LONDON – European auto makers are setting out tough preconditions to negotiations between the European Union and Japan over a free-trade agreement.

With the two sides having completed a “scoping exercise” setting goals for an FTA, the EU auto sector is worried about unfair competition if European tariffs on Japanese autos are lowered or scrapped as part of the agreement.

Europe’s beef is with Japanese technical rules, and the difficulties of selling in Japan, rather than tariffs – which are not charged on autos being imported into the Japanese market. As a result, a trade deal focused on tariffs would not help the Europeans, as EU import duties are charged on Japanese auto exports.

“We’ve told the European Commission, EU member governments and (members of the European Parliament) that we need first to obtain from the Japanese an agreement that any car that’s been certified for sale in the EU should be able to enter Japan without any further testing or authorization,” says ErikBergelin, director of trade and economics for ACEA, the European auto makers’ association.

“Second,” he says, “there should be a change in Japan over the privileged treatment of Kei cars.” These are small, inexpensive, 0.66L cars, almost exclusively designed for Japan, which receive preferential treatment on taxes and environmental legislation and which comprise a sector of the market to which the EU industry is closed.

“For the moment we do not believe that what’s in the scoping exercise gives us sufficient assurance that Japan will actually deal with these issues in a way we can accept,” Bergelin says.

Garel Rhys, a professor and president of the Centre for Automotive Industry Research at Cardiff University Business School, in Wales, agrees the main headache for European exporters is not so much tariffs on imported vehicles as Japanese rules that seek to restrict imports under cover of safety or health regulation.

“There are also biases in the market in Japan so that someone who buys a foreign truck, say, might be treated differently than someone who buys a Japanese vehicle,” Rhys says. “He may not get the big orders, (or) he may be looked at in a strange way by registration authorities and targeted by police, for instance.”

Bergelin adds that in the year since the free-trade agreement between the EU and South Korea came into force, there have been “massive increases for Korean exports of passenger cars, yet only relatively modest gains for the EU industry.” He is calling on the EC to publish an impact assessment before beginning negotiations with Japan.

In light of the Korean experience, Japanese auto makers are keen for their government to forge ahead with comprehensive talks on an EU free-trade agreement that they anticipate will provide them with lucrative new opportunities.

The Japanese government, initially more than a little cautious about leaping into a trade deal with the EU, is warming up to the idea, also because of Korea’s success.

That FTA with Seoul phases out all EU industrial tariffs, which previously were set at 10% on imports from Korea. And even with the final agreement’s inclusion of a safeguard mechanism designed to resist a surge in imports of Korean cars, Japanese auto makers have been impressed at the rapid increase in the number of Hyundai, GM Korea and Kia cars on Europe's roads.

Tokyo hopes to move on to the formal talks, although officials in the Ministry of Economy, Trade and Industry's automotive division are playing their cards close to their chests.

Kikuo Take, deputy director of the division, says the issues to be discussed are "totally confidential."

A spokeswoman for the Japan Automobile Manufacturers' Assn. is only slightly more forthcoming.

"JAMA's member companies strongly support open trade and investment and have worked for many years to help create the current positive climate in the global auto industry," Kazusa Yoshino says.

"That business climate, in which companies compete not only in local markets but also around the world, has been a result of the fact that the liberalization of trade and investment is far more economically beneficial than trade protection."

The association backs up its position with a Mitsubishi Research Institute study assessing the impact of any trade deal on both Japan and the EU.

The study projects a deal would enlarge the whole auto market in both parties, with sales of 17 million vehicles in the EU’s 27 member states in fiscal 2020 if a trade deal were implemented, some 742,000 more units than if no agreement were in place. In the Japanese market, vehicle sales in the same year are predicted to reach 4.4 million units with an FTA, 97,000 more than without any such agreement.

The study further suggests sales of European brands in both the EU and Japanese markets would increase by a total of 518,000 units, an increase of about 4.2% over the scenario without the trade pact. Simultaneously, the study suggests Japanese brands would sell 224,000 extra units in both markets combined, an increase of 3.7%.

Detailing the figures at a March business seminar titled “Future Visions of EU-Japan Partnerships for Economic Growth” in Brussels, Yoshihiro Yano, director general of JAMA's international department, emphasized that early conclusion of a trade deal would create a "win-win" situation for both sides.

That view is not shared by Martin Schulz, senior economist with Fujitsu Research Institute in Tokyo, who points out there is no tariff on auto imports into Japan but 12% into the EU.

"Progress on the European side has been very slow, simply because they have very little to gain in this area," he says. "Why would they trade that advantage?

"European car makers have learned from the FTA with Korea. They have seen exports exploding and they are very worried. The Italians, in particular, are concerned as they have a very large car sector but they are not very competitive."

Yet, Schulz believes an agreement will come to fruition because of the political will for it to happen. He also predicts Japanese auto makers, which already operate 13 plants in eight EU member states, will sweeten the deal by offering to set up more job-creating production facilities throughout the EU.

– with Julian Ryall in Tokyo