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The European Commission is on Wednesday expected to ask EU member states for permission to launch negotiations with Japan on a free trade agreement – putting it on a collision course with the bloc’s struggling carmakers.
If concluded, an EU-Japan free trade agreement would rank as the world’s largest, uniting two trading partners that account for roughly a third of global economic output.
Both sides have warmed to the possibility of such a pact as they search for new ways to revive slow-growing economies. The start of bilateral negotiations would also serve as further acknowledgment of the failure of the Doha round, which was intended to deliver a global trade agreement.
An internal assessment conducted by the commission, the EU’s executive arm, has estimated that an agreement could increase the 27-member EU’s gross domestic product by 0.8 per cent while adding 420,000 jobs.
At a workshop in the European parliament last week that was sponsored by the centre-right European People’s party, textiles, chemicals and food groups all voiced their support.
But any agreement is expected to face stiff resistance from European carmakers, who are already suffering overcapacity. They fear that a free trade agreement would make it easier for Japanese competitors to turn to the EU to offload their own production as their domestic market shrinks.
Japanese brands boasted 11.5 per cent of the EU market in 2011 – although more than two-thirds of those vehicles were produced in European factories. European imports accounted for just 5.5 per cent of the Japanese market.
At present, the EU imposes a 10 per cent tariff on imported Japanese cars. Japan does not impose any tariff, but foreign carmakers complain that they are kept at bay by a thicket of technical regulations and other non-tariff barriers.
EU carmakers are also fuming over a landmark free trade agreement with South Korea, which has already led to an increase in low-priced imports from Hyundai and Kia since it went into effect last year.
The impact of that deal gained increased attention after PSA Peugeot-Citroen last week announced France’s first car plant closure in more than a decade.
Karel De Gucht, Europe’s trade commissioner, is seeking to assuage the fears of industry and sceptical member states, including Germany and Italy, who will decide on the commission’s request in October or November.
In an unusual move, the commission is expected to insert a condition allowing member states to call off negotiations after one year if Japan does not follow through on promises to remove certain non-tariff barriers related to automobiles, food and drink, and medical devices, among other products.
“For us, it’s a sine qua non that they remove their non-tariff barriers,” one EU official said.
In pledging to dismantle some barriers even before the negotiations have commenced, Japan has demonstrated its seriousness to close a deal. Trade analysts say that any agreement would probably have to be clinched before Mr De Gucht’s terms runs out in 2014.
If talks with the EU founder, however, Tokyo also has other invitations on the table, including discussions to create a regional free-trade agreement with China and South Korea as well as the broader Trans-Pacific Partnership.
Hosuk Lee-Makiyama, an analyst at the European Centre for International Political Economy, a trade-focused think-tank, said the size of a Japan deal meant that it was one of the few free-trade agreements that could make a noticeable impact on EU growth.
But he added: “There is no shortage of sensitive sectors on each side – passenger cars for Europe, and services in Japan.”