A new era for the EU and Japan, the champions of global free trade and multilateral agreements, has begun. A landmark event that will change the global economic landscape has taken place. The EU and Japan signed a massive free trade deal at the 25th EU-Japan Summit on July 17 in response to recent geopolitical developments. The parties sent what they are calling a "clear message" against protectionism. The Economic Partnership Agreement (EPA) will provide a powerful impetus to the economic growth of its signatories and also set the standards for their other trading partners.
The EPA creates a large free-trade area (FTA) with no tariffs whatsoever, encompassing almost a third of the world's GDP and 600 million people. Now that the deal has been signed, it will also apply to the UK during the two-year Brexit transition period that will begin in March 2019.
The “mega-trade” deal will affect 40% of global trade (up to 70% in high-tech sectors). A drop in prices is likely to boost spending and spur growth. The European Union annually exports more than $100bn (£75bn) in goods and services to Japan. EU agricultural exports could increase by up to 180%.
The Japanese computer, electronic, and automobile industries are all expected to benefit. The prices for Japanese cars will decline in Europe, as import tariffs are gradually reduced to zero. The EPA includes modern provisions that apply to property rights (IPR), labor protections, a procedure for settling accounts, and a commitment to the Paris Agreement on Climate Change — the one rejected by the United States.
The news about the signing of the EPA contrasts starkly with the tariff wars launched by Washington. On July 15, President Trump called the EU a “foe” that takes advantage of the US in trade. The United States rattled international markets by threatening a trade war with China. Washington imposed 25% tariffs on $34 billion of Chinese goods, and Beijing was quick to retaliate. Henceforth EU officials and Japan will present a united front against US tariffs on steel and aluminum. In turn, China is offering to join forces with the EU in an effort to stand up to the US trade policy.
The United States had been in talks with Japan and other Asia-Pacific countries on the Trans-Pacific Partnership (TPP) trade agreement before President Trump made the decision to unilaterally withdraw. Washington has abandoned the talks on the Trans-Atlantic Trade and Investment Partnership (TTIP) and insists on rewriting NAFTA.
Meanwhile, the EU and Japan continue to discuss the Strategic Partnership Agreement (SPA), the EPA’s political twin, which will soon be finalized. The SPA will consolidate all areas in which the parties are politically engaged into a binding agreement to facilitate those joint efforts on such issues of mutual concern as North Korea.
Brussels and Singapore have committed themselves to promoting the ratification of their 2014 trade and investment deal by the end of 2018. The EU plans to launch FTA negotiations with Australia and New Zealand, making that alliance the driving force that is propelling the global process of integration.
The Comprehensive Economic and Trade Agreement between the EU and Canada (CETA) took effect in September 2017. The eleven remaining TPP partners, including Australia, Mexico, and Vietnam, signed the agreement, which has been renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), in March, leaving the US on the sidelines. The deal applies to a market of nearly 500 million people. America could be a big loser, forgoing a boost to its GDP of 0.5% (worth $131bn). If those eleven join the EU-Japan agreement, the world will drastically change.
There are other examples of regional integration happening in the world. Despite Western sanctions, Russia is part of that process. The Russia-led Eurasian Union has an FTA with Vietnam and is negotiating similar agreements with several countries, including India, Iran, Indonesia, and Singapore. In May, another milestone event took place that was undeservedly left out of the media spotlight.
China signed a free trade agreement (FTA) with the Eurasian Economic Union (EAEU) in Astana, Kazakhstan. This turns the EAEU-China into a unified zone that sits between Europe and Japan. Goods can be transported from Japan to China by sea and then via train through Kazakhstan, Russia, and Belarus directly to the borders of the EU. The two trade entities could easily agree to make this happen. Russia’s Northern Passage could also become a trade route for shipping goods from Japan to Europe and vice versa.
A new world order is emerging without the US. Washington’s prominence is waning as the global integration process gains traction while America marches out of step. The US just cannot imagine a world it does not dominate. It made the fundamental mistake of adopting a policy of arms twisting, insisting that others dance to its tune or else. Now other actors are shaping the economic and political world map while the US is gradually losing its status as the global leader that is essential to any integration process.