Generation Brexit


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Brexiters will be delighted: even without ISDS it took nearly half a decade to negotiate a trade deal with Japan

Posted by Roch Dunin-Wąsowicz (Admin) Feb 18, 2018

A free trade deal between the European Union and Japan (JEFTA) was finally concluded on the 8th of December 2017. The final agreement was reached after four years of intense bargaining, and it took more than eighteen rounds of negotiations. This time around the Commission took a more innovative approach by keeping out the controversial parts. Miguel Cortijo Antona & Val Afteniuc argue that the lessons that can be drawn from this negotiation are far from optimistic for the UK's post-Brexit international trade ambitions. 

The economic benefits of the EU-Japan deal

Together the two economies account for around 25% of the global GDP, and Japan is the EU’s second biggest trading partner in Asia, after China. The deal promises to boost EU exports to Japan by approximately €20 billion a year. It is good news for European farmers as the tariffs for dairy products, wine and beef have been significantly reduced. European car manufacturers are more ambivalent about the benefits of the deal. While they acknowledge the strategic importance of the deal, which sends a clear message to the rest of the world that two of the globe’s biggest economies are still committed to the principles of free rules-based trade. They are concerned that reduced tariffs on Japanese cars coming into the EU will have a negative impact on their bottom-line. However, not all the tariffs will be reduced at once. Some tariffs will be slashed immediately after the deal is ratified in 2019, others will be phased out during a 15 year period.

What next? What about the controversial ISDS clause?

The controversial topic of ISDS (Investor-state dispute settlement) was left out of the deal. ISDS is a mechanism which allows foreign investors to sue governments of host countries for enacting regulations which affect their profits. While some see ISDS as an important tool for making sure that the rights of foreign investors are protected. Others argue that the vague wording which is used in investment protection chapters allows arbitrators to interpret regulation how they feel suited. While the investment tribunals do not have the right to strike down laws enacted by sovereign nations, they can award financial compensation, often extremely large, that make policy-makers think twice before adopting new laws and regulations.

This controversial clause almost brought down the CETA agreement and was a major issue during the TTIP negotiations. In 2015, the European Commission revamped the controversial dispute settlement mechanism and proposed the creation of an Investment Court System which is arguably more transparent than the current system. However, the big nations including US, China and Japan do not seem too keen on backing the EU’s proposal, and it remains to be seen what kind of dispute settlement system (if at all) will be negotiated between Japan and EU.

Ultimately, it appears that the Europen Commission has learnt its lesson. By not including ISDS in the main agreement it will be able to ratify the EU-Japan trade agreement by a majority vote in the European Parliament and qualified majority voting (QMV) in the European Council, without having to pass it through national parliaments.

Can the EU march on with globalisation?

Both Brexit and Trump are considered to have been major backlashes against globalisation that took place in 2016. With the EU-Japan trade deal, however, it seems that both economic blocs were able to restore confidence in free trade agreements despite the current political climate. The EU views the deal as a way to get back on the front foot in opening up new trading opportunities after the near collapse of CETA in 2016 due to the veto of a Belgian regional parliament. Apart from JEFTA  the EU is now focused on closing deals with other major economies such as South America’s Mercosur and launching new negotiations with Australia and New Zealand. It is also strengthening its ties with the US' backyard: having finalised a trade agreement with Canada it is now renegotiating and updating one with Mexico.

With the failure of TTIP, it seemed as though the Commission was no longer able to negotiate trade deals with major world economies. By excluding the ISDS clause, the executive branch of the EU has given the Member States time to reach a consensus on this controversial issue. There is no running away from it, the EU member states must come up with a common position on ISDS. Trump’s protectionism and the Brexit vote created a free trade gap – with JEFTA the EU was swift to bridge it.

If the EU, with its immense bargaining power, spent close to five years negotiating JEFTA, what is the likelihood that the UK will conclude such trade deals any faster, without completely giving into its counterpart’s demands?  More importantly, what are the chances that the world’s superpowers will prioritise a trade deal with a country with a market of 65 million people, over one with 440 million? Barack Obama’s prediction was perhaps accurate, the UK might well end up at the back of the queue.

This post represents the views of the author and not those of the Generation Brexit blog, nor the LSE.

Miguel Cortijo Antona is an MSc Student in EU Politics & Val Afteniuc is an MSc Studetn in Political Economy of Europe, LSE European Institute.

This post was edited on Feb 19, 2018 by Roch Dunin-Wąsowicz

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