Table of Contents
Section II: Challenges and Competition
Section III: Steps and Initiatives
Negotiating free trade agreement
Eliminating the custom duties with EPA
Strategic Partnership Agreement
Introduction
Japan is a member of the International Trade, which adheres to law and order and protects intellectual property. Japan is not considered a trading country. The Economic Partnership Agreement is a Japan-EU trade agreement. It was officially signed in July 2018. Japan is the EU’s second-largest trading partner and the seventh-largest EU importer and exporter. Japan imports various products into the EU, such as vehicle parts, chemicals, agriculture, and machinery. Honda Motor is a multinational-based automobile company located in Japan. Japan exports Honda’s parts and accessories to the EU. Initially, Japan-EU had trade conflicts. In particular, when the Western developed countries suffered from the great recession, Japan exported its goods. EC (European Country) has criticized Japanese’s inflow products. It makes trade conflicts between Japan-EU in the late 20th century. In the meantime, Japan-EU has temporarily suspended the import and export of Honda Motor due to the covid-19 crisis. It affects the supply chain of Honda motor from Japan to the EU. Then the various initiatives that are taken by Japan in making the effective partnership with EU has been discussed.
The report critically assesses the trade market between Japan and the European Union (EU) with relevant examples. Covid-19 poses enormous challenges to people in various sectors. It requires government or respective authority to take necessary initiates to address all challenges and opportunities. Therefore, the report evaluates the impact of Japan’s goods and services (Honda Motor) on the EU during the Covid-19 crisis. There are three sections in the report. Section I analyses the political impact of Japan on foreign business. Section II focuses on identifying the trade challenges and competition of Japan with the EU. Section III recommends steps and initiatives to address identified challenges and competition issues. Finally, the recommendations were provided to develop the trade and relations.
Section I: Political Impact
Approach taken by Japan government in supporting foreign business
Japan is active and encourages foreign business. The Government of Japan focuses on creating the best environment for overseas investors. The Ministry of Economy, Trade, and Industry (METI) in Japan is taking adequate initiatives to encourage FDI. Advanced technologies and Research and Development (R&D) are Japan’s main strengths. However, demographic, cultural, and linguistics are potential barriers of Japan to investment. In May 2020, a new and updated legislative came into effect for foreign business investment. Foreign investors need prior notice from the government about investment. However, the newly renewed Japan foreign investment review regime reduces the ownership limit from 10% to 1%. It creates a business environment as favorable. As Japan has skilful workers and a stable political system, foreign companies are also interested. Quality of human resources and advanced technologies in Japan are additional benefits for foreign companies.
In 2013, the Japanese government set a target to raise foreign direct investment shares to 35 trillion yen. The Japanese government achieves its target by attracting foreign companies (i.e. by providing business matching opportunities, living conditions, and a business development environment). In December 2020, they attained 39.7 trillion yen as an inward FDI stocks. Similarly, in June 2020, the government adopted a new strategy to Promote Direct Foreign Investment. As a result of this strategy, they targets to reach 80 trillion yen as an inward FDI stocks by 2030. These are effective measures taken by the Japanese Government to encourage FDI in Japan.
Issues and challenges for foreign businesses in Japan
Substantial investments are essential for foreign companies in Japan. However, the foreign companies invests very minimal. It cause to business failure in Japan. It cause high inherent risk. In such case, either the foreign companies will get more profit or face huge loss. Vodafone in Japan is the best example for the failure of foreign business. Vodafone spent low budget for infrastructure. It results in poor coverage and network quality. Hence, they lost 83 billion value US dollars.
Low FDI in Japan affects foreigners in expanding their business globally. However, the government is committed to providing attractive FDI by reducing trade barriers.
Japan has strong competition against foreign trade, which brings huge losses to foreign trade. For example: eBay lost in Japan against domestic companies like Yahoo. Japan has developed strong strategies for new foreign business entrants into the business market. Culture, resolving insolvency, trade across borders, and taxes are some of the other challenges to foreign trade in Japan.
The following are two effective countermeasures against contemporary issues and challenges in Japan.
Ø Before trading, the foreigner must go through the Japanese trade agreement.
Ø It is foremost essential to analyse the local competition of Japanese companies against new entrants.
