Last December saw the finalisation of what is termed as the « world’s largest free trade agreement » between the European Union and Japan. How does this modify the international trade ? How can Mauritius benefit from it ? What is the importance of free trade agreements, knowing that Mauritius has several regional trade agreements, free trade agreements/bilateral trade agreements as well as multilateral trade agreements. We put the question to the former Director of the Trade Policy Unit at the Ministry of Foreign Affairs, Assad Bhuglah
>> In December last year, the European Union and Japan concluded negotiations on the largest free trade agreement. How does this modify international trade?
The free trade agreement (FTA) deal between the European Union and Japan demonstrates the commitment of the two powerful economies to free trade at a time when protectionism is gaining momentum. There are several factors that have pushed the two parties to go for a bilateral FTA. In the first instance, the long awaited conclusion of the World Trade Organisation's Doha Round of multilateral talks has been elusive.
The Round was launched in 2001 and, up till now, there has not been concrete outcome for business community. This is the reason why the developed economies wanted to negotiate trade deals outside the WTO in terms of the Trans-Pacific Partnership (TPP) free trade pact and the Trans-Atlantic Trade and Investment Partnership (TTIP). With the advent of Donald Trump as President, the United States has withdrawn from both these initiatives and the talks have stalled.
Both Japan and the European Union are concerned about Trump’s “America First” approach to trade, and his suggestion of punitive tariffs on steel imports from Europe, Japan and other countries. The EU-Japan FTA attempts to mitigate the impact of Trump's protectionist policies and boost trade and investment opportunities for the European and Japanese business community. In the wake of Britain’s decision to leave the bloc, the EU-Japan pact will also show the Euro-skeptics of the benefits of staying in the grouping with access to Japanese market.
European farmers are seeking to tap deeper into the Japanese market for wine, cheese and meat. The pact is also expected to give competitiveness to Japanese automobile and electronics manufacturers within the European market in competition with rivals from South Korea, who have already signed a free trade pact with the EU.
>> What might be, according to you, the implications or opportunities for Mauritius?
The pact does not seem to have immediate implications for Mauritius. Our market access on the EU is governed by the Economic Partnership Agreement (EPA). Our access to Japanese market is conditioned by the General System of Preferences (GSP). Mauritius can seize the opportunity to negotiate, with both parties, provisions for cumulative rules of origin which could allow Mauritian manufacturers to use raw materials from both EU and Japan, and qualify their products to obtain preferential treatment on both markets. Mauritius can also envisage to plug itself in the supply chain between the EU and Japan.
>> Mauritius is a member two regional blocs, the COMESA and SADC. Do we leverage enough on our membership to promote our exports to these two blocs? As well as to what is now called the COMESA-SADC-EAC Free Trade Area?
First of all, it is important to underline that Mauritius forms part of the African Union which has a long-term goal of building a continental market. As a pathway to attain this goal, the Lagos Plan of Action and the Abuja Treaty had, decades ago, invited African nations to regroup themselves as sub-regional blocs on the basis of different geographical configurations. COMESA and SADC are part of this process.
It would have been an aberration if Mauritius had opted to remain aloof of these blocs of Eastern and Southern Africa. Mauritius could not have afforded to stay outside the doorstep of such trade fortresses emerging in its neighbourhood. Mauritius has a better leverage to negotiate a deal, with support of other members, within SADC and COMESA, than dealing individually and bilaterally.
Imagine the inconvenience if Mauritius was to negotiate bilateral deals, one by one, with all the countries of the region… The frameworks of COMESA and SADC put Mauritius on equal footing with all the members, big or small. The same rules apply to all. Mauritius has always considered COMESA and SADC markets as training ground for our business people before they can step up to a global trading environment.
Export is not the only measurement rod to assess the benefits of our membership to the regional blocs. Sourcing of inputs for our industries and vital commodities for our consumers from the regional markets is very critical for a Mauritius which is deficient in raw materials. Secondly, our association with regional blocs helps us to overcome our inherent weakness of tiny market and it also serves as an important marketing tool to attract investors who are always interested in big numbers.
>> What have been the advantages for Mauritius following signature of trade agreements with countries like India, Pakistan and Turkey amongst others ?
