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2. Basic Perspectives on European Integration
3. Issues Needing Resolution To Promote Closer Japan-Europe Economic Ties
4. Toward a New Stage in Japan-Europe Economic Ties
With the May 2004 accession of 10 countries, the European Union (EU) has become a single market of 25 countries with 450 million people. The EU has been carrying out institutional reforms to adapt to this historic transformation. The substantial change, combined with the successful introduction of the Euro as a single currency, has been enhancing the EU's presence in the international community. Today, the EU has about as strong a voice and influence as the United States at the G8 summit meeting, the WTO and the OECD. The EU often exerts significant influence on not only the process of building and maintaining the international order and systems but also the direction of rule making, which defines the scope of global business activities.
Japan, now emerging from a long recession and on the road to economic recovery, is being called upon to contribute more to the international community by fostering stability and growth in the global economy. Japan and Europe should now strengthen the business relationship and work together for world prosperity.
The Japan-Europe economic relation has changed greatly. The days of contentious trade friction have gone. Close and cooperative relations have been friendly maintained between Japan and Europe. Japanese investment in the EU region has increased almost to the level of its investment in the United States on a flow basis. #1 Japan and Europe are highly developed economic entities accounting for 40% of global GDP. They share common values grounded in the principles of democracy, the rule of law, human rights, a market economy system, a recycle-oriented society and other basic human values.
Medium- to long term requirements make it important that Japan regard Europe as one of its most important economic partners. At a time when the process of widening and deepening of the EU integration is taking a new turn, Japanese business community needs to clarify its thinking with regard to the economic impact of European integration on their business activities, and find ways to fasten Japan-Europe economic ties. It was with this in mind that Nippon Keidanren examined, from a variety of perspectives, the new direction being taken in the Japan-Europe economic relations. The various views of members of Japanese business circle have been compiled into this opinion paper.
With the addition of 10 new members in May 2004, the EU has become a single market with about 450 million people and a GDP of 10 trillion euros. #2 Changes of business environment in Europe offer new business opportunities, encouraging Japanese companies to further reorganize their business strategies in the region. One can sense the strong political will and enthusiasm for restructuring efforts required by the 2004 enlargement in statements such as that of European Commission Vice-President Günter Verheugen: "This is not the first time the EU has expanded, but the scope of the last enlargement is unprecedented in the history of the EU or EC. It has strategic importance." #3 The enlargement is not only a symbol of the end of division of Europe in the Cold War, but also an impressive reality that a new Europe has been born. The new members, who are "a breath of fresh air blowing through the EU," #4 have been vigorously undertaking drastic institutional reforms to realize its accession to the EU, believing it leads to their countries' further economic development. Their expectation for the EU membership is reflected in such statements as "the accession to the EU has increased our country's potential," #5 and "the membership means an opportunity for further economic growth of our country." #6
Japanese companies have conducted various types of business in Europe over the years. They must now respond to the elimination of business boundaries between Eastern and Western Europe by developing comprehensive business strategies that regard all of Europe as a single market.
Japanese manufacturing related bases in Central and Eastern Europe increased in number from 15 in 1994 to 160 in 2004. #7 The countries newly admitted to the EU have become more than just manufacturing bases — they support the pan-European business activities of Japanese companies, from parts procurement and sales to research and development. As such substantial business partners, the new EU members have rapidly grown in importance for Japanese companies.
The Accession Treaty with Bulgaria and Romania have already been signed and preparations for their entry into the EU have been moving forward, so it is only a matter of time before the EU expands for the sixth time. Negotiations for the EU membership of Turkey and Croatia have also begun. In the case of Turkey's accession, there exist substantial differences of opinions, but statements such as that of Turkish Prime Minister Erdogan that "we will continue to work hard as before in anticipation of our entry into the EU" #8 show a firm resolve of the country. Japanese business community hopes that Turkey will be admitted to the EU without delay. EU cohesiveness and strength have been enhanced by respect for diversity of its member countries. Turkey's accession will make the EU even more attractive as a business partner. Some of former Yugoslavia countries have not started accession talk with the EU and the admission of former Soviet Union states has not been discussed. Market transparency and predictability in the region are expected to increase in the process of discussions of their membership.
