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Japan and Europe’s huge new trade agreement shows that US leadership is already fading

They’re creating a rival to NAFTA — because Trump.

European Council President Donald Tusk, left, and Japanese Prime Minister Shinzo Abe at the EU-Japan Summit in Brussels. Japan and the EU announced an agreement on a trade deal that will rival NAFTA in size.
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Japan and Europe have a pointed message for the US: We’re taking your place as global leaders in free trade.

Japan and the European Union agreed on an outline for a massive trade deal on Thursday that will rival the size of NAFTA, the free trade accord that the US has with Canada and Mexico — currently the largest one in the world.

That is, in and of itself, big news. But the timing of the agreement makes it even more significant: It’s taking place on the eve of the upcoming G-20 summit in Germany, a meeting of the world’s 20 largest economies. Japan and Europe are telling the US — and the world — that they’re taking the reins as the US withdraws from the global trading arena under the Trump administration’s protectionist turn.

“Two big, highly globalized economies are stepping up and showing they’re going to continue liberalization — with or without the US,” Caroline Freund, a senior fellow at the generally pro-free trade Peterson Institute for International Economics, told me.

The deal is yet another momentous consequence of Trump’s decision to withdraw from Trans-Pacific Partnership negotiations during his first full working day as president.

Here’s why that’s the case: Japan has been in negotiations with the EU over this free trade agreement since 2013. But in recent years, Japan’s priority has been the TPP, a deal that would have allowed it to trade with the largest and most advanced economy in the world (the US) with few barriers; to become a key member of the largest free trade bloc in global history (12 Pacific Rim countries accounting for 40 percent of global GDP); and to form a strategic counterweight to Chinese hegemony in Asia. Since the TPP was so promising, the prospect of a Japanese deal with Europe was on the back burner.

But Trump’s January withdrawal from the TPP, which the Obama administration had spent years negotiating, changed all that. The TPP might not be entirely dead — technically it could be revived without the US — but Japan has made a clear pivot toward Europe in the wake of the US’s withdrawal from it. This new deal is evidence of that.

“I have no doubt the final rounds were accelerated to try to conclude the deal as quickly as possible and send a message that the EU and Japan are prepared to lead on trade even without the US,” Edward Alden, a trade expert and senior fellow at the Council on Foreign Relations, told me. “The fact that it was concluded right before Trump's first G-20 summit is a symbolic poke in the eye to the Americans.”

Europe, too, has reason to prioritize Japan over the US. Talks between the US and Europe over the Transatlantic Trade and Investment Partnership, a free trade accord that’s been in the negotiation stage since 2013, were already going poorly during the Obama administration due to protracted disputes over regulatory standards on issues like food safety. Trump’s abrasively protectionist stance has only made its prospects worse.

So here we are, with Europe and Japan agreeing on the broad strokes of a trade deal that will rival NAFTA in size and scope.

This isn’t a purely symbolic blow to the US’s reputation as the world’s foremost proponent of free trade. This deal means that European and Japanese exporters will gain an edge over American exporters in each other’s markets. It’s a real loss for American agriculture in particular, which already has huge inroads in Japan and could’ve seen them expanded under TPP.

But in addition to that, Japan and Europe’s negotiations will also mean they are in an unrivaled position to shape the future of trade. Freund says that as Japan and Europe hash out standards on everything from intellectual property laws to labor standards for their agreement, “they’ll get to be the rule-setters ... setting the standard for global trade agreements.”

That’s the role the US has played for decades, and it’s fading.

Japan and Europe have a lot to gain — and the US has a lot to lose

German luxury cars should face fewer trade barriers in Japan under the agreement.
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The agreement between Japan and the EU is currently very broad, and there are still plenty of details that need to be hammered out over the next several months before final ratification.

But overall, it’s designed to do what most free trade deals do: lower and eliminate trade barriers like tariffs (border taxes) for selling and buying goods between countries.

For instance, the EU will eliminate the 10 percent duty that they slap onto Japanese car imports, and Japan will remove obstacles to the entry of European cars into the Japanese market.

One area in which Europe is keen on lowering barriers to its exports is agriculture, since Japan has long been highly protective of many of its natively-produced agricultural products.

But Europe’s win here is a big loss for the US. American agriculture is a huge export industry, and Japan is a big consumer of it — it’s the US’s fourth-largest agricultural export market. Under the TPP, the US would’ve been able to gain much better access to the Japanese market and become an even more dominant exporter in that market.

“The TPP that Trump abandoned would have opened huge opportunities for exports of US beef, pork, wheat, rice, and other products. European exporters will now have the edge,” Alden explains.

In addition to losing out on special access to the Japanese market, the US is also suffering a blow to its long-held status as the most influential trade rule-maker in the world. As Japan and Europe negotiate the terms of what would become the biggest free trade zone in the world, they’re going to be creating standards and precedents that will in turn influence World Trade Organization rules and other free trade agreements around the world.

Here are some ways in which it could manifest, using Europe’s preferences as an example:

  • Europe tends to have stricter labor and environmental standards than the US.
  • Europe tends to be more conservative about data localization — that is, where a company should be allowed to store data for foreign customers — than the US.
  • Europe tends to have weaker intellectual property preferences (think shorter-lasting patents on drugs) than the US.
  • Europe is skeptical of the “investor state dispute settlement” system that the US favors in free trade agreements (a policy that allows investors to sue governments in private trade tribunals and basically gives corporations the status of countries under international law).

Europe’s ideas are more likely to gain traction in the trade world as the big European-Japanese agreement is finalized — and it won’t be to the liking of many free-trade advocates in the US. (That’s not necessarily a bad thing — many of Europe’s preferences are sensible; but the point is that US influence is waning.)

One fascinating dynamic at play in all this is that both Trump and Brexit have actually made it easier for European negotiators to move forward on the agreement with confidence that it can be ratified by European governments. “Trump seems to have ignited backlash against the backlash to globalization, which ends up with more rallying around free trade and open markets,” Freund says.

The chaos associated with the new protectionist streak popping up in the Western world has made Europeans a bit more inclined to stick with the free trade status quo.

Donald Tusk, president of the European Council, the body that represents the 28 EU heads of government, capitalized on that when announced the trade deal on Thursday.

“Although some are saying that the time of isolationism and disintegration is coming again, we are demonstrating that this is not the case,” he said at a news conference in Brussels. “The world really doesn’t need to go a hundred years back in time. Quite the opposite. It doesn’t have to be so.”

Alden estimates that while Europe had a terrible time ratifying its recent free trade deal with Canada, the new Japanese-European deal should be confirmed more easily due to this Trump effect.

The lesson for the US is that if it pursues a more protectionist path, the rest of the world will carry on without it. And in the process, its voice on how trade should be conducted will likely grow weaker.