Opening Opportunities:The Business View on the

EU-Japan FTA/EPA

Chairman

European Business Council in Japan

Danny Risberg

Fifth EU Asia Top Economist Round Table

EU Japan Economic Forum

Tokyo, 14 November 2014

About the EBC-IntroductionPromoting the interests of European businesses in Japan

The European Business Council (EBC)/European (EU) Chamber ofCommerce in Japan is the trade policy arm of 16 European NationalChambers of Commerce, Business Associations & other organisations inJapan

EBC represents the interests of 2,500 European companies in Japan

EBC works to improve the trade and investment environment forEuropean companies in Japan and improve opportunities for EUcompanies to enter the Japanese market

EBC has 29 sector committees with 400 corporate members

EBC FOCUS:

Specific sector issues – NTBs, tariffs, business practices, etc.

Cross-cutting issues –Procurement, FDI issues, IPR, Competition, etc.

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Changing World

Since 1972, the world has changed:

Growth of WTO

Decline of protectionism

Globalisation

WTO failure

China and India embrace capitalism

Multipolar globalisation

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Changes in Shares of Global GDP

Share of world GDP of G20 members in 2000 and 2012(%, based on current international PPP)

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Changes in Shares of Global Trade

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Impact of Rising Economies on Global Trade

• Rising economies might not adhere to open, multilateral, rules-based WTO system

• Rising economies developing their own terms of trade

• Cannot rely on the WTO to move the fair trade agenda

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Bilateral Trade Agreements

• Japan – EPAs with numerous countries, including Australia, India, Malaysia, Vietnam, Singapore, Mexico, and Chile

• The EU has trade-related agreements with more than 30 countries, including Australia, South Korea, Mexico, Chile and South Africa, and soon with Peru, Columbia and Central America; further agreements under negotiation with Singapore and Canada

• Since 13 February, 2013, the EU and the US jointly working towards a mutual comprehensive trade and investment agreement –

The EU and US account for nearly half of the world GDP and one third of global trade flows

Hope to develop global rules

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EU-Japan Relationship-2013

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In 2013:

• Accounted for nearly 30% of global GDP

• Accounted for about 25% of global Trade

• Japan was the EU’s second biggest trading partner in Asia, after China.

• The EU was Japan’s 2nd largest source of imports

• The EU was Japan’s 3rd largest destination for exports

• Japan was the EU’s 6th largest source of imports

• Japan was the EU’s 6th largest destination for exports

• Japan was the EU’s 7th largest overall trading partner and the EU was Japan's

3rd largest overall trading partner.

• The EU was Japan’s largest source of FDI

Global GDP (nominal) 2013

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EU17.35

23.17%

US16.80

22.43%China9.24

12.34%

Japan4.90

6.54%

ROW26.61

35.52%

$US 74.90 Trillion – Source: World Bank

EU & Japan

together

account for

almost 30%

of Global GDP

EU Trade in Goods with Japan: 2002-2013

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EU-Japan FDI: 2010-2013

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ABENOMICS – 3rd Arrow Proposals

• Further reduction of the Corporate Tax rate, towards a level closer to that of other developed economies;

• A new code of Corporate Governance for listed companies;

• Measures to enable more skilled professionals from overseas to work in Japan;

• Measures to boost female participation in the workforce;

• Further reform of healthcare, expanding provision including preventative

• healthcare services;

• Revision of the policy asset mix of the Government Pension Investment Fund;

• Liberalisation of the agricultural sector.

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ABENOMICS-Not Enough

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• Japan still relies on export demand to keep its companies profitable

• Is postponing much needed, but painful productivity improvements

• Recent policies driving down the value of the yen have compounded the problem

• Japanese exports have become cheaper, thus stimulating demand abroad, allowing inefficient domestic companies to survive unchallenged

• Japan must take more control of its economic destiny and achieve sustainable growth.