On another front, member countries of the European Free Trade Association (EFTA) have been developing economic ties to the EU within a loose form of market integration. Japan has maintained good relations with the EFTA members and cooperates with them in the WTO. The EFTA countries enjoy a high level of scientific and industrial technology that they use for advanced purposes. It is indispensable for Japan to pursue policy dialogues with the countries.
Having achieved this historic enlargement, the EU must now substantially reform its rules governing decision-making processes and budgeting systems, in order to ensure effective integration of its 25 members and maintain and strengthen international competitiveness. It is true that the institutional reforms have recently made slow progress, but it should be remembered that some areas have seen remarkable success in its integration history, especially the adoption of a single currency, the Euro - the success of which was once widely doubted. It would therefore be unwise to remain pessimistic about the reform efforts just because of the current standstill. The Japanese business community is extremely interested in how the EU's restructuring policies unfold in the future.
The Treaty establishing a Constitution for Europe is expected to form the basis on which the enlarged EU of 25 members will be managed more effectively and efficiently to play more important role in the international community. However, it has become uncertain when the treaty will take effect. It was rejected in French and Dutch national referenda and several countries have suspended the procedure of the ratification. These circumstances indicate that the EU's integration may not proceed in a straight line. It is predicted that discussions among member states regarding the treaty will be reopened. It is hoped that the treaty will come into effect soon.
Economic disparities among the members of the EU exist. The EU has so far undertaken a number of disparity-reduction programs and has made budgetary redistributions. The EU enlargement in 2004 has not changed the situation. On the contrary, the increase of the members into 25 has put the current budgeting system at the crossword.
The member countries have already implemented substantial financial reforms, cutting unnecessary spending and prioritizing the allocation of a large portion of funds to areas with a high expected financial return such as R&D. The establishment of "2007-2013 Financial Perspectives" is an extremely important milestone required to deepen EU integration. It is worth while to notice how appropriate measures for subsidies to the members will be determined based upon the mid-term budget because it has great influence on the member states' policy on business environment improvement such as building and implementing of foreign direct investment introduction measures.
The distribution of Euro banknote and coins as a single European currency began in 2002, and the Euro now holds its own as an international currency. It has become common for non-European countries to hold euro-denominated foreign reserves and issue euro-denominated bonds. The Euro is now second only to the American dollar as a pivotal international currency, and has become instrumental in promoting corporate operations because it eliminates exchange risks and reduces business costs. For these reasons, it is hoped that EU member countries that have not already adopted the Euro will do so in the near future.
The promotion of EU integration has included efforts to establish an EU legal order that satisfies conditions under which the EU exercises authority, especially the principles of subsidiality #9 and proportionality. #10 EU law provides for a uniform, stable, politically independent legal environment throughout the EU region. This encourages the elimination of unnecessary regulations within member countries. Therefore, development of an EU legal order is basically a good thing as it will promote the business activities of companies based inside and outside the EU. However, in cases where EU law strongly impacts on business activities within the EU, it is important that the opinions of companies within and without the EU are carefully heard and reflected during the process leading toward the adoption of legislation, and that the economic effects of such legislation are carefully considered. One good example of this is the Registration, Evaluation and Authorization of Chemicals (REACH), discussed below. Various considerations are required during the process leading up to its implementation.
On the other hand, when EU law is not adequately reflected in laws of member countries, or where the relationship between the two is ambiguous, business operations can be subjected to additional costs, and this could hamper the promotion of business ties between Japan and Europe. One example is levy system #11 in the EU region. The EU Copyright Directive (EUCD) calls for introduction of a method for calculating losses from copyright infringement in the form of private copying and use as well as the study of copyright protection technology (Technological Protection Measures, or TPM), but the copyright laws of many member countries do not reflect the Directive's provisions. It is hoped that EU member states will modify their domestic systems to appropriately reflect the EUCD.