Policies
The “Infrastructure strategy economic cooperation meeting” was established by the Government of Japan in March 2013, which compiled with the Infrastructure system export strategy. The intended purposes of the policy are listed as follows:
Ø Strengthen global competitiveness by supporting public and private enterprises.
Ø Overseas expansion of business infrastructure.
Ø To obtain international standards.
Ø Supports entrants into a new field.
Ø Provide sustainable and cost-effective services.
Some of Japan’s trade policies for foreign businesses are as follows.
Ø Most Japanese goods can import freely without any import licenses. However, for chemical products and weapons, import licenses are paramount (Jetro, 2012).
Ø Depending on the domestic supply and demands, import quotas are essential for fishery products. METI in Japan is responsible for monitoring the import quota.
Ø It has stand-alone legislation for food, drinks, and marine products, which increases trade secrets.
Trade restrictions
Japan restricts products that violate IP (intellectual property) laws and regulations. The country also has restrictions on certain import products, such as firearms, counterfeit currency, explosives, and more. In the meantime, Japan imposes sales restrictions on certain products in the healthcare industry. Considering the negative impact on the Japanese economy, industry, and public safety, they restricted those products for foreign trade. In some cases, inspections and other requirements are necessary to authorize and import those items. Adherence to Japan’s intellectual property and trade policies is paramount to foreign trade.
Tariffs
In Japan, the average applied tariffs rate is the lowest in the world. However, Japan imposes higher tariffs on agricultural products than on other non-agricultural products. In this way, Japan focuses on protecting domestic businesses from foreign competition and increase revenue. Rising prices of food (agricultural) products are triggering a change in the supply of goods (Terada, 2006). It has an impact on balancing global trade. According to a recent survey, Japan imposes 10% tariffs on food products (refer figure 1). Similarly Japan imposes 9.2% and 2.3% tariff on clothing and chemical businesses respectively.
Figure 1. Japan Tariff on Agricultural products (Beckman & Scott, 2021)
Bureaucracy
Japan formed the bureaucracy in the late nineteenth century. The bureaucracy in Japan is more efficient than in parliament. Bureaucracy is the act of engaging in business and acting independently. For any foreign company, it takes a direct decision. Meanwhile, foreigners and Japanese are increasingly relying on the bureaucracy because it reduces the level of corruption. In this way, it increases the opportunities for new foreign business in Japan. Figure 2 shows political officials and high-ranking bureaucrats in Japan. These bureaucratic agencies are involved in making important decisions related to foreign trade policies. In this way, it promotes the growth of foreign trade in Japan.
Figure 2. Bureaucratic group in Japan (Zakowski, Bochorodycz, & Socha, 2018)
Antidumping rules
Japan established anti-dumping rules to impose additional duties other than customs duty. In this way, Japan protects domestic business. Under the certain condition of the World Trade Organization (WTO) agreement, Japan allows antidumping rules. It strengthens trade and liberalizes world trade. In Japan, imported goods/products are sold for the export purpose at a dumped price. In the case of overseas manufactured products, antidumping rule prevents the foreign trade from selling goods at a lower price than the fair price. In such cases, it reduces the international competition of domestic businesses involved in trading similar products. It has a high impact on foreign companies. As the value of the Japanese currency increases, the fair value of each product defined by the Japanese Government will also increases.
Currency controls
Japanese foreign exchange regulations have less impact on normal business transactions. Due to the export sales of vehicles, machinery and other goods, a large trade surplus occurs in Japan. It also creates a high demand for the Japanese currency (yen). It allows foreigners to pay for those goods and services. The foreign exchange control system in Japan has high freedom than the European Union. Currency controls limits inflow and outflow of currency and supports stabilize Japanese economies. In this way, it creates exchange rate volatility. Therefore, foreign business may have both positive and negative impacts on currency control.