Our effort to sign trade agreements with different countries is motivated by our desire to diversify our trade relations which have traditionally been Euro-centric. Our first move was to conclude Preferential Trade Agreements (PTA) with India and Pakistan, two emerging economies of Asia with which Mauritius has cultural proximity. A PTA, as compared to FTA, has a limited product coverage. It can also be termed as partial-FTA.
The idea of starting with a PTA with these two countries was to pave the way for a FTA with full product coverage in the long run. We signed the PTA with Pakistan in 2007. Although we had finalized the PTA with India long time back, it could not be signed because it had to await the conclusion of CECPA, which itself became a prisoner of the thorny problem of double taxation agreement. The rationale for signing a FTA with Turkey is explained by the fact that Turkey is in Customs Union Agreement with the EU. Given that Mauritius and EU are bound by the EPA, it was important for Mauritius and Turkey to align their trade policies. But more important is that the FTA with Turkey gives us an outreach to the markets of Balkans and Central Asia.
>> Do we need to sign FTAs with some countries for our exports, or is it better to sign Economic Partnership Agreements to enlarge the economic space of the country?
A FTA is a legal instrument that binds two or more countries to their mutually agreed commitments and obligations. It discourages the contracting parties to take unilateral decisions on their trade policies and serves to bring predictability in their trade behaviour. As I explained above, exportation is not the only objective of the FTA, it's much wider. Economic Partnership Agreement builds itself upon a FTA and it englobes several sectors of the economy, namely investment, finance, infrastructure, transport, communication, services, agriculture, fishing and mineral resources.
>> Do you think we need to plan ahead, about what we can export, in the next 5, 10 or 20 years?
I understand that the former Enterprise Mauritius recently came up with an export strategy. I think that with the setting up of the Economic Development Board (EDB), the strategy can be further refined and set on a longer term of vision. But we must reckon that we have travelled a long journey, from exporter of sugar to exporter of apparels and tuna; from exporter of services to generator of knowledge-based economy. As an ocean-based economy, the future export items would be more and more related to maritime-oriented products and services.
The world’s largest FTA
The negotiations between the EU and Japan on the Economic Partnership Agreement (the EPA) have been finalized in December 2017. The texts will be confirmed upon signature and become binding upon the Parties under international law only after completion by each Party of its internal legal procedures necessary for the entry into force of the Agreement.
EU firms already export over €58bn in goods and €28bn in services to Japan every year. But European firms face trade barriers when exporting to Japan which make it hard for them to compete. The trade agreement with Japan will “remove these barriers, help the EU shape global trade rules in line with its high standards and shared values and send a powerful signal that two of the world's biggest economies reject protectionism.”
In so doing, the EU and Japan set the path to create the world’s largest open economic area. “Japan and the EU will join hands and build a free, fair and rule-based economic zone, which will be a model of an economic order in the international community in the 21st century,” Japanese Prime Minister Shinzo Abe told reporters in December last year. Japan had been one of the signatories to the planned Trans-Pacific Partnership (TPP), a massive 12-nation trade alliance that Trump ditched on his first day in office. Abe said a “new era” would now start for the EU and Japan.
The Economic Partnership Agreement will remove the vast majority of the €1 billion of duties paid annually by EU companies exporting to Japan, as well as a number of long-standing regulatory barriers. It will also open up the Japanese market of 127 million consumers to key EU agricultural exports and will increase EU export opportunities in a range of other sectors. The agreement also opens up services markets, in particular financial services, e-commerce, telecommunications and transport. It also guarantees EU companies access to the large procurement markets of Japan in 48 large cities, and removes obstacles to procurement in the economically important railway sector at national level; and addresses specific sensitivities in the EU, for instance in the automotive sector, with transition periods before markets are opened.
In 2013 EU governments instructed the European Commission to start negotiations with Japan. On 6 July 2017 the European Union and Japan reached an agreement in principle on the main elements of the EU-Japan Economic Partnership Agreement.
European Commission Jean-Claude Juncker said on the occasion: “This is the EU at its best, delivering both on form and on substance. The EU and Japan send a powerful message in defense of open, fair and rules-based trade. This agreement enshrines common values and principles, and brings tangible benefits to both sides while safeguarding each other's sensitivities.”