On the Economics of an EU-Japan Free Trade Agreement

Tasks

The negotiations between Japan and the EU over a free trade agreement are taking place during times in which global economic integration is increasingly being called into question. With TTIP on hold and the US no longer pursuing TTP, a successful trade deal between two leading economic powers like Japan and the EU would be a strong political message: economic integration between countries is still achievable and is favourable due to the welfare gains for all participating parties. This report revisits the case for an EU-Japan free trade agreement, and provides estimates of its potential economic impact. It employs advanced quantitative methods to shed light on the economic effects that can be expected from a bilateral trade agreement between the EU and Japan. A key innovation in the proposed approach is that it uses the recently implemented EU-Korea free trade agreement as a benchmark and employs the most recent data available in the simulation model.

Methods

Descriptive presentation of bliateral economic and trade relations between Ja-pan and Germany, as well as other EU states.
Use of a quantitative international trade model to simulate the potential free trade agreement between Japan and the EU.
Use of econometric results to assess long-term effects.

Data and other Sources

Destatis, Eurostat, World Input Output Database, WITS-TRAINS, IDB and GTAP

Results

While a less ambitious form of trade liberalization, which is based only on tariff eliminations, is predicted to yield very low welfare benefits, economic gains turn out to be substantial if the negotiating parties pursue a comprehensive free trade agreement that would reduce non-tariff barriers across various sectors. According to a conservative estimate, which is modelled on the experience of the EU-Korea trade agreement, the welfare effects for Japan are around EUR 9 billion, which is equivalent to 0.23% of Japanese GDP in 2014. At the same time, the EU Member States can expect total income gains worth approximately EUR 11 billion per year. For Europe, simulations predict that the agreement would have positive value added effects in the pharmaceutical industry, in the food, beverages and tobacco, and in the motor vehicle industries. At the same time, some losses can be expected in the machinery industry. Amongst the services sectors, wholesale trade would benefit the most from an agreement. In the area of services, minor losses are likely to appear in computer programming or the entertainment industry. For Japan, substantial gains are expected in the computer and electronics sector. The motor vehicle and machinery industries would also benefit, albeit on a much smaller scale. By contrast, losses are highly likely to arise in the pharmaceutical sector and in wholesaling. The agri-food industry might lose some market share, albeit to a fairly limited extent. Given the recent developments within the EU, this study also accounts for the possible trade effects with a Brexit scenario. Without the UK, an agreement between the EU and Japan would be worth substantially less for Japan.

Publication