On 6 July, the European Union and Japan reached a so-called ‘political agreement’ on the main elements of a future economic partnership during the 24th EU-Japan Summit in Brussels. While the announcement of this imminent deal may be good news for international trade, which has been going through a rough patch recently, some outstanding issues still have to be addressed before the talks can be concluded.
Already now, Japan accounts for the highest import value for passenger cars in the EU and is the second largest importer in volume terms. Nearly 575,000 Japanese cars were imported into the EU last year, representing 20% of all imports. With trade totalling €9 billion, Japan is the number one importer in terms of value. The other way around, Japan is the fifth most important destination for European cars when it comes to trade volume. 279,259 passenger cars were exported from the EU to Japan in 2016, only accounting for 5.1% of all our exports.
ACEA members are global companies and international trade is an important pillar of the European automobile industry’s competitiveness, generating a trade surplus of more than €90 billion for Europe in 2016. Our sector supports trade agreements that are free and fair, providing mutual benefits. The fact that Japanese and EU leaders announced a political accord to conclude negotiations for a trade deal is a positive signal for international trade.
However, it should be noted that the two parties only signed a political agreement to conclude a free trade agreement (FTA) in the near future, not the final deal. Fine-tuning the agreement will take at least a few more months, and might even take till the end of the year. So, the coming negotiations will play a crucial role in defining the outcome of the deal for Europe’s auto industry.
Automobile manufacturers accept that the elimination of tariffs is an essential part of any FTA, but I would like to emphasise the importance of a balanced agreement for our sector. Today, EU import duties on passenger cars amount to 10%, while duties on commercial vehicles are between 10-22%. As ACEA, we believe that any schedule for the elimination of these tariffs should reflect the status of automobiles as sensitive products and should be progressively reduced to zero in a linear way, over a minimum of seven years.
At this stage, the current political agreement commits the EU to a seven-year tariff phase out for all automobiles and as such our red-line has been respected in the negotiations. With regard to rules of origin, however, several concessions have been made to the Japanese side. If this remains the case, Europe risks allowing Japanese manufacturers to source additional parts and components from suppliers in China or other East Asian countries. Relaxation in rules of origin could therefore have a significant impact on the competitiveness of our industry, and thus on the overall balance and fairness of the EU-Japan agreement.
At the same time the political deal does refer to an automotive annex designed to ensure continued regulatory convergence and to provide certain protections against the imposition of new non-tariff measures by Japan – something that our industry would welcome. However, one of the things we have learnt from FTAs concluded over the last few years, is that the removal of market barriers hampering EU exports is not as easy in practice as it might have looked on paper when the deal was inked. For example, despite the fact that the EU’s free trade agreement with South Korea has been in force for six years now, certain non-tariff measures have remained unresolved – resulting in significant costs for EU manufacturers.
Therefore, the automotive annex should not only encourage regulatory collaboration but should also allow for issues to be addressed in case of non-compliance. Likewise, it should oblige both parties to consult each other prior to the introduction of any new regulation that could potentially become a barrier for trade in the automotive sector – thereby benefitting EU and Japanese manufacturers alike. The proposed introduction of a ‘snapback clause’ that will allow for the reintroduction of import duties for failure to comply with non-tariff measure requirements is a welcome addition in this regard. It is thus of vital importance that the EU negotiates a more robust and comprehensive automotive annex in the EU-Japan free trade agreement, applying to both passenger cars and commercial vehicles.
Japan has made considerable progress in harmonising its vehicle standards with international UN Regulations in recent years. Building on this enhanced regulatory co-operation and harmonisation, our hope for the future is that an EU type-approved vehicle can be sold in Japan without the need for further certification or costly modification (as would be the case for Japan-made cars sold in Europe of course). In addition, we hope that Japan will remain committed to regulatory cooperation at UNECE level.
Finally, there is also the issue of the so-called ‘Kei cars’ that still requires further action. Kei cars are small cars unique to Japan. They enjoy a number of special financial and other regulatory advantages, but are not produced for any other markets. It is estimated that subcompact cars offered by EU manufacturers pay more than three times the tax rate compared to kei cars. These cars will not be addressed directly in the EU-Japan FTA, as taxation is not within the scope of the agreement. However, ACEA expects Japan to make a firm commitment to redressing the imbalance in taxation of this category of cars. They currently hold more than 35% of the Japanese market, meaning that EU manufacturers are effectively locked out of a huge chunk of the market.
As you can tell, it will take several more months to hammer out the details of this deal. There are some essential automotive-related elements that still need further work before a final agreement can be concluded later in the year. For the time being, it remains difficult to assess the eventual impact of a future EU-Japan FTA. Only once all texts become available, and the final automotive annex in particular, can ACEA and its members analyse the implications of the deal for the EU auto industry. While we welcome the positive elements of the current political agreement, it is clear that there are still various issues that need to be addressed. That’s why we have to keep calling on the negotiators to ensure a balanced outcome for the European automobile sector.
Secretary General of ACEA