EU-Japan free trade agreement

The EU-Japan free trade agreement marks a period of declining trade relations in particular in the most dynamic trade sectors. On 12 December, the European Parliament ratified the EU-Japan Economic Partnership Agreement and the EU-Japan Strategic Partnership Agreement to come into effect in February 2019. The agreement will remove the vast majority of residual duties, remove regulatory barriers on car exports and open up new sectors like agriculture. hanse data show that the trade patterns between the two signal the need for a revival.

The bilateral trade between the EU and Japan has been relatively uneven and since Japan’s 1992 crisis in decline. During the past 50 years from 1967 through 2017, the share of the EU (15) in Japan’s exports increased from 7.7 percent in 1967 to 19.0 percent in 1991 and declined to 10.1 percent by 2017. Similarly, the share of Japan in EU (15) exports increased from 1.0 percent in 1967 to 2.0 in 1991 and decline to 1.4 percent by 2017.

EU’s exports to Japan have been relatively concentrated in a small number of sectors. In the 10 largest EU exports,  in the Standard International Trade Classification out of 150 groups, the share of Japan declined from 2.2 percent in 1991 to 1.6 percent in 2017. Road motor vehicles are an exception and the share of Japan in EU exports increased from 10.3 percent in 1991 to 13.0 percent in 2017 representing in 2017 19.3 percent of total EU exports to Japan. In the EU 10 fastest growing exports, representing 46.7 percent of total EU exports, the share of Japan declined from 2.2 percent in 1991 to 1.5 percent in 2017 (Figure 1). In contrast, in the sectors where Japan increased its share in EU exports the most from 0.6 percent in 1991 to 2.8 percent in 2017, those sectors have declined in EU exports from 4.2 percent in 1991 to 4.0 percent in 2017.

Figure 1. Japan’s market share in EU(15) fastest growing sectors

Japan’s exports to the EU have been shown declines in key sectors. In the 10 largest sectors in Japan’s exports, the share of exports to the EU declined from 20.1 percent in 1991 to 10.5 percent in 2017. In Japan’s 10 most dynamic exports, the share of the EU declined from 15.3 percent in 1991 to 8.7 percent in 2017. The 10 sectors where the share of exports to the EU increased the fastest, from 4.9 percent in 1991 to 39.4 percent in 2017, represent only 0.4 in 2017 of total Japanese exports (Figure 2). 
EU-Japan trade relations have been lacklustre. The new trade pact may change that. For the free trade agreement to be of significance, the EU and Japan need to increase trade where it matters most to both, that is, in their most dynamic sectors.