A new white paper published by the London School of Economics and Political Science looks at how trade agreements improve return on investments. Focusing on the new EU-Japan Economic Partnership Agreement (EPA), the white paper shows how cuts in trade costs increase profit margins for European investors in Japan and can be used to conquer larger market shares.

The EU-Japan EPA, signed on 17 July 2018, is on track for ratification and expected to swiftly enter into force. Covering nearly one-third of global GDP, it is one of the largest trade agreements ever completed.

In contrast to other Asian economies, Japan is already open for foreign investors; however, the LSE white paper looks at how the EU-Japan EPA cuts nearly all tariffs and creates a Euro-Pacific marketplace with transparent rules and common technical standards.

The EU agreement with Japan is well-timed. In a time of global market uncertainties, structural reform under Abenomics delivered the longest stretch of growth in nearly three decades and record profits in the corporate sector. The size of private demand in Japan is USD 4.5 trillion (EUR 3.6 trillion), making it the largest consumer market in Asia.

According to EU statistics, the return on investment in Japan is already twice what European businesses receive from overseas investments on average. Japanese research and development (R&D) also has major commercial synergies with the EU: in artificial intelligence, 5G and software where Japan and its “society 5.0” strategy is ahead of its Asian neighbours and in life sciences, where the market potential of Japan’s ageing society and M&A is outperforming the rest of Asia combined.

The author of the report, Hosuk Lee-Makiyama says: “If done right, trade agreements could even turn unprofitable markets into profit.”

The white paper also notes the lack of diversification in Europe’s engagement in Asia; this disproportionately exposes European investors to the macro-political and regulatory risks affecting the rest of Asia. Currently, European firms underinvest in Japan compared to their US competitors.

Lee-Makiyama says: “To compete globally, European and British businesses must also steer their investments towards high-end markets – and not just emerging markets where they compete on price and yesteryear technology.”