Japan May Strike Trade Agreement With EU Before US

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 |  Includes: FXY
by: Marc Chandler

Summary

Japan and EU seek to conclude trade agreement by year-end.

Main obstacles are not tariff barriers.

An agreement would suggest main obstacle to TPP is US.

Some US officials have suggested that if Japan does not cede to US demands that should be dropped from the Trans-Pacific Partnership negotiations. This might be a rhetorical zeal and part of the negotiating process.

If it is genuine, it is a risky course and could be a self-defeating exercise. Prime Minister Abe did not appear to be a strong advocate initially and had to be persuaded by the US and his domestic strategists of the benefit. Almost by definition, a Trans-Pacific Partnership without Japan, the world third largest economy, is more of a paper dragon than a solid compliment to the US so-called Asian pivot.

Abe understands that the international trade agreements will help him push through structural reforms of its domestic economy. This is the third arrow of Abenomics (the first two are fiscal and monetary stimulus). However, that international trade agreement need not be with the US. Japan has recently struck a free-trade agreement with Australia. Although it falls shy of what the US would like, it is an improvement from the status quo. And the free trade agreement with Australia is not the only free trade agreement in the works.

The EU and Japan pledged today to accelerate their yearlong negotiations. They have had five rounds of negotiations already. The EU trade representatives indicated that Japan has complied with or is complying with its commitments that will allow the negotiations to move forward. There is some discussion of the possibility of an agreement before the end of the year. Together the EU and Japan account for more than a third of the world's GDP.

According to EC data, Japan is the EU's seventh largest export market. It bought about 54 bln euros of Europe's goods exports last year. As recently as 2002, Japan was the EU's fourth largest export market. The EU is Japan's third largest export market. It bought about 56.5 bln euros of Japanese goods exports in 2013. Japan's exports to the EU are dominated by machinery, transportation equipment and chemical products. EU exports to Japan are largely the same sectors and include food and fibers too.

Japan already has low or no tariff on a wide range of European goods, including zero duty on cars, Scotch Whisky and Cognac. The problem European negotiators have is with the non-tariff barriers to trade, including regulations and standards.

Many US policy makers appear to be caught up with great power politics and the shifting balance between the US, China and Russia. They risk losing sight of the trees for the forest. Maybe they can learn a lesson from America's pastime, baseball. Sometimes the game is won by "small ball," the little hit and tactical play, not home runs. President Obama likes basketball, which is modeled on war, with territory and position. Baseball is not based on capturing territory or warfare and may offer a better analogy with trade and contemporary geopolitics.

An EU-Japan free trade agreement will give Abe the international assistance to push for the structural reforms that still appear to be struggling to gain traction. It allows Europe to strengthen its ties with Japan. It would suggest that the key obstacle with achieving the Trans-Pacific Partnership lies with the US, not Japan.

The direct impact on the euro and yen may be marginal. Methodologically, given that the capital markets are significantly larger than the markets for goods and services, the I often emphasize capital flows over trade flows in assessing the outlook for currencies. The foreign exchange market turnover is around $5.3 trillion a day, according to the BIS. In a week, the foreign exchange market's turnover is sufficient to cover nearly a year worth of trade.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.