On the new gold standard in EU trade integration: reviewing the EU-Japan EPA

Abstract

In 2011 the European Union’s free trade agreement with South Korea was considered its most ambitious agreement with any Asian economy. In 2019, however, this distinction was handed over to the EU’s Economic Partnership Agreement (EPA) with Japan. With Japan being a top-ten trading partner of the EU, the EPA is of economic and political importance in times of rising protectionism to support rule-based trading principles as well as international standards and sustainability goals. The paper reviews EU-Japan trade structures and the components of the EPA accompanied by a structural gravity estimation that builds on the experiences of the EU-South Korea agreement. Manufacturing industries benefit from reduced duties and application of the same international standards, facilitating approval. The greatest potential for cost reduction through tariff cuts remains in the strongly protected agri-food sector. Given the importance of non-tariff measures in negotiations of the EPA, we consider a counterfactual ‘gold-standard’ scenario, in which the regulatory gap for standard-like non-tariff measures between the EU and Japan closes. General equilibrium results suggest welfare effects for Japan of up to 0.05% of real GDP. Estimated GDP effects for the EU are in the magnitude of 0.01%, however, with marked differences across EU Member States.

Appendix

1.1 Country coverage

See Table 10.

Table 10 Countries covered. 155 countries/territories were considered for our analysis. The counterfactual scenario performed for the year 2016 returned estimates for the following 97 economies

1.2 Full endowment general equilibrium model

Presented by Anderson et al. (2015) and Yotov et al. (2016):

$$X_{ij,t} = \frac{{Y_{i,t} E_{j,t} }}{{Y_{t} }}\left( {\frac{{t_{ij,t} }}{{{\Pi }_{i,t} P_{j,t} }}} \right)^{1 - \sigma }$$

(4)

$${\Pi }_{i,t}^{1 - \sigma } = \mathop \sum \limits_{j} \left( {\frac{{t_{ij,t} }}{{P_{j,t} }}} \right)^{1 - \sigma } \frac{{E_{j,t} }}{{Y_{t} }}$$

(5)

$$P_{j,t}^{1 - \sigma } = \mathop \sum \limits_{i} \left( {\frac{{t_{ij,t} }}{{{\Pi }_{i,t} }}} \right)^{1 - \sigma } \frac{{Y_{i,t} }}{{Y_{t} }}$$

(6)

$$p_{i,t}^{{}} = \left( {\frac{{Y_{i,t} }}{{Y_{t} }}} \right)^{{\frac{1}{1 - \sigma }n}} \frac{1}{{\alpha_{i} {\Pi }_{i,t} }}$$

(7)

$$E_{i,t} = \varphi_{i} Y_{i,t}$$

(8)

The value of output ($Y_{i,t}$) and expenditure ($E_{j,t}$) adapt by allowing prices ($p_{i,t}^{{}}$) to respond to changes in bilateral trade costs ($t_{ij,t}$) and by changes in multilateral resistance terms ($\text{outward } {\Pi }_{i,t}^{{}}$ and $\text{inward } P_{j,t}^{{}}$). Production, however, is assumed to remain constant in the full endowment setting.