• Japan should cast aside layers of unnecessary regulation and bureaucracy

• Japan should open the door to real, invigorating competition and foreign investment

Significant issues are remaining unaddressed. Businesses on both sides

are investing less than they should and the economies of the EU and Japan

growing less than they could

NON-TARIFF BARRIERS to FDI

Non-Tariff Barriers to FDI

Examples of non-tariff barriers (NTBs) inhibiting

Foreign Direct Investment (FDI):

Mergers and Acquisitions: no tax deferral on cross-border transactions

Efforts to encourage more Mergers and Acquisitions, essential if foreigndirect investment is to increase, have failed. Japan’s rules do not permit taxdeferral on cross-border stock swaps between foreign and domesticcompanies. Deferring capital gains tax for shareholders receiving sharesfrom a foreign company with no previous operations in Japan should helpbring much needed FDI to Japan.

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Non-Tariff Barriers to FDI

Examples of non-tariff barriers (NTBs) inhibiting

Foreign Direct Investment (FDI):

Regulatory Environment

Foreign companies in all sectors will continue to be reluctant to invest in

and trade with Japan if their products manufactured abroad cannot reachthe Japanese market in realistic times and at reasonable cost. Resolvingthe regulatory impediments identified by the EBC -unclear administrativepractices, unique Japanese standards and testing for consumer goods, andtoo rigid, multiple and often redundant testing and certification processes,to name just a few, would definitely cause a surge in both FDI and trade toJapan.

Regulatory reform is crucial for Japan

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TARIFF & NON-TARIFF BARRIERS TO TRADE

FOOD SECTOR

Tariff & Non-Tariff Barriers to Trade

Example of barriers that damage consumer interestsin the food sector:

High tariffs on European food products

Bans on harmless food additives

The result is:

Very high cost of ingredients and transport, coupled with high import duties, makesome imported foods prohibitively expensive :

Butter (with an import duty rate of 35% +1,159 yen/kg)

Cheese (26–40%)

Chocolate for professional use (29.8%)

Confectionery (25%)

Syrup (24% + sugar tax) related to quota

Fruit juice and fruit puree for babies (21.3%)

Herbal tea (15%)

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MEDICAL EQUIPMENT SECTOR

Non-Tariff Barriers to Trade

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Example of barrier that damages consumerinterests in the medical equipment sector:

Medical Devices: Product specifications and certification processesthat are unique to Japan and delay introduction of medical innovations

Many life-saving medical innovations never reach Japan, or only arriveyears after they have been introduced in the EU and US, because Japanmaintains its own product specifications and certification processes,instead of adopting international standards. The resulting costs anddelays can be so severe that some manufacturers are completely put offby them. Some EU companies have to keep Japan-only production linesrunning because the older models are no longer produced for the EUmarket.

HARMONISATION of TECHNICAL

STANDARDS & CERTIFICATION

PROCEDURES

& ACCEPTANCE OF MARKET

AUTHORISATIONS

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Non-harmonised standards and testing

requirements and redundant testing are facts of life

in many sectors -

Examples: medical devices & equipment, medical

diagnostics, pharmaceuticals, vaccines, veterinary

products, food and wine additives,

telecommunications, construction products, cosmetics

ingredients, railways, automobiles, veterinary products,

LED lights and luminaries, chemicals,

telecommunications equipment etc.

Non-Tariff Barriers to Trade

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LABELLING OF

HOUSEHOLD PRODUCTS:

Illogical

Non-Tariff Barriers to Trade -Labelling

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Product Size unit

Spring and Urethane foam mattresses mm

Bed frames not specified

Leather gloves cm

Desks, tables, chairs, benches and sofas mm

Tansu, chests of drawers, wardobes, etc. mm

Tissue paper and toilet paper mm

Pots cm

• Another example of a unique Japan-only labelling requirement is that a unit of force (expressed in the unit of Newtons) is required to describe bed softness/hardness.

• Gathering the data and adding to labels enormously increases costs.

• Consumers do not understand “Newtons” related to bed softness/hardness• Bed softness/hardness labelling in other countries normally is descriptive:

Hard/medium/soft

Japan does not allow non-metric measuring units to be included on a measuring device. A ruler marked in centimetres along one side cannot have inches marked along the other side.• For global companies, sourcing and distributing throughout the world, this requires

additional production processes and increases costs.