Section II: Challenges and Competition
Challenges
Trade between Japan and EU
Japan and the European Union (EU) are members of the EU-Japan Economic Partnership Agreement, which was entered on 1st February 2019. The EU-Japan agreement is one of the largest bilateral free trade agreements in the world. It creates a platform for open trade that covers 1/3 of global GDP. Within the agreement, both the EU and Japan agreed to tackle global challenges including, climatic changes, environment protection, security, regional stability, and trade protectionism. It creates a strategic partnership between them. According to 2019 statistics, Japan was the fourth largest country in the world in terms of export and import market. In 2020, Japan was the seventh-largest export and import partner for the EU. In the meantime, the EU is also focusing on exporting products. Some exported goods of the EU are as follows: machinery, motor vehicles, food and beverages, and chemicals. The EU focuses on producing unique regional food and drinks such as Irish whiskey for Japan. On the other hand, Japan exports cars, auto parts/accessories, motor vehicles, medical equipment, machinery, food (agricultural products), and chemicals (Vourazeris, 2017). However, due to the Covid-19 crisis, imports and exports between Japan and the European Union have declined. However, Japan faces economic challenges by the covid-19 pandemic (Maliszewska, Mattoo, & Mensbrugghe, 2020).
Trade Challenges
Japan has non-tariff barriers. It affects business operations and delays in importing foreign goods into the country (Japan). Since Japan and the EU are trading partners, any change in EU trade policies will have a direct impact on Japan. Therefore, the EU has both positive and negative impacts on trade. The EU has a free trade policy. It allows the EU to make trade easier without any tariffs. However, EU trading regulations are not effective. It makes outside countries to influence. It is difficult to trade outside the EU due to regulations set by the European Commission and Parliament. It affects Japan to make proper trade with the EU. Due to the non-traffic barrier in Japan, the EU needs to consider non-tariff barriers to trade. Trade would be affected without analysing the export experience of such projects or products from Japan to the EU. The new entrants of such products into the market are not commendable. It may violate Japan’s official regulations on trade with the EU. In such a case, cultural significance in Japan breaks business relationships. Although Japan has a strong market influence, it operates goods and services without supervision. Cross stock holding between Japanese companies affects the supplier of the traditional business group.
Example: Honda Motor
The following section discusses the EU-Japan trade Agreement with a specific product of Japan i.e. Honda Motor. Honda motor is a Japanese multinational automobile business. For the past few decades, the global sales record of Honda has been ongoing. Japan exports its Car manufacturing (Honda) products and services to the EU trade group. Therefore, any change in the EU's trade policy will reflect in Japan's trade. It has politicized effect on Japan. Therefore, trade policies and regulations have a direct impact on trade value due to interference of third-party.
During a pandemic, Japan faced a severe impact with the EU to supply car products or accessories. Transport, exchange of goods and services from one country to another was temporarily stopped during the outbreak of the covid-19 pandemic. The EU and Japan agreed to avoid unnecessary barriers during pandemic (World Trade Organization, 2020). Like Japan, many countries have suspended their imports and exports. It disrupts the global supply chain. The Covid-19 stopped production of the Honda car and disrupted public movement. As a result, Honda has cut off the supply chain of car production in trade market. However, Japan and the EU allow the supply of chemicals and equipment. Even now, Japan and the EU maintain their strong trade relationship.
Figure 3. Impact of Covid-19 on Japanese economy (BBC news, 2020)
Figure 3 shows the existence of the Japanese economy during the covid-19 crisis. Japan faced a technical recession due to a 3.4% fall in GDP (Growth domestic product) in 2020 and 6.4% in late 2019.
Competition
Japan is a greatest exporter and importer in the world for the past 50 years. As of 2019, Japan has been emerged as the fourth largest exporter and fourth largest importer in the world. But, when dealing with the EU trade, Japan stands at seventh position in exporting and importing goods. There are about 27 countries in the EU member states which was founded in the year 1993. Among those 27 countries, Germany is identified as the largest importer and exporter to Japan in terms of goods. But when coming to the trade, Japan is the second-biggest partner for EU in Asian countries after China. China holds the first position in trading with the EU countries. It is also to be known that Japan and EU together to be accounting for almost quarter of the world’s GDP. The products that are exported to EU from Japan are mainly of machineries, chemicals, motor vehicles, medical and optical instruments, and plastics. The products that are imported to Japan from EU are of machineries, chemicals, motor vehicles, medical and optical instruments, dairy products, food and junk. But when dealing with China, Japan stood at seventh position in the exports and imports business with the EU countries.
When coming to the business and competition, Japan and China are rivalries. Also, the countries has issues with its territories. The direct business competitors for Japan in the goods like automobiles is South Korea. According to the report by United Nations COMTRADE database on international trade the first country is China which stood at value of $442.61 billion. The second position holds by United States, followed by Switzerland, Russia, and Turkey respectively. At the seventh position stood Japan at $63.72 billion (Jato, 2018). All these data were calculated in the year 2020. Thus, the major competitors were these countries who are trading with EU countries. But, there will be difference in trading with various countries in EU members.
