The EU/Japan EPA : taking stock and looking ahead.
Date: 2021-09-14
Institutions: European University Institute
Subjects: European Union, Japan, economic agreement, trade agreement, trade policy

POLICY BRIEF

The EU/Japan EPA – taking stock 
and looking ahead

Introduction

The  world  has  been  through  different  stages  of  trade  negotia-
tions during the last decade. With the fundamental insight that the 
world trade order in the wake of the Doha round stalled, countries 
and  established  trading  areas  such  as  the  EU  looked  for  more 
constructive  solutions  to  bring  trade  forward.  Before  the  Trump 
administration  took  office,  the  EU  and  the  US  were  negotiating 
the Transatlantic Trade and Investment Partnership (TTIP). In the 
Pacific, the US was engaged in negotiations on the Trans-Pacif-
ic Partnership Agreement (TPP) framework, capturing most trade 
outside  China.  With  the  Trump  administration,  the  US  view  on 
trade  relations  and  trade  negotiations  changed  drastically.  With 
the US currently withdrawn from both the TTIP and the TPP ne-
gotiation frameworks but with the UK applying to join the ‘replace-
ment  version’  of  the  TPP  called  the  Comprehensive  and  Pro-
gressive Agreement  for  Trans-Pacific  Partnership  (CPTPP),  the 
playing field of international political economy and trade relations 
is profoundly altered. In the wake of the post-Trump position of the 
US and continuing tense relations with China, the world has rap-
idly seen geoeconomics as a new field with strong repercussions 
on the international political scene.

There has been an intense debate involving both academia and 
policymakers on the benefits from seeking what is often seen as 
the  second-best  alternative  to  multilateral  solutions.  Regional/
plurilateral  trade  agreements  are  examples  of  such  alternatives 
(e.g. Kawai and Wignaraja, 2008; Wilson, 2015; Solís and Wilson, 
2017). A dividing line has been drawn between multilateralism as 
the only sustainable long-term alternative and the more pragmatic 
view of regional trade arrangements. These arrangements can be 

 EU-Asia project

Issue 2021/40
September 2021

Authors

H Richard Nakamura, School of Business, Economics and Law, University of Gothenburg 
Patrik Ström, European Institute of Japanese Studies, Stockholm School of Economics

seen as incremental approaches towards success-
ful  multilateralism.  This  has  resulted  in  the  ‘stum-
bling  block’  vs.  the  ‘stepping-stone’  metaphor  (Al-
vstam and Nakamura, 2015). In recent years, there 
has been a process of conversion between the two 
attitudes, arguing that regionalism and plurilateral-
ism can be multilateralised. This can be understood 
as  regional  and  plurilateral  trade  arrangements 
which obey the general multilateral basic rules and 
in addition are also able to proceed further than is 
possible at the WTO level. Eventually, this might in-
crease the possibility of reaching a successful mul-
tilateral agreement (Ibid.).

Nevertheless,  various  preferential  agreements 
have become parts of a larger geopolitical, geoeco-
nomic and security policy context, where trade has 
become a token of a lack of political intentions and 
political will. Therefore, with this backdrop there is 
an increasing need to view trade negotiations in a 
multidisciplinary  synthesis  of  economics  and  poli-
tics,  where  influential  stakeholders,  such  as  gov-
ernments  and  transnational  corporations  (TNCs), 
can utilise the playing field to sustain a rules-based 
framework towards a multilateral trade order.

