of the leading products exported by the EU enter Japan duty-free, all are subject to tariffs ranging from 1 percent (frozen rock lobster) to 10 percent (octopus).

Thus, most products traded between the EU and Japan will be directly affected by tariff removal under the EPA. EU exports of frozen round Atlantic bluefin tuna to Japan, for example, will no longer be dutiable at 3.5 percent, and prepared/preserved anchovies will lose their 9.6 tariff applied by Japan. Japanese exports of scallops will lose their 8 percent tariff rate imposed by the EU, and prepared/preserved sardines will lose their 12.5 percent EU import tariff. With many, many other products whose trade is small, it may well be that tariff elimination will propel their trade levels much higher; but predicting such changes has not yet been done by experts who have examined thee impacts of the EU-Japan EPA.

However, on the consumer side, the available information suggests that, given Japan’s tiny share of overall EU seafood imports, the impact of an EPA with Japan on Europe’s consumers would be small. It would mainly be downward pressure on prices of Japanese seafood and the domestic and other imported products they compete with in the European marketplace, as import tariffs on such products decline. Japanese fishery products that are now subject to relatively high EU tariffs (e.g., canned tuna) are available also from other foreign sources (indeed, most EU imports come from non-Japan sources), and a reduction in duty rates could give Japan an advantage over competitors, including those under the EU GSP programme that benefit from reduced but not eliminated tariffs. 

Industry support for those who need it

A change in trading patterns as significant as those likely to be caused by the EU-Japan EPA inevitably means drastic adjustment for some businesses and workers. The EPA provides for “safeguard measures” to temporarily protect a domestic industry from a surge in imports. Typically, the safeguard consists of a delay in reduction of an import tariff for a fixed period (2 years, with a possible one-time extension of 2 more years), to give the industry time to adjust to the new reality. This safeguard provision has always been available to member states of the World Trade Organization, and its inclusion in the EU-Japan EPA mirrors the safeguard agreement in the WTO. Not everyone can or will benefit from the safeguard; the injury (or threat thereof) to the domestic industry from the surge in imports must be shown (in arbitration) to be as great as any other cause of the industry’s woes, thus the “burden of proof” can be high. However, the provision is available to help firms and workers adjust to exceptional adverse changes in trade patterns. Petitioners for such safeguard protection can be businesses or workers’ associations themselves, as long as they demonstrate that they represent the interests of the bulk of a particular sector (whether product-specific, geographic, or other delimitation of a “domestic industry” within the EU). Everyone who is interested in the specifics of the EPA as it currently stands can get further information from the European Commission at http://trade.ec.europa.eu.

Some details remain to be hammered out

The EU-Japan EPA is currently “an agreement in principle,” meaning some sections of the agreement still require fine-tuning and some issues still remain to be settled before finalisation and ratification of the agreement.  For example, issues of product quality remain, including how exactly to reconcile differing protection mechanisms for health and safety, a key concern for the seafood industry, and food additives in processing or marketing, and other areas where specifics might need further work. Finally, as demonstrated by the complicated adoption by the EU of its trade agreement with Canada, complete ratification by all national and regional parliaments within the EU may take quite some time. Nevertheless, for the EU seafood industry and consumers the stakes involved with this latest agreement are high, for the benefits of increased trade beyond EU borders, market opportunities, ever-widening product availability, and further investment in sustainable production and consumption have already been demonstrated to all concerned with the EU seafood sector.

Roger Corey