Automobile giant, Honda has been struggling to make business in European car market. Japan is the third largest car manufacturer as a country and fifth largest as the region. Since EU is an open market and many number of car makers benefit from it, the competition for Japan in car businesses has been increased (KOTANI, 2014). Due to the political and environmental impacts in the country which made them generate new safety and environmental regulations. This has made complex for Honda to compete with the car makers.
Figure 4. Japan made cars registrations in European Union (Jato, 2018).
From the above image it can be understood that Japan made cars has been declining from the year 2003. This has been due to the surge competition and complex regulations in the EU car market.
Figure 5. Japan made car brands and registrations in EU (Jato, 2018).
It is clearly evident that the local Japanese brands itself are the huge competitors for Honda to trade with EU. Honda stands at 8th position in exporting cards to EU after Mazda, Toyota, Suzuki, Mitsubishi, Nissan, Lexus and Subaru. The share of Honda in trading with EU is 6% in total and has been in positive growth. But due to the various issues that are due to Brexit and competition made Honda to plan for leave from Britain in the year 2021 (Tsang, 2019). Apart from the other reasons, geopolitical reasons is one of the reasons in the decline of car sales. Not only Honda, much more car-makers are struggling in EU in the business. The other competition for Japan based company Honda and others is that EU have employed 856,000 people in the industry to produce the cars on own. Thus, the local car production in EU will be a tough challenge for Japan market to trade with EU (Thomas, 2019).
Section III: Steps and Initiatives
Negotiating free trade agreement
In order to strength the trade relationship with Japan for enhancing the business in terms of exports and imports, Japan was negotiating with EU for four years. After such long negotiation, both Japan and EU have reached an agreement for a comprehensive free trade agreement. After this trade, Japan has become the important trade partner for EU. After China, Japan is the most important international trade with EU both in imports and exports. The agreement is named as ‘Economic Partnership Agreement’ which helps in making some important deals between the two. The value of the bilateral acquired of about €170 billion in a year which accounts for about quarter of the world’s GDP. This trade agreement helps in overcoming the challenges that were faced in the past between Japan and EU (Felbermayr et al., 2019,). For manufacturers and farmers, the prices become cheaper when free trade without tariffs are made.
The strong co-operation in trade between the countries made to export more new products on food and agriculture. These two sectors helps overcoming the issues that were taken place due to the coronavirus pandemic in both the countries. Now, the focus in on developing the trade on two major sectors namely wine and cars. The rules and regulations in the trade has been followed effectively and has helps in making the strong bilateral trade as per the World Trade Organization. Dealing with the vehicle exports is a concern for both the countries until the agreement. But, after the agreement is made, it has become easier in exporting vehicles for both Japan and EU. One of the challenges that are available in the past is the standards and environmental factors that were considered while exporting vehicles. But after this trade deal, the safety requirements list will not require any double approvals for exporting. The safety requirements includes the various new requirements like green technologies, hybrid vehicles and hydrogen-fueled vehicles. All this has helped in complying with the standards. For example, if Japan has certified the car under compliances, then it will comply with the standards of EU and hence there is no need for double checking and the same for EU. As a discussion we had in the previous section, it will be easier for Honda as well as other automation industries to trade with EU nations. The challenges and competitions could be reduced by making such agreement with EU and thus enhancing the bilateral trade between the countries.
Eliminating the custom duties with EPA
With the trade agreement between the two countries, the economy of Japan will be increasing by 1% which is nearly 5 trillion yen per year. In addition, the employment will also be increasing to about 0.5% which is 290,000 jobs. This trade agreement has enabled one-third of the world trade to be conducted and about quarter of the total GDP of the world. The EPA agreement between Japan and EU has been set as a model for trade liberalization to the world. After this EPA has been made in the year 2019, the most important industries that has been expanded are wine and automobile industries (Yoshii, 2021,).