The Societas Europaea (SE) system was enacted in 2004 to promote borderless corporate reorganization at the EU level. Under the SE system, companies incorporated outside the EU can establish business entities inside the EU under the same rules, and this is expected to bring significant reductions in their costs. #12 Implementation of the SE System was welcomed in Japan because it is expected to promote Japan-Europe economic ties. It is hoped that corporate tax system will be coordinated at the EU level in the future.
Economic growth achieved without environmental destruction is an important goal for the international community. Since 1997, Japanese business community has been steadily advancing the goals of the Keidanren Voluntary Action Plan on the Environment, #13 and has enjoyed considerable success promoting measures to alleviate global warming. Both Japan and Europe possess advanced environmental conservation technology and share a basic awareness of the importance of recycling, so they are well suited to play a leading role working together for resolution of environmental deterioration, a global issue.
The EU has achieved progress in environmental protection measures, building on the First Environmental Action Programme that began in 1973. The Sixth Environmental Action Programme, adopted in 2002 designated climate change as one of four central areas to be tackled. If environmental regulations are coordinated at the EU level, this would eliminate the redundancies now inherent in the multitude of national regulations, and this in turn would remove an additional cost burden from businesses. The role of the European Commission in formulating environmental policies common to all member countries will therefore become increasingly important.
In this regard, the Registration, Evaluation and Authorization of Chemicals (REACH) #14 proposed by the European Commission would impose an excessive burden on the business community, and could restrict the import of some products. Business communities inside and outside the EU have therefore expressed great concern about REACH being implemented. It is forecasted that the directive will be passed in 2006 after receiving some amendments. However, a number of the current bill's provisions are stricter than the European Commission's original proposal, and there are still trade-restrictive provisions regarding the registration of chemical substances contained in imported products. All interested parties need to monitor developments to ensure that environmental protection measures do not end up discriminating between entities based inside and outside the EU.
The intention of the Directive on Waste Electrical and Electronic Equipment (WEEE) is to increase the recycling of such waste. However, its applicability with regard to some specified products is unclear, #15 and procedures that will make Directive implementation feasible should be adopted. In addition, some countries are considering the introduction of systems that would make it difficult for companies to reduce the costs involved in recovering recyclable waste. Some flexibility in recycling systems is needed so that greater competition can be introduced in the recycling business.
Manufacturers have been developing programs to supply safer products that meet the requirements of the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS) Directive, which comes into effect in July 2006. However, this Directive should be implemented in a way that does not cause disruptions.
Since agreement achieved during the WTO Uruguay Round of negotiations, tariffs have taken a downward path in much of the world, and this has substantially promoted global commercial operations. This type of trade liberalization benefits every country and region, and both Japan and Europe are leaders in promoting liberalization of trade and investment.
However, the EU still maintains tariffs on major industrial products that are higher than in other developed parts of the world (for example: electric appliances, as high as 14%; #16 trucks, 22%; passenger cars, 10%). Audiovisual equipment is an especially useful tool for promoting opportunities in education, culture and computerization, and when one considers the fact that tariffs on IT devices have been eliminated, it would be appropriate to also eliminate tariffs on audiovisual equipment. Nippon Keidanren supports multilateral efforts both by governments and business representatives to eliminate or harmonize tariffs for specific sectors in Non Agricultural Market Access (NAMA) negotiations in the WTO Doha Development Agenda (DDA). Nippon Keidanren calls for the tariff reduction through such sectoral approaches in the NAMA.
Digital multifunctional machines and multifunctional liquid crystal display monitors are treated as high tariff items under a classification system that is hard to say rational. Tariff classifications should follow international standards. Technological innovations, such as the fusion of the broadcasting and telecommunications sectors, promote the continual development of products with new capabilities, and one result is that tariff clarification issues may become even more numerous in the future. Nippon Keidanren believes that the EU should abolish arbitrary classifications and classify items in a manner that more readily promotes trade liberalization. The EU is an active participant in the Information Technology Agreement (ITA), one purpose of which is to eliminate tariffs on IT products, but its imposition of tariffs on multifunctional devices, which are IT products, is contrary to the fundamental thrust of the ITA.
