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December 11, 2017

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You say goodbye, I say konnichiwa

The EU reached two important agreements last Friday - with the UK and with Japan. As the agreement with the UK was announced early in the morning we could report that the EU Council will be able to declare later this week that "sufficient progress" has been made in the Brexit divorce settlement. Later in the day, the EU and Japan announced the conclusion of their negotiation of free-trade agreement. To judge by the press coverage, the most important aspect of the EU-Japan agreement is the size of the market it creates: over 600m people. But a more interesting conclusion is that the EU is taking over from the increasingly protectionist US as the political leader of international trade.

Access to the EU market motivates foreign exporters to adopt EU standards. Jakob Hanke argues in Politico that the EU, with a string of successfully negotiated trade agreements with Vietnam is 2015, Canada in 2016, and now Japan is quickly replacing the US as the standard setter in global trade. In addition to these, the EU is currently embarked on trade negotiations with Mercosur, with trade commissioner Cecilia Malmström currently visiting a trade summit in South America. The EU is also pursuing trade agreements with Mexico and Australia. 

In a column published by Project Syndicate before the Japan agreement was announced, Daniel Gros sees an erosion of the post-war international trade system set up by the United States as part of its hegemony, and which includes notably the World Trade Organisation. We see this erosion in the increasing use of bilateral trading agreements at the expense of the multilateral WTO framework. Gros explains this situation by reference to a 1989 paper by Paul Krugman where he showed that a system of three trading blocs was least conducive to trade cooperation. This suggests that in theory the rise of China as a third global trading player alongside the US and the EU does not favour trade liberalisation. The reason is that in a three-player game, if one of the players (the EU in this case) expends political capital to prevent another one (the US) from undermining the WTO, the third player (China) benefits. And in practice we see that US exporting fewer manufactured goods, and importing less energy as it is not self-sufficient due to shale gas. And China is letting the EU do the heavy lifting of supporting the WTO regime. 

As to the details of the EU-Japan economic partnership agreement, it is a mixed agreement affecting more than just EU competences on trade, so it will require ratification by member states - and some regional parliaments like Wallonia's. This means the agreement could end up in ratification limbo like Canada's CETA. The most contentious part of CETA was the investor protection clauses, which have led the EU and Canada to set up special arbitration courts. The EU and Japan are still negotiating investment protection standards and dispute resolution. The agreement has been dubbed "cars for cheese". Japan eliminates tariffs on EU agricultural goods such as cheese, beef, and pork, as well as honouring European protected geographical indications. In exchange for this, it opens up the markets to Japanese car exports, though this will be phased in over a number of years. That's for the exclusive EU competences. In addition the agreement opens up services markets such as financial services, e-commerce, telecommunications and transport; as well as public procurement, allowing European companies to compete for tenders in 48 large Japanese cities and in the Japanese railway services at the national level.

Our other stories

We also have stories on whether the EU/UK Brexit deal will survive the week; on Laurent Wauquiez's triumph; on growing scepticism of a German grand coalition; on snap elections in Greece; on Portugal's productivity puzzle; and on Jean-Pierre Landau's proposal of a European Monetary Fund with access to ECB funding.

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