EU, Japan near record trade deal as 'political' accord reached

[BRUSSELS] The European Union and Japan overcame their differences on farm and car exports, paving the way for a free-trade agreement between two partners that make up more than a quarter of the world's economic output.

"We've reached political agreement" on an EU-Japan trade deal at the ministerial level, EU Trade Commissioner Cecilia Malmstrom said on Twitter on Wednesday.

"We now recommend to leaders to confirm this at summit." Japanese Prime Minister Shinzo Abe, European Commission chief Jean-Claude Juncker and EU President Donald Tusk are expected on Thursday to endorse the preliminary accord, which has been in the works since 2013.

Mr Abe is seeking to establish Japan as a leader in global trade after US President Donald Trump pulled out of a trans-Pacific commerce agreement in January, underscoring his "America First" policy.

The EU-Japan pact is also a political triumph for Chancellor Angela Merkel as she prepares to host fellow leaders of the Group of 20 in Hamburg this week, an occasion the German government intends to use to champion open markets.

Under the agreement, the EU is phasing out its 10 per cent import duty on cars from Japan, while the Japanese government is expanding access for European farm goods. Mr Abe has met opposition from the agriculture lobby among lawmakers in his ruling Liberal Democratic Party who are emboldened by a plunge in popular support for the prime minister.

The accord, which would be the EU's largest free-trade agreement, comes as the bloc is seeking to bolster its open-market credentials in the face of Mr Trump's challenge to a global trade order established in the wake of World War II.

Talks between the two sides will continue into the fall, with a legal text outlining the agreement expected in the next few months, according to an official with knowledge of the discussions. The deal will eliminate 99 per cent of tariffs when fully enacted, said the official, who asked not to be named because the proceedings were private and who signaled that the time frame to scrap the EU's import tariff on cars will be seven years.

Japanese public broadcaster NHK said Wednesday that Japan would create a low-tariff quota for European cheese and abolish levies over 15 years.

Next Steps

Once the negotiators have finished their work, the European Parliament and the bloc's national governments would have to give their approval before the agreement could take provisional effect, a process that isn't guaranteed to succeed.

Last year, the Belgian region of Wallonia, using its leverage over Belgium's federal government in commercial matters, nearly torpedoed a similar accord between the EU and Canada.

Mr Abe, his domestic political clout undermined by scandals and a heavy defeat in a Tokyo election, faces pressure from his ruling Liberal Democratic Party to maintain protective measures for home-produced cheese. The EU, the world's largest cheese exporter, predicts the deal would result in an additional 10 billion euros (S$15.74 billion) in exports of processed food, including meat and dairy products, to Japan.

On the other side, Japan's automakers have complained they are losing out to their counterparts from South Korea, which has a trade deal with Europe.

BLOOMBERG