In June, the EU and Japan agreed upon a comprehensive free trade agreement that will create a new framework for the relationship between two of the world’s largest exporters. Together, the EU and Japan account for 28 per cent of global GDP and their annual bilateral trade amounts to nearly DKK 1,200 billion. Around 600,000 European jobs are estimated to be linked to exports to Japan.
These are big numbers, but what do they mean for a Danish company?
A whole lot, it may turn out, because even though our 2016 exports to the country “only” amounted to DKK 22 billion - making Japan our 11th greatest export market - historically seen, Danish companies have done rather well in the Japanese market.
Japan is wild about Danish products, because Danish design and innovative solutions satisfy the critical taste of Japanese consumers. A free trade agreement will therefore make it cheaper for those already in the market to sell their products to Japan - and hopefully thereby enable them to sell even more goods to the 127 million Japanese consumers, whom the royal family, the Confederation of Danish Industry and a number of Danish companies will pay a visit next week.
But the free trade agreement is also meant to make it easier for those who are not yet in the Japanese market to enter it. For one thing, their goods will have a clear competitive advantage in relation to American competitors, for example, who will not benefit from the same reduced tariffs. But the agreement also means that a number of barriers that may thus far have kept some companies out of the Japanese market will now be removed. Indeed, a number of these barriers have already been eliminated in connection with negotiations. For example, access to the Japanese market has already been made easier for Danish ingredients in the food sector.
But even though it has already become easier for some goods to enter the Japanese market as a result of the free trade agreement, by far the majority of the benefits, including elimination of tariffs, improved access for services and improved access to public procurement, will only come into force in two to three years. The precise date is still uncertain, because the EU and Japan are still negotiating about whether common rules for exchange of data should be part of the agreement, just as it is also not yet clear whether investment protection will be part of the agreement.
We expect that before the end of this year, a decision will have been made as to whether these two elements will be included in the final agreement. After this, the agreement must go through a legal review to ensure that it complies with existing EU rules and treaties, after which it can be translated to all of the EU’s official languages. That process is likely to take at least a year. The agreement must then be approved by EU member states as well as the European Parliament, which is likely to take at least six months. The agreement would be able to come into force a few months after that, meaning that at best, Danish companies will be able to take advantage of the agreement at the end of 2019. That is, however, an optimistic scenario which requires that everything goes according to plan.
In other words, Danish companies have plenty of time to plan how to make the most of the deal. And there is good reason to do so, because Japan is no easy market to enter. The linguistic, geographic and cultural distance is vast. If there are small dents in packaging or visible faults on a product, Japanese consumers will turn their back on it for good. And should a defect to a product be found after it has been purchased, they expect to be able to have it fixed or replaced, even several years after it was bought - and they also expect a clear explanation of what went wrong with the faulty product. It is not without reason that Japanese consumers are known to be the most critical in the world.
Meanwhile, if you are able to deliver a product that satisfies the discerning Japanese consumer’s sense of quality and detail, they are an extremely loyal customer group that will happily pay extra for a product. For those who are able to and wish to enter it, the Japanese market has many good and profitable opportunities to offer - and it’s just a matter of getting started so that you are prepared to take full advantage of the trade deal once it takes effect.