As free-trade agreement (FTA) negotiations go, the ones between the European Union and Japan are going quite smoothly. Since getting under way on 25 March 2013, six rounds of talks have taken place.
The latest, in July 2014, was described by the European Union Economic Partnership Agreement as “fruitful” and created the belief that the next review, in a year’s time, will point towards the “early conclusion of a highly comprehensive and ambitious agreement”. There are always points of contention, however, with one of the most significant being railway procurement.
While the European market has long been open to Japanese railway providers, Japanese non-tariff barriers, particularly for rolling stock, have hampered the ability of EU companies to do business there. According to a 2013 presentation by the Association of the European Rail Industry (UNIFE), a Brussels-based group that is representing 80 medium and large European rail firms at the FTA negotiations, only 2% of Japan’s rail market is open in accordance with international procurement rules. Of that 2%, only 15% is accounted for by non-Japanese firms. Conversely, Japanese technology providers have won some big contracts in Europe, including for the £4.5bn intercity express train procurement programme in the United Kingdom.
The frustration of European rail operators is understandable. Although only 1% of Japanese freight is moved by rail, the country’s passenger market is larger than all 27 EU markets combined – to be deprived of business leaves a particularly bitter taste in the mouth.
The operational safety clause and other problems
The main bone of contention as far as UNIFE is concerned is the operational safety clause (OSC), a contractual clause that allows Japan to reject European railway equipment on the basis that it doesn’t conform to national safety standards. Japan has thus far refused to give a full definition of what the OSC is and how it can be triggered, meaning that European manufacturers have no way of working around it. UNIFE members account for 50% of global rail supply, so their ability to meet safety standards would appear beyond question.
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In the most recent round of negotiations the Japanese government said that its railway companies would try to make their procurement process more transparent so European companies can at least get some idea of how they might gain access. This was not enough for the representatives of UNIFE, which told the press, “For the European Rail Industry, the stakes and expectations on the first year of negotiations on a FTA between EU and Japan were high since both parties sought to agree on a set of concrete measures to guarantee transparency and non-discrimination… Nevertheless, UNIFE believes that the agreement found following the fifth round of negotiations does not constitute a sufficient guarantee of transparency and non-discrimination treatment on the Japanese rail market.”
We are seeing actions, not just words, on the part of the Japanese. At the start of 2014 East