The Wall Street Journal: Japan, European Union Strike New Trade Deal

BRUSSELS: Japan and the European Union agreed on the terms of a new trade deal, hours before U.S. President Donald Trump was expected to clash with them and other world officials over how global trade works.

Thursday’s announcement is a fresh sign of major global powers responding to Mr. Trump’s “America First” policies. If approved, the pact would represent a significant opening of the once heavily-protected Japanese market. Japan is seeking to pursue new export opportunities following Mr. Trump’s withdrawal from the pending Trans-Pacific Partnership trade deal, which now has 11 countries.

Mr. Trump arrived on Thursday in Hamburg, Germany, for a meeting of the Group of 20 major economies, where differing views on trade are likely to loom large.

With €125 billion ($142 billion) of exports and imports in 2016, an EU-Japan trade deal would be one of the most significant the bloc has reached. Officials have said it could eventually knock an annual €1 billion off customs duties.

Negotiations have taken four years and significant hurdles remain. Still, leaders on both sides hailed the deal, which they hope will take effect in two years, as a blow to protectionism.

“Some are saying the time of isolationism and disintegration is coming again, we are demonstrating that this is not the case,” European Council President Donald Tusk said at a media conference.

Negotiators must still agree how to resolve disputes that arise after the pact is launched and create a mechanism for protecting investments. Months of work are needed to complete detailed legal texts and ratify any deal in Europe and Japan.

Meanwhile, domestic opposition is rising against the pact, which addresses tariffs and non-tariff barriers to trade, such as regulations.

However, negotiators recently resolved some of the thorniest issues, revolving around the auto and dairy industries, helped by top-level political encouragement.

Not all details of the deal are completed and public yet, but Japanese auto makers stand to gain from the eventual elimination of import tariffs ranging from 10% to 22%, although a safeguard clause is built in to allow tariffs to snap back if Japan restores non-tariff barriers to European exports. Tokyo would harmonize its regulatory standards with the EU.

Japanese Prime Minister Shinzo Abe called the deal “a major pillar in our economic growth under Abenomics,” referring to his domestic economic platform.

European companies are expected to see a significant boost in agricultural and food product sales, despite longstanding political sensitivities about the sector in Japan. Tokyo has committed to lift most, but not all, tariffs on key EU exports like pig meat, cheese and wines, although in some cases, the transition periods are as long as 15 years.

Before Mr. Abe’s election as prime minister in 2012, Tokyo had shown little interest in free-trade talks with major economic powers, reflecting strong domestic resistance to opening up markets such as agriculture.

But as Japan’s economy faced headwinds from persistent deflation, a declining birthrate and an aging population, Mr. Abe looked to improve foreign market access for Japanese companies, as well as seeking competition from imports as a way to drive reform of inefficient industries.

Emboldened by a strong mandate for economic reform, Mr. Abe drove Japan’s participation in the Trans-Pacific Partnership, seen as key to increasing exports to the U.S., Japan’s largest overseas market. Once Mr. Trump abandoned the deal, Japan gave the EU agreement priority. Earlier in 2017, Tokyo dispatched officials to reignite negotiation, with an eye on Mr. Abe’s visit to Europe for the G-20 meeting as the finish line.

Still, a disagreement over dispute arbitration and protection for investors could derail the pact. Japanese officials were also cautious Thursday about committing to an early-2019 deal, which coincides with Britain’s planned exit from the EU. Japanese officials acknowledged Britain’s exit from the bloc could cause further complications, potentially requiring some renegotiation of low-tariff quotas.

Political hurdles are also likely. In Japan, politicians want the government to ensure local producers of pork, wood and dairy products are able to compete against European rivals.

European concerns range from preventing the sale of illegal logging products to protecting the car sector. Depending on the final details, the agreement could need ratifying by all 28 member states plus the European Parliament, exposing the agreement to the kind of delays the EU’s Canada trade deal experienced because of opposition in Belgium’s regional Wallonia parliament.

Separately Thursday, the EU and Japan issued a statement condemning North Korea’s recent nuclear and ballistic missiles tests. They called for the swift enactment of a new United Nations Security Council resolution restricting Pyongyang’s access to products, technologies and funding for its missile program.