The EU and Japan Move Closer

Any news that emerged from last week's G-20 Summit in Hamburg, Germany was bound to be overshadowed by the high theater of the first-ever meeting between U.S. President Trump and Russian President Vladimir Putin. As a result, the biggest actual development from the Summit garnered very little attention in the American media. In fact, it did not involve America at all.

On July 6th, the European Union and Japan announced a broad EU-Japan Economic Partnership Agreement. The fact that the agreement was presented at the time when world attention was focused on the G-20 can be viewed as a snub to President Trump, who has routinely disparaged these types of comprehensive deals. It also placed added pressure on Prime Minister Theresa May in the Brexit negotiations, as it was clearly meant to demonstrate what the UK will be missing if it leaves the Union. Politics aside, the deal could have a major impact on corporate strategy and earnings within the EU and Japan with effects ranging far into the global economy.

Last year, according to World Bank statistics, the U.S. GDP was some $18.6 trillion, comprising still marginally under a quarter of the world's economy. In aggregate, the EU was second with a GDP of $16.4 trillion. Japan is ranked fourth with $4.9 trillion. As a result of the potential close cooperation it envisions, this deal would create an economic bloc that would be larger than the U.S. economy.

During the cold war, the U.S. used military and economic pressure to establish clear leadership on the world stage and to curtail the spread of communism. The economic end of those efforts unquestionably resulted in some trade deals that offered foreign countries access to lucrative American consumer markets and negatively impacted some American businesses. On the campaign trail, Donald Trump was able to whip up widespread resentment against these deals, like the Iranian Nuclear deal, the Trans-Pacific Partnership Agreement (TPPA), and even the North American Free Trade Agreement (NAFTA), which just a few years ago was considered a success by both Democrats and Republicans. Trump even managed to characterize NATO itself, somewhat accurately, as a version of a bad trade deal for the U.S. He argued that the de facto defense subsidies that American taxpayers provide to NATO (we pay more towards the NATO budget than all other members combined), sacrifices U.S. economic interests for the sake of political leadership of dubious value.

President Trump was elected, promising to correct these perceived imbalances. He pulled out of the TPP negotiations, and has made some noise about renegotiating NAFTA. In May, President Trump called for NATO members to pay their "fair share." The sharp change in tone from prior U.S. Presidents can probably be summed up best in German Chancellor Angela Merkel's much publicized statement during an election rally in Munich, saying "The times in which we could completely depend on others are, to a certain extent, over,...We Europeans truly have to take our fate into our own hands." This is the lens through which we must view the EU's decision to fast track its negotiation with Japan.

To be fair, the EU-Japan trade block is not one of the world largest. In fact, Japan is the EU's seventh most important trading partner, according to 2015 figures of the European Commission Directorate-General for Trade. Furthermore, EU-Japanese trade has been relatively in balance, according to Bloomberg. These facts would argue that a deal between the EU with Japan was not particularly pressing.