EXCESSIVE ADMINISTRATIVE BURDEN

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UNEVEN PLAYING FIELD IN CERTAIN

SECTORS(e.g. INSURANCE , EXPRESS DELIVERIES)

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LONG PRODUCT APPROVAL TIMES

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Impact on Competition

Removal of tariffs and NTBs will:

• decrease costs and prices and increase competition

• lead to increased domestic competition which means morereasonable prices & more consumer spending

• stimulate the economy

• provide the impetus for a dramatic change in EU-Japantrade & investment

• result in growth of both economies

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EU-Japan FTA/EPA

The EBC believes there is huge potential to increase

EU-Japan bilateral trade & investment through an FTA/EPA

• Extremely limited progress through the previous dialogues

• Attention of businesses turned to promoting the start of negotiations on a formal EU-Japan trade agreement

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EU-Japan Summit – May 2011

Agreed to start the process for negotiating for a “deep and comprehensive Free Trade Agreement” addressing “all issues of shared interest to both sides” including:

Tariffs

Non-Tariff Measures

Services

Investment

Intellectual Property Rights

Competition

Public Procurement

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EU-Japan FTA/EPA HistoryTiming Action

28 May 2011 Agreement to Launch Scoping Exercise

November 2011 EBC submits Digital Compendium (updated regularly hereafter)

May 2012 Scoping Exercise Completed

18 July 2012 EU Commission tables proposal to start FTA negotiations to Council

25 October 2012 European Parliament adopts resolution to start FTA negotiations

29 November 2012 European Council (Foreign Affairs Ministers) to discuss launch of FTA

25 March 2013 Official announcement of start of FTA negotiations

15-19 April 2013 First round of FTA negotiations (EBC members consulted)

24 June – 3 July 2013 Second round of FTA negotiations (EBC members consulted)

21-25 October 2013 Third round of negotiations (EBC members consulted)

27-31 January, 2014 Fourth round of negotiations (EBC members consulted)

31 March -4 April, 2014 Fifth round of negotiations (EBC members consulted)

May 2014 European Council approves continuation of negotiations

7 July – 11 July 2014 Sixth round of negotiations (EBC members consulted)

October 20-24, 2014 Seventh round of negotiations (EBC members consulted)

December 8-12, 2014 Eighth round of negotiations (EBC members to be consulted)

Key EBC Concerns in EU-Japan FTA/EPA

• Mutual recognition of standards, product certifications and marketing authorisations, and adoption of international standards, for example in terms of medical equipment, environmental technology, consumer products, cars, and food. The European Union model should provide inspiration.

• Lifting of barriers, such as high costs and unnecessary bureaucracy that prevent or delay products from reaching the market – for example, in terms of tariffs on certain foods, and Japan-only product labelling requirements.

• Ensuring of fair competition and fair and equal treatment of all companies, domestic and foreign.

• Ensuring of fairer and more open competition in services – which would mean, for example, introducing truly open tendering for public procurement contracts, and improved network access for foreign telecom carriers.

• Improvement of conditions for foreign direct investment, including requirements unique to Japan in the banking and asset management sectors.

• Further enhancing of incentives for investment in R&D, including reimbursement schemes in the healthcare sector to recognise and reward innovation.

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Signs of Success

Some early signs of success in the negotiations so far include:• Regulation on wholesale liquor licensing was recently modified to facilitate the

granting of licenses for cash and carry wholesale distributors

• Pyrotechnic safety devices for motor vehicles are subject to less burdensometesting procedures

• Almost all of 46 high priority food additives have now been approved – previously the approval rate was extremely slow

• Daytime slots at Haneda Airport have now been allocated to most European Airlines.

• Relatively satisfactory progress so far in Japan’s adoption of UN Regulations related to the Whole Vehicle Type Approval system in the auto sector.

• Japan’s “Pharmaceutical Affairs Law” was replaced by the “Pharmaceuticals and Medical Equipment Law,”which treats pharmaceuticals and medical equipment separately in contrast to past practice

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Patience Required

Caution:

• Japan wishes to conclude the negotiations by 2015 end

• Agreement must have content – there should be adequate coverage of NTBs

• Negotiation of NTBs will be slow

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What an EU-Japan FTA can achieve(If sufficiently mutual, comprehensive and ambitious)

• Economic growth for both economies

• Leadership in ensuring a platform of rules andstandards at the global level

• And of course, a massive boost to EU-Japan trade!

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Thank you for your attention