With the EU's adoption of International Financial Reporting Standards (IFRS), foreign companies listed on EU security markets will be required to prepare their financial statements in accordance with IFRS or an equivalent standard after January 2007. Accordingly, strong concerns are raised over whether European Commission will accept financial statements with Japanese accounting standards.
Japanese accounting standards have already been raised to a level that compares favorably with IFRS. However, if technical advice by the Committee of European Securities Regulators (CESR) in July 2005 is followed, additional disclosures will be required to certain standards. Considerable cost would be needed in preparing the additional data, and for this reason, many Japanese companies have already been showing their intention to withdraw from the EU market. For the sake of invigorating capital markets in the EU region, we submit that the EU should deem Japanese accounting standards as equivalent to IFRS.
As cross-border business activities gain energy both inside and outside the EU, EU competition policy on European business is extending its influence. The EU made considerable amendments to its competition law in May 2004, and the European Commission has begun basing its decisions and judgments on the amended law. #17
The European Commission also applies EU competition law outside the EU in cases where extraterritorial business activities have effects inside the EU (so called Extraterritorial Application). Under these circumstances, there are even cases where, EU merger regulations are applied when a Japanese company acquires a company outside the EU. When such regulations are applied to transactions outside the EU, Nippon Keidanren believes that transparency in the process of the EU decision making and rationality of the application should be ensured.
Good labor-management relations are essential for healthy corporate operations, and Japanese companies do their best to foster harmonious relations wherever they are located, including of course Europe.
Each EU member country basically has the discretionary power to apply its own labor and hiring policies that evolved under cultural and historical influences specific to that country. Nippon Keidanren believes that EU member countries with stricter labor and employment policies #18 should promote more flexibility in their labor markets, as this would foster a more favorable investment environment.
Japan-Europe economic relations have surmounted the friction and opposition that tended to appear from the 1970s to the early 1990s. Today, Japan-Europe economic relations are marked by collaboration and coordination. Care must be taken to ensure these favorable relations do not lead to a state of inertia and deteriorate into mutual disinterest. There is therefore a need to further expand opportunities for exchange of people. The business communities of Japan and the EU should expand mutual understanding through private-sector diplomacy and encouraging their participation in the international rules formulation process. These objectives can be achieved through various types of cooperation leading to closer and stronger Japan-Europe economic ties that contribute significantly to global development.
For example, the 2001 Agreement on Mutual Recognition between Japan and the European Community (MRA) has expanded trade and reduced corporate costs. This type of policy initiative brings the Japanese and European markets closer together, and is therefore profitable for the business communities of both sides at this time of regulatory reform. Japan and Europe should strive to realize mutual recognition covering more than just the four areas envisioned in the 2001 MRA, #19 including qualification recognition.
Japan and Europe both enjoy highly developed socioeconomic systems and share values promoting a market-oriented society. They are therefore well positioned to establish a strong partnership in the international community, at a time when many global issues must be tackled.
During the DDA negotiations, Japan and Europe have frequently adopted the same stance in many areas, including agricultural trade, trade in services, and anti-dumping measures. Statements such as, "Japan and Europe should cooperate to promote the new round" #20 underscore the possibilities for strategic coordination.
As leaders in environmental conservation, Japan and Europe should increase their level of coordination in areas ranging from development of a framework for global warming prevention to initiatives tackling environmental pollution and promoting energy efficiency.
In response to growing debate over corporate social responsibility (CSR), the International Organization for Standardization has begun examining international standards for social responsibility (SR). #21 The EU treats CSR as a priority policy item and has issued a number of reports promoting CSR. #22 These reports have even influenced how CSR should be regarded in Japan. Since ISO standardization has significant impact on the activities of companies, it is important for Japan and Europe to coordinate their efforts and collaborate with one another when examining standards, and to take a lead in the standardization process.