The foundation of the EPA in the 
world order

Despite  a  pessimistic  outlook  for  multilateral,  and 
even  large  FTA  agreements,  countries  pushed  on 
without the US in the Asia-Pacific region, where the 
CPTPP  and  the  EU-Japan  Economic  Partnership 
Agreement  (EPA)  are  the  prime  stable  and  con-
crete  examples.  First,  with  the  former  US  admin-
istration moving into a more isolationistic position, 
the  need  became  apparent  for  the  EU  and  Japan 
to honour the rules-based international order. With 
more  focus  on  the  EU,  Japan  can  now  also  com-
mit  more  resources  and  political  emphasis  to  the 
economic partnership as it contains the most clear-
ly spelt-out and concrete aims and statutes of any 
FTA/EPA deal Japan has closed with a major glob-
al economic power so far. Second, the EPA could 
also  offer  a  rules-based  framework  for  positioning 
the EU-Japan partnership in relation to the increas-
ing  geoeconomic  weight  of  China.  Third,  the  fact 
that  relations  between  the  US  and  China  are  de-
teriorating into escalating trade conflicts and secu-
rity  issues,  including  both  threats  of  trade  barriers 
and  military  muscle-flexing,  is  giving  the  EU  and 
Japan  new  delicate  diplomatic  considerations  but 
also new opportunities in the global arena. With this 
political  and  geoeconomic  backdrop,  and  with  the 
time and effort invested in the negotiations, it was 

a great success when the EPA was finally ratified in 
December  2018  and  came  into  effect  in  February 
2019.  This  concluded  a  timeframe  dating  back  to 
2013 when negotiations were initiated, which in turn 
was preceded by six years of preparatory talks.

An important background to the negotiations is that 
growth in direct bilateral trade between the EU and 
Japan had stagnated during the previous decades. 
Adding  to  this  relative  decline,  both  the  EU’s  and 
Japan’s shares of world trade had substantially de-
creased during the same period. Researchers and 
policymakers who were assessing the progress of 
the negotiations saw the launch of a bilateral FTA/
EPA  between  the  EU  and  Japan  as  a  “defensive” 
measure  with  the  aim  of  increasing  and  reaching 
prior  trade  levels  among  the  trading  partners  (Al-
vstam  and  Nakamura,  2015). The  idea  of  an  EPA 
as a defensive measure could in today’s changing 
global political and economic arena be transformed 
into an adaptive economic relationship, with which 
the EPA partners could put their weight behind the 
rules-based  world  order  where  trade  negotiations 
are the natural starting point.

The EPA and the complex trade 
setting

Today,  almost  50  per  cent  of  global  trade  can  be 
defined as in intermediate goods (UNCTAD, 2021). 
If the capital goods sector is included, the share of 
world trade in intermediate goods1

is likely to be even higher. Therefore, international 
cross-border transactions have to be understood in 
the context of increasingly complex global produc-
tion networks (GPNs). The design and governance 
of such networks are in this respect a clue to a new 
understanding of the geography of external trade in 
goods and services (e.g. Yeung, 2014; Yeung and 
Coe, 2014; Yildirim, 2015). The focus should there-
fore be moved from physical products to tasks, i.e. 
the production locations of physical goods and as-
sociated services that constitute the nodes between 
links in a global value chain.

The  emergence  of  global  production  networks  in 
complex  global  value  chains  is  a  reality  that  will 
continue to thrive and develop in an interconnected 
world,  where  data  and  intermediate  goods  consti-
tute the building blocks of the economy. Facing this 
world order of global business, the EPA creates a 
vital framework for including production and invest-
ment planning by international business rather than 
merely taking trade research estimations into con-
sideration  when  assessing  the  effects  of  an  EPA. 

1  Products that have not yet reached their final shape or consist of machinery and equip-
ment aimed at generating added value in the production of final consumer products.

2  

  Robert Schuman Centre | September 2021

Due  to  the  mobile  nature  of  global  value  chains 
(GVCs)  and  GPNs,  decisions  among  TNCs  re-
garding production locations and the choice of sup-
pliers  and  first-tier  customers  in  value  chains  are 
also  important  to  include  in  such  an  assessment. 
Besides  the  shifting  gravity  in  international  trade, 
with China having strengthened its position in rela-
tion to the traditional trading superpowers, both the 
EU and Japan suffer from relatively slow economic 
growth due to structural impediments in their econ-
omies. By including the effects of GVCs and GPNs 
on trade patterns between the EU and Japan, the 
EPA can create an important mutual contribution to-
wards better utilisation of comparative advantages 
and  revitalisation  of  key  domestic  industries.  The 
relevance of such considerations is obvious given 
the  asymmetries  that  exist  in  the  EU-Japan  trade 
relationship in terms of more exports from Japan to 
the EU taking place through intermediate partners 
in global production networks than there are in the 
reverse  direction.  Indirect  trade  relations  between 
the  EU  and  Japan  within  the  context  of  a  GVC 
should therefore be incorporated in an explicit and 
transparent  manner.  The  stagnating  or  declining 
direct trade flow can therefore be partly explained 
by the fact that trade takes place through interme-
diate  locations  along  a  value  chain  (Alvstam  and 
Nakamura, 2015).

