The conclusion of an “Agreement in Principle” on the Japan-EU Economic Partnership Agreement (JEEPA) is being heralded by many as a major victory for free trade. Despite growing concerns about a rise in protectionism, the EU and Japan are trying to buck this trend. Beyond the big picture, however, some of the technical details are very interesting. For instance, the Agreement in Principle notes:
The disparity in terms of levels of liberalization on both sides is justified by the commitments undertaken under this agreement by Japan to eliminate non-tariff barriers to EU exports, notably virtually total alignment on international standards in the automobile sector.
To really understand what this might mean, however, we need to look further, specifically, at the section on non-tariff measures in the auto annex. The summary in the Agreement in Principle states:
The NTM auto annex has solved all issues mentioned by industry, and was developed in close consultation with industry associations. It covers a very substantial part of UNECE (United Nations Economic Commission for Europe) Regulations – most of which will be in force at entry (as a result of the work undertaken under the NTM list for cars, the implementation is already under way by the relevant Japanese regulators). It covers passenger cars, and commercial vehicles like buses and trucks of all sizes as well as motor cycles. The auto annex, together with the NTM work concluded, should lead to the removal of all regulatory barriers for accessing the Japanese car market. The annex includes robust cooperation procedures and obligations to ensure that this state of affairs can be maintained over time. On domestic regulatory measures a special consultation procedure was defined. The limits of these obligations were defined by the EU's need to maintain its regulatory autonomy in areas related, for instance to environmental measures, but also measures on new technologies like autonomous driving or electric cars.
Special attention was paid to establish robust compliance provisions similar to the one agreed under the EU-Korea FTA. In addition, it contains a safeguard clause, allowing the EU to reintroduce tariffs in case Japan stops applying UNECE Regulations or reinstalls removed NTMs (or develops new ones). In particular, the safeguard would allow to snapback tariffs on the affected products quasi automatically. The most important feature is however the cooperation in-built in the annex, which allows to ensure joint work in international standard setting fora. This is also the main reason why the safeguard is limited to 10 years. It can be expected that all UNECE Regulations will have been updated in accordance with the cooperation obligations.
As we don’t have the text of the annex yet, my guess is that this could be something similar to what appears in the CETA Annex 4-A under the TBT Chapter, but with the exception that there is no equivalent safeguard clause in the CETA. In the CETA, Canada incorporated a number of UN Regulations, but “maintains its right to modify its law, including by amending or revising which United Nations Regulations are incorporated into its law, or the manner in which or the extent to which these Regulations are incorporated into its law.” From what we know so far, the JEEPA appears to go further than CETA in this regard, though we can’t know for certain until we see the final text. Compared to CETA, the EU-South Korea Free Trade Agreement, for example, has a far more detailed annex on motor vehicles and parts (Annex 2-C), which contains obligations on harmonization of regulations and UNECE standards.
The part I find most interesting, however, is the last sentence on “joint work in international standard setting,” which is where I think the EU may have made its most significant mark. It is well known through discussions surrounding the TTIP that auto standards are one major area where the U.S. and EU take very different approaches, mainly because the U.S. relies heavily on voluntary, industry-set standards, and has been generally hesitant in adopting international standards. Though the U.S. participates in the working party created by the 1998 Global Agreement administered by the World Forum for the Harmonization of Vehicle Regulations, it does not observe the mutual recognition of products with UN certifications, which basically means that any auto parts that meet UN standards still must comply with the U.S. FMVSS standards as well, which in practice means compliance with two separate certification processes.
Regulatory cooperation and the elimination of NTMs has become a major feature of modern trade agreements, and the EU is pushing forward with its approach, which gives more deference to international standard setting bodies. The problem is that without TTIP, the U.S. is being left out of these discussions entirely, and its regulatory model may become ever more isolated from the disciplines others agree to adopt. Article 6 of Annex 4-A in the CETA recognized this might be a problem in the future, and states:
The Parties recognise their mutual interest to cooperate with the United States of America in the field of motor vehicle technical regulations. If the European Union and the United States conclude an agreement or an arrangement on the harmonisation of their respective technical regulations related to motor vehicles, the Parties shall cooperate with a view to determining whether they should conclude a similar agreement or arrangement.
But we have no TTIP, and may have no TTIP ever. And if Canada, and now Japan, continue to work with the EU in harmonizing and eliminating divergence in auto standards, they will ultimately move closer to the EU approach, which may have significant implications for automotive supply chains. Since the U.S. relies heavily on both Canada and Japan for auto parts, and Japanese auto-parts companies now employ more people in Canada than U.S. auto-parts firms, this is an important development to watch.