Infringement of intellectual property rights has become a serious problem in recent years. Japan and Europe possess many intellectual assets, and this too points to the need for cooperation in assessing actual damage, making improvements, and developing effective countermeasures that draw on their mutual expertise.
With economic globalization on the rise, Japan and Europe should strengthen coordination to help ensure that the dynamism of emerging economies, particularly the BRIC countries (Brazil, Russia, India and China), is linked to further development of global economy.
Japan and Europe both face declining birthrates and aging populations, and it would be effective for each to learn from the strong points and experiences of the other's social systems, in order to develop suitable measures to deal with these challenges. Some initiatives are already capitalizing on the technical expertise and know-how of Japan and Europe, #23 with the aim of "working together to resolve the welfare problems that confront us." #24
The governments of Japan and the EU regularly hold policy dialogues, including Japan-EU summits and Japan-EU economic ministers' meetings, as part of the Decade of Japan-Europe Cooperation program that began in 2001. Now that the program has reached its midway point, the spotlight is on future actions to be taken under various initiatives. Of particular note is the Japan-European Union Regulatory Reform Dialogue, which is part of the critical process required to dismantle trade barriers still existing between Japan and the EU. It is hoped that the Dialogue will generate even more beneficial results.
It would be desirable to simultaneously pursue several approaches that strengthen and expand Japan-Europe economic relations. Because the approaches are multiple, they would bring synergistic benefits.
The first approach is to promote more bilateral exchanges. Nippon Keidanren intends to appropriately coordinate some of its activities with government programs, and will strive to improve the business environment for private industry by dispatching policy dialogue missions and by meeting with key figures in Europe. It will lead to promoting mutual understanding between Japan and Europe and reinforcing the economic partnership.
Japan has pursued Economic Partnership Agreement (EPA) negotiations primarily in the Asia-Pacific region, but is also considering negotiating EPAs with countries in other regions and will avail itself of the option of starting negotiations with developed countries. As part of this trend, some EFTA countries have shown an interest in establishing EPAs with Japan, as indicated by statements such as "bilateral negotiations will contribute to the establishment of a tailor-made, dynamic framework." #25 EPAs with such countries could become an effective tool for fastening Japan-Europe economic ties. Nippon Keidanren believes that Japan should continue to work hard to strengthen bilateral economic relations with individual European countries, and that EPA negotiations with non-EU member countries can be included in these efforts, since EPAs complement endeavors to liberalize trade and investment through the WTO.
The second approach is to deepen Japan-Europe collaboration at multiple levels. Nippon Keidanren has worked on various parties concerned toward the early conclusion of DDA. For that purpose, the organization has cooperated with the Union of Industrial and Employers' Confederations of Europe (UNICE) in dispatching joint missions and issuing joint declarations. Nippon Keidanren has also combined forces with major business organizations in individual European countries to urge the Business and Industry Advisory Committee to the OECD (BIAC) to ensure that private sector's views are fully reflected in OECD decisions. The business communities of both Japan and Europe should make more efforts of this type and take the initiative in making rules on important areas of mutual interest to both Japan and Europe, such as intellectual property rights and innovation in multifaceted negotiations.
A third approach is to strive for greater Japan-Europe coordination on a regional basis. Whereas the Asia-Europe Meeting (ASEM) functions as a forum for the governments of 28 Asian and European countries, the Asia-Europe Business Forum (AEBF) was established to make the ASEM leaders a policy proposition that reflects the viewpoints of the private sector and urge them to implement the policy. The business communities of Japan and Europe can further strengthen relations between Asia and Europe by joining forces to energize AEBF activities. Stronger Japan-EU ties are the goal of Nippon Keidanren's cooperative efforts to ensure the success of the Helsinki Meeting #26 of the AEBF, which will soon celebrate its 10th anniversary.