The joint committee meeting was held in the year 2019 April for the first time and several discussions on the trade has been done. The second joint committee meeting has been held in the year 2021 February, when 28 new Geographical indicators were added to be protected from imitation. The elimination of custom duties has been taken as the initiative to improve the challenges that were in the past. The two main industries that were benefited from the custom duty elimination will be industrial products and agriculture. For automobiles, the custom duties has been eliminated in the 8 years. The car parts, chemicals, electronics, and general machineries had an effect of elimination of 90% of custom duties. While dealing with the custom duties of food products like tea, beef, and fisheries, there will be 100% elimination. For the Japan wine, EU has eliminated the import restriction as well as the customer duties of exports and imports (Hagiwara, 2021,). The custom duties that were available for alcoholic beverages has been eliminated immediately. Thus, as part of the trade agreement between the two countries, the custom duties has been eliminated which made easier for business between the two countries.
Strategic Partnership Agreement
Apart from the other two agreements, the Strategic Partnership Agreement of SPA was the third one. SPA is the comprehensive framework that has dealt with cooperation in about 40 areas. This agreement has been acting to change the fundamental relationship between the two countries with effective strategies (Borucińska, 2021,). This agreement will be helpful in sharing the common principles and the values for the longer period of time to strengthen the relationship rather not only in economical background. The framework has been designed under SPA for dealing with common core values, democracy, and rule of law, freedom and human rights between the two countries. When coming to the common values, challenges and the threats to the countries has been considered. All these were based and focused on the democracy and freedom.
In addition to the commonly shared values among the two countries, there were agreement with the global issues in the international community. International peace, dispute solving and stability are also taken in consideration. The agreement between the countries has been on the sustainable connectivity and the infrastructure quality between EU and Japan. The other areas that are to be developed through this agreement were digital technologies, transport, and sustainability, exchanges between people, fiscal capacity and energy. When coming to the global discussion or issues, the climatic change has been considered primarily. All necessary actions to resolve the issues has been discussed in the agreement (Berkofsky, 2020,). The challenges that were faced by global climatic change due to CO2 emission are considered and thus green technology has been promoted in automobile sectors. The standards and the rules all the areas where climatic change has incurred has been discussed here in this SPA agreement.
Recommendations
Japan has been emerging as the global leader in the trade both in exports and the imports especially. This discussion has been made between Japan and EU where there are about 28 countries. The trade was initially complex and several restrictions were there. After waiting for four long years, a triple agreement has been made between Japan and EU namely, Free Trade Agreement, Economic Partnership Agreement and Strategic Partnership Agreement. The following are the recommendations for Japan to enhance the bilateral agreement between the Japan and EU.
Focusing on Automobile industry
The main focus of Japan should be on the Automobile industry which is their major industry. The trade between the Japan and EU should be satisfying the compliances that are made. The green technology should be deployed in order to accomplish with their values for environment.
Using available technologies in agriculture
The technologies that are available should be implemented in agriculture to produce and export more beef, tea, cheese and fisheries. The GI indicators on 28 items should be focused effectively.
Updating the compliances and standards
The standards and the compliances in the trade between EU and Japan should be updated at a regular period of time to avoid controversies. Every meeting should be discussing on the significant compliances and standards.
Developing trade with every country in EU
Japan should be focusing on introducing and developing the trade with all the available countries in EU. The new trade should be focused based on the demand and the availability in Japan. The exports and imports on the key products should be focused.
Sharing common values and focusing on global issues
Finally, as per SPA the common values should be shared with EU. The global issues like peace and climatic change should be taken in consideration. Green technologies and hydrogen fuels should be encouraged and promoted to be manufactured.
Conclusion
Japan has been selected here for the discussion and the trading bloc is EU where there are countries. There were several issues while dealing with the trade between the two countries and it has to be analyzed in an effective manner. From the above analysis it has been clearly evident that there are several internal political issues in every country to do business with the foreign countries. Several factors are to be considered while dealing with the issues in the politics between Japan and EU has been studied. The issues and the challenges in an automobile industry has been taken with Honda as an example and discussed. Then the challenges and the competition that are available for Japan while making the business is explained with the help Honda industry. The next part has discussed the various steps or initiatives taken by Japan which is the triple agreement. The Free Trade Agreement, Economic Partnership Agreement and Strategic Partnership Agreement has been discussed in this section. The various importance of dealing with the trade and other common values were also discussed in this section. Finally, the recommendations has been made for Japan for improving the trade and the values with EU.
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