European carmakers are once again expressing their concerns about the latest free trade deal the European Commission is pressing ahead with, this time with Japan.

 
Last week the EC called for the launch of talks to establish what could be the world’s largest deal between trading partners which together account for around a third of global economic output. With each partner experiencing slow growth, not least in the automotive sector, the deal is hoped to stimulate a revival and, according to Europe’s trade minister Karel de Gucht, could increase EU exports to Japan by one third while boosting jobs across EU nations by 400,000.
 
However, carmakers in Europe and their representative associations have warned that preparatory research for the agreement has been inadequate and that the methods used to dismantle non-tariff barriers remain vague.
The proposed agreement would require the 27-member EU to dismantle its existing 10% customs duties, which the European Automobile Manufacturers’ Association (ACEA) said would represent a saving of €1.2 billion ($1.44 billion) a year for Japanese carmakers and a saving per vehicle of €1,500.
 
“This would trigger a higher flow of cars into the EU,” said ACEA’s general secretary, Ivan Hodac, who added that the resulting drop in EU production, which could go down by some 160,000 units a year as a result, could lead to job losses, not the gains outlined by de Gucht.
 
Hodac went on to say that Japan would have to cut its non-tariff barriers if Europe cut tariffs in this way, “[o]therwise we don’t have a level playing field,” he said. “Reducing tariffs is easy; removing non-tariff barriers is far more time consuming,” he added.
 
According to the European Commission’s trade impact assessment report published last week, automotive is one of seven business sectors that cover the bulk of EU exports most affected by Japan’s non-tariff barriers. The report states that the  automotive sector  suffers  from  divergent  technical  standards  and  regulations, as  well  as  from differences in  conformity  assessment  procedures, though the list of non-tariff barriers that the EC expects Japan to remove has not yet been made public.
 
The report does say that the barriers encountered by EU-based carmakers in Japan are mainly technical barriers to trade related to emission, safety and noise standards, which cause extra conformity  assessment,  development  and  production  costs  for  EU  exporters  and  distort consumption  of  vehicles  toward  the  domestic  Japanese  manufacturers who  do  not carry these costs.
 
Studies estimate that the trade cost associated with these non-tariff barriers is equivalent to a tariff of 12.5%.
The report does point out that with 25% of global production, the EU is the largest motor vehicle producer in the world with 19.6m vehicles produced in 2010 out of a global total of 78m. This is compared with 9.6m in Japan.
It also states that in the automotive sector, where fears of a negative impact from an EU-Japan FTA are often strongest, there would be a mainly negative impact from the elimination of tariffs alone but that when tariff reductions are  combined  with  reductions  of  NTMs  costs,  the  impact  for  the  EU  is  broadly  neutral.
 
“This  indicates  that  Japan's  increased  presence  in  the  EU  motor  vehicle  market  would  be tempered by increased exports of EU motor vehicles to Japan,” says the report. 
 
Nevertheless, the UK’s Society of Motor Manufacturers and Traders (SMMT) said that a comprehensive assessment of the impacts of such an agreement, including the removal of all non-tariff barriers, was essential before the opening of any negotiations for a free trade agreement. “Fairness is critical and trade strategies must be aligned with policy in supporting manufacturing and export-driven growth,” said the association in an official statement.
 
Ford was more direct in its concerns. “It is troubling that the European Commission – in the midst of a serious economic crisis – would propose launching negotiations with Japan over a free trade agreement before the Japanese remove important non-tariff barriers against the European auto industry, especially given that the EU automotive sector has a significant trade deficit with Japan which a free trade agreement is not expected to reverse,” it said in a statement.
 
In a more detailed statement, Ford of Europe’s chairman and CEO, Stephan Odelle, said that Ford endorsed good free trade agreements, recognizing they are vital for the free flow of goods such as cars and vehicle components. However, he reiterated the point that to be effective, they require the removal of not just established tariff barriers, but also the often more hidden non-tariff barriers, an absence of currency manipulation, and reciprocal import-export liberalisation by great trading nations or regions.
 
However, he pointed to Europe’s existing free trade agreement with South Korea, which he said had set “a worrying precedent”.
 
“The trade deal with South Korea, implemented last year after four years of negotiation, has failed to completely address the lack of reciprocity or the non-tariff barriers that obstruct exports to the important Korean market,” said Odelle. “Non-tariff barriers, which are supposed to have been removed, are still acting as a deterrent on the sale of European vehicles.”
 
He noted that, according to the Korean Customs Service, car imports to the EU from South Korea have jumped 40% year-on-year to more than 400,000 units since the implementation of the EU-Korea FTA, while EU car exports to South Korea increased by 13% to less than 73,000 units. “Clearly, this is not reciprocal trade,” said Odelle.
 
Comparing that FTA with the latest proposal, Odelle observed that Japan also enjoyed a healthy trade surplus with Europe, with more than 560,000 cars exported there last year compared with less than 180,000 vehicles flowing the other way. 
 
Countering this, the Japanese Automobile Manufacturers’ Association has published figures that show that in 2011 more than 70% of all Japanese vehicles sold in the EU were produced there, equal to 1.30m units. It also showed that exports of Japanese models made in the EU rose significantly, from around 94,200 in 2010 to more than 241,200 in 2011.
 
In support of European tier suppliers JAMA also showed that Japanese carmakers bought €11.75 billion worth of parts in 2011 and that European suppliers delivered more than 80% of the value of the parts to Japanese production facilities in Europe.
 
At home, however, Japan’s sales outlook is pessimistic with the domestic market set to decline by 660,000 units a year between 2010 and 2020, according to figures from the Mitsubishi Research Institute quoted by ACEA.
 
Given this ACEA said the proposed Japan-EU agreement represented “an opportunity for the Japanese to shore up export levels into the EU, thereby compensating for their own declining market and helping maintain employment.
 
“The trade agreement risks being used by the Japanese as a tool for passing on productive capacity that cannot be absorbed at home to the EU, a market which increasingly has its own issues of overcapacity,” said Hodac.
 
Seeking to placate the concerns of carmakers, de Gucht said that the negotiations toward an FTA would be terminated after a year if moves to dismantle the non-tariff barriers proved unsatisfactory.
 
“After one year of starting the negotiations we will take stock on the progress Japan has made on dismantling the non-tariff barriers as set out in the roadmap we have agreed together,” he stated. “If the implementation has not been satisfactory, I will stop negotiations.”
 
 

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