Connecting the EPA and the SPA

In parallel with the mutual work on the EPA, Japan 
and the EU are also engaged in negotiations on a 
new  form  of  international  agreement.  The  frame-
work of the Strategic Partnership Agreement (SPA) 
was set to expand the collaboration interfaces be-
tween the two parties. The fact that it is a platform 
complementing the EPA also pushed the envelope 
for  strengthening  relations  between  the  EU  and 
Japan.  The  format  of  a  legally  binding  agreement 
made the SPA stand out from other more ‘commu-
niqué’-style  agreements  in  areas  other  than  trade 
and investment. After relatively slow progress, the 
areas of connectivity, digitalisation, climate change 
and  security  have  become  areas  of  special  con-
cern. The issue of infrastructure investment has be-
come a vital area. With the Covid-19 pandemic, the 
SPA  turned  into  an  important  future  tool  for  trade 
and business connectivity. The pandemic has also 
shown the increasing importance of digital connec-
tivity and data transfers, and in particular the kinds 
of  data  transfers  including  personal  information 
regulated  by  the  European  GDPR.  These  are  ar-
eas within the EPA that will probably also affect the 
future development of trade in services and related 
foreign direct investment. With an increasing possi-

bility of data transfer and value being generated at 
the  interface  between  service  content  and  goods, 
the  economic  interconnection  between  the  agree-
ments will be vital for the future development of po-
litical economy and business model connectivity.

Taking stock of the EPA outcome

With  the  EPA,  both  parties  foresaw  strengthening 
relations and economic gains in general and for cer-
tain sectors (EU, 2018a) in particular. In theory, the 
overall  tariff  reduction  should  generate  additional 
trade, but in the long run the elimination of non-tar-
iff  barriers,  standardisation,  regulatory  harmonisa-
tion and trade facilitation will probably have a more 
profound  effect  on  trade.  Estimates  show  the  po-
tential  gains  for  the  agri-food,  textile  and  leather 
industries are positive in the long run by involving 
countries  in  the  rest  of  Asia,  which  is  something 
that  has  also  been  stressed  as  a  positive  indirect 
effect of the EPA (Ibid.). This assessment builds on 
the understanding of the complexity of regional and 
global production networks and value chains (Coe 
et al., 2008). Hence, the EPA will potentially create 
a more transparent institutional setting for firms in 
both  the  EU  and  Japan  to  operate  in.  With  a  lack 
of  a  successful  multilateral  trading  system,  this  is 
an  essential  component  of  the  bilateral  economic 
relationship.

When assessing the implementation of the EPA, it is 
important to consider the relatively short time peri-
od that has elapsed since the agreement came into 
effect on 1 February 2019. Furthermore, the world 
has for the last 18 months experienced the severe 
effects of the Covid-19 pandemic and its repercus-
sions on trade and investment. Originally fearing a 
deep negative impact on world trade, it seems that 
these fears have not materialised. However, there 
are examples of trade restrictions on specific inter-
mediate  goods  in  the  healthcare  and  pharmaceu-
tical  sectors,  but  in  general  world  trade  has  been 
surprisingly resilient (UNCTAD, 2021).