As this opinion paper has stressed, Japan and Europe can further promote coordination and cooperation through bilateral, multinational and regional frameworks. By fastening their ties, Japan and Europe can contribute even more to global stability and prosperity. At a time when the EU has entered a new stage of its integration process, and when economic conditions in Japan and Europe are entering a new phase, a deeper level of mutual understanding and partnership between Japan and Europe is required to eliminate obstacles hindering business and to take multiple approaches toward the resolution of global issues.
- Japanese investment in the EU was ¥792.6 billion, compared with investment in the U.S. of ¥814.6 billion. The EU investment in Japan was ¥601.4 billion, while the U. S. investment in Japan was ¥148.3 billion.
(All figures 2004 net flow.) Source: Bank of Japan
- The actual population : 456.9 million, GDP: 10,269.0 billion euros
(both figures for 2004). Source: European Commission
- European Commission Vice President Günter VERHEUGEN, in a talk with Nippon Keidanren's Mission in September 2002
- Slovakian Prime Minister Mikulas DZURINDA, in a meeting at Nippon Keidanren in May 2005
- Polish Prime Minister Marek BELKA, in a meeting at Nippon Keidanren in January 2005
- Hungarian Prime Minister Ferenc GYURCSANY, in a meeting at Nippon Keidanren in October 2004
- Source: Japan External Trade Organization
- Turkish Prime Minister Recep Tayyip ERDOGAN, in a talk with Nippon Keidanren mission in September 2005
- The principle that the EU should have exclusive authority over policy issues when the exercise of such authority would be more effective than member countries acting on their own, while member countries should retain authority over all other issues
- The principle that EU policy should infringe minimally on the authority of member countries when the effect would be the same
- A system for compensating authors for losses resulting from the copying of copyrighted material for private use. Compensation is imposed based on purchase of copying equipment and media.
- The SE system is creating some confusion since a bilateral air navigation services agreement is supposed to be signed by two countries, and the EU's signing such an agreement as a single regional entity is not considered to be possible.
- One of the characteristics of REACH is that all chemical substances on the market must be registered and risk-assessed on companies' responsibility.
- For instance, WEEE Directive requires that all of the products it regulates bear a logo. However, in cases where it is difficult to affix a logo due to the small size or function of the equipment, a provision is needed to permit it to be affixed to the packaging or user's manual.
- For instance: televisions, 14%; DVD players, 14%; camcorders (digital video camera), up to 14%; stereo systems, 12%
- As a result of these amendments, cases where Articles 81 and 82 of the EC Treaty can be a ground for decisions by the competition regulation authorities and courts of individual member countries have been substantially increased. There is concern that this devolved enforcement will allow contradictory interpretations and judgments among member countries.
- Japan's Proposal for Regulatory Reform Dialogue (November 21, 2005), presented as part of the Japan-European Union Regulatory Reform Dialogue, identifies policies on employment, working hours and wages that are considered detrimental to business activities.
- Telecommunications equipment, electrical products, good laboratory practice (GLP) for chemicals and good manufacturing practice (GMP) for medicinal products
- French Minister for Foreign Trade Christine LAGARDE, in a meeting at Nippon Keidanren in February 2006
- ISO tends to use the term SR (social responsibility) instead of CSR, to widen the concept beyond that of the responsibility of companies.
- The EU's 2001 Green Paper and 2002 White Paper formed the basis for the Making Europe a Pole of Excellence on Corporate Social Responsibility communication issued in 2006
- Finnish Prime Minister Matti VANHANEN, in a meeting at Nippon Keidanren in May 2005
Similar statements were made by Finnish President Tarja HALONEN in a talk with Keidanren in October 2004.
- One example is the Sendai-Finland Wellbeing Center established through the collaboration of industry, governments and academia in Japan and Finland. The Center promotes independent lifestyles for the elderly. It operates a special elderly care facility in Sendai, Japan, that combines the welfare approaches of both countries, and conducts research into services and assistance devices for senior citizens.
- Swiss President, Minister of Economic Affairs Joseph DEISS, in a meeting at Nippon Keidanren in October 2004
- Scheduled for September 10 and 11, 2006