From  the  European  perspective,  the  EPA  nego-
tiations  also  coincided  with  the  complexity  of  the 
Brexit  vote  in  the  UK.  Over  recent  decades,  the 
UK had attracted a substantial share of the total in-
vestments  in  the  European  single  market  in  both 
manufacturing  and  service  industries.  The  long-
term implications of Brexit and the subsequent less 
comprehensive free trade deal between the UK and 
Japan will be of significant importance in the eco-
nomic  relation  to  the  European  single  market  and 
the  trade  flows  between  Japan  and  the  EU.  Spe-
cifically, possible consequences might be changing 
industrial footprints in both the UK and the EU that 

3  

  The EU/Japan EPA – taking stock and looking ahead

could  affect trade flows. Several  knowledge-inten-
sive professional service firms, banks and financial 
service providers have already changed domiciles 
from the UK to other parts of the European single 
market (FT, 2018; Reuters, 2021; FT, 2021). Manu-
facturing firms in the automotive industry have cho-
sen to serve Europe from Japan or relocate man-
ufacturing  units  to  the  continental  EU  rather  than 
expanding  UK  production  facilities  (Nikkei,  2018; 
2019). The EPA has facilitated this development by 
making such industrial reconfiguration economical-
ly  viable.  In  relation  to  the  overall  outcome,  mer-
chandise trade has increased by around 6 per cent 
whereas  the  sectors  of  anticipated  strong  growth 
such as agri-food, industrial textile and leather have 
seen  increases  of  about  10  per  cent  (EU  COM, 
2020). This seems to be along the lines of the esti-
mates made prior to the implementation of the EPA 
(EU, 2018a). 

Important future areas of the EPA

In general, the EPA has had a viable start with the 
intention of creating a broad trading framework that 
aims to expand the boundaries of traditional trading 
agreements. In addition to tariff reduction and trade 
facilitation,  with  specialised  working  groups  and 
committees in several areas, the Covid-19 pandem-
ic has also generated an understanding and need 
to deepen efforts in several areas to strengthen the 
economic standing of both parties in the world mar-
ket (e.g. Ström et al., 2021). There are a number of 
pressing issues that will be of utmost importance in 
the relationship between the EU and Japan through 
the EPA (e.g. EU, 2018b): 

	• Services,  servitisation  and  product  service 

systems

	• Digital services
	• Sustainability and a green economy
	•

Localisation  of  value  generation  –  GPN/
GVC
Implications  of  the  Regional  Comprehen-
sive Economic Partnership (RCEP)
Trade measurement and business level
FDI  –  a  need  for  an  investment  arbitration 
agreement?

	•

	•
	•

In the light of further increases in merchandise trade 
due to limited tariffs, services have been acknowl-
edged as a highly important area in the future de-
velopment of the EPA. With the EU and Japan be-
ing strong in services and integrating services with 
manufacturing (i.e. servitisation), digitalisation and 
data  transfer  will  be  the  key  to  deeper  trade  inte-
gration. Digital services are growing both in Europe 
and  Japan,  and  this  development  is  facilitated  by 

4  

  Robert Schuman Centre | September 2021

regulatory harmonisation and market entry process-
es  having  been  smoothened.  With  the  increased 
use  of  the  internet-of-things,  business-to-business 
data transfers will also become an important issue 
in post-pandemic international trade. 

Another central area of the EPA that has tradition-
ally been neglected in trade talks is environmental 
and social sustainability. The EU and Japan share 
a  great  interest  in  pushing  green  growth  forward, 
and  the  latest  large-scale  economic  stimulus  pro-
grammes in the EU and Japan clearly have profiles 
of  green  growth  and  social  inclusion  (EU,  2018c). 
The EPA will therefore be an important tool to pro-
mote and facilitate increased trade in areas of sus-
tainability. 

Acknowledging the complexity of value chains and 
regional and global production networks could have 
implications  for  the  development  of  the  EPA  (e.g. 
Alvstam  and  Nakamura,  2015).  Trade  will  reflect 
the  industrial  configuration  of  GVCs  and  GPNs. 
This aspect of the EPA has received relatively limit-
ed attention. Localised value in the geographical ar-
eas of Japan and the European single market could 
act as a catalyst for designing effective production 
structures including hardware, software and service 
production by lessening the need for complex pro-
duction network configurations involving third-coun-
try  locations  far  outside  the  EU  and  Japan.  More 
indirectly,  this  configuration  in  the  post-Covid-19 
pandemic economy will be connected to the recent-
ly agreed Regional Comprehensive Economic Part-
nership (RCEP) comprising ASEAN, China, Korea 
and Japan. In order to achieve the objective of the 
EU to play a larger role in wider Asia, the configu-
ration of company locations and hence trade will be 
of key interest for the competitiveness of both the 
EU and Japan. 

All in all, the combination of the rising importance of 
services, digitalisation, localised value creation and 
firm location configuration leads to a need for sta-
tistics that can capture this development. This calls 
for  a  combination  of  more  traditional  macro-eco-
nomic measures in combination with company-lev-
el (micro) data generation. With a steady increase 
in digitalisation in industries, this will be paramount 
for developing relevant and effective policy and en-
hancing  trade  facilitation  measures  built  into  the 
EPA.

Finally, with regard to the slow progress of the in-
vestment agreement, some might question the ne-
cessity  to  conclude  such  an  agreement  between 
the EU and Japan if there is only a limited interest 
in creating a standing set-up for FDI dispute settle-
ment. On the other hand, the lack of a FDI dispute 

settlement mechanism might be the reason for the 
slow progress of the investment agreement. As the 
causality between these important items in the EPA 
talks is still to be established, the question is wheth-
er such a mechanism meets any real demand from 
private sector businesses. From statistics, we can 
observe  that  mutual  Euro-Japanese  investments 
are occurring anyway. Does this mean that the EPA 
can develop regardless of whether there is an FDI 
dispute settlement mechanism in place?

Conclusions and policy 
recommendations

The global geopolitical and geoeconomic situation 
will bring the EU and Japan to the forefront in glob-
al  relations.  If  it  is  possible  to  showcase  the  EPA 
as  a  platform  for  deepening  economic  integration 
between two of the world’s most important trading 
blocs,  this  will  most  certainly  have  an  impact  on 
others.  With  the  new  US  administration  in  place, 
it  is  also  a  good  opportunity  to  move  onwards  by 
developing  the  provisions  and  functioning  of  the 
EPA with the mandate and acceptance of the World 
Trade Organisation. The EPA can act as an exam-
ple  and  facilitator  for  finding  broader  acceptance 
of continued liberalisation of trade. The agreement 
can be the model that the world trade order needs 
in order not to see inter-regional trade agreements 
as  stumbling  blocks  for  economic  development 
(Nakamura  and  Alvstam,  2015).  This  means  that 
the  EU  and  Japan  can  jointly  form  a  strong  van-
tage point improving the existing rules-based world 
order.  However,  if  the  potential  is  not  acted  upon, 
it will probably be more difficult to enforce the gen-
eral  approach  of  rules-based  institutional  support. 
A  related  opportunity  to  enhance  the  idea  of  con-
necting the EU to wider Asia will be a development 
of trade and investment relations with all the parties 
to  the  RCEP  trade  agreement.  Such  an  initiative 
would be another positive contribution to sustaining 
and developing the rules-based world trade order. 
In this light, the newly established FTA agreement 
between Japan and the UK can also be seen as a 
good example for future international trade negoti-
ations.

In the wake of the Covid-19 pandemic, the poten-
tial of combining the EPA and the SPA is obvious. 
In  the  post-pandemic  world,  both  the  geopolitical 
and geoeconomic situation calls for cross-function-
al  approaches  to  create  a  more  resilient  structure 
of both mature and developing economies. Clearly 
formulated  strategic  policies  in  the  areas  of  infra-
structure,  global  health,  digitalisation,  sustainabili-
ty, data and connectivity will go hand-in-hand with 

economic recovery and fostering trust in the ability 
of  a  rules-based  world  order  to  deliver  continuing 
relative  wealth  in  different  parts  of  the  world.  Fur-
thermore, the EU and Japan have the means and 
ability through their institutions and financial capa-
bilities  to  back  up  necessary  investments  through 
aid  programmes  and  trade-facilitating  measures 
(Ström et al., 2021).

Finally,  for  the  EPA  to  capture  the  full  potential  of 
the relationship, a set of areas need special atten-
tion in policy recommendations. With the increasing 
importance of services in GDP growth and employ-
ment,  and  the  important  role  played  by  knowl-
edge-intensive services as intermediaries for other 
sectors  in  relation  to  innovation  and  productivity, 
services will be an important area of the EPA’s de-
velopment.  The  pandemic  has  also  shown  the  in-
creasing importance of a digital-ready society both 
from the private and public perspectives. The need 
for business-to-business solutions and data trans-
fer will be crucial issues for the future competitive-
ness of companies based in the EU and Japan. The 
ongoing  business  reinvention  of  corporate  Japan 
(e.g.  Schaede,  2020)  with  a  strong  focus  on  digi-
talisation, also pushes this need further. The digital 
services and e-commerce markets have rapidly be-
come vital parts of the economy in both the EU and 
Japan. If these services are to thrive on the basis 
of  the  EPA,  more  is  needed  in  terms  of  trade  fa-
cilitation, regulatory transparency and market entry 
facilitation. The development of categorisations and 
data capture will be vital to develop viable policies 
in the EU and Japan and the competitiveness of the 
companies there. Since services are more affected 
by  non-tariff  barriers,  this  calls  for  coordinated  ef-
forts by both parties to the EPA.

Another  area  of  great  importance,  challenge  and 
possibility for both the EU and Japan would be to 
further develop the green economy and trade. Both 
parties are well established to push this within the 
rules-based  world  order.  The  substantial  commit-
ments presented as post-pandemic economic rem-
edies are tightly connected to the delivery of green 
growth and social cohesion in both Japan and the 
EU. In addition, the area of green growth is closely 
related  to  the  enhancement  of  servitisation  of  the 
manufacturing industry and the importance of ser-
vices  in  a  transition  to  a  green  economy  (Ström, 
2020). Developing this part of the EPA and the re-
lated SPA could be a viable way to create resilient 
societies in the post-pandemic world economic or-
der. Again, strong parties such as the EU and Ja-
pan  can  use  the  rules-based  world  order  for  both 
geopolitical and geoeconomic purposes. 

5  

  The EU/Japan EPA – taking stock and looking ahead

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7  

  The EU/Japan EPA – taking stock and looking ahead

www.eui/rsc

Views expressed in this publication reflect the opinion of individual authors and  
not those of the European University Institute or the European Commission. 
© European University Institute, 2021
Content © H Richard Nakamura, Patrik Ström.

doi:10.2870/290139 
ISBN:978-92-9466-078-7 
ISSN:2467-4540 
QM-AX-21-040-EN-N

8 

 RSC | Policy Brief | Issue 2021/40 | July 2021

Co-funded by the Erasmus+ Programme of the European UnionRobert Schuman Centre for Advanced StudiesThe Robert Schuman Centre for Advanced Studies (RSCAS), created in 1992 and directed by Professor Brigid Laffan, aims to develop inter-disci-plinary and comparative research on the major issues facing the process of European integration, European societies and Europe’s place in 21st century global politics. The Centre is home to a large post-doctoral pro-gramme and hosts major research programmes, projects and data sets, in addition to a range of working groups and ad hoc initiatives. The research agenda is organised around a set of core themes and is continuously evolving, reflecting the changing agenda of European integration, the ex-panding membership of the European Union, developments in Europe’s neighbourhood and the wider world.The Global Governance Programme The Global Governance Programme (GGP) is research turned into action. It provides a European setting to conduct research at the highest level and promote synergies between the worlds of research and policy-making, to generate ideas and identify creative an innovative solutions to global challenges. The Programme is part of the Robert Schuman Centre for Ad-vanced Studies of the European University Institute, a world-reknowned academic institution.  It receives financial support from the European Com-mission through the European Union budget. Complete information on our activities can be found online at:  globalgovernanceprogramme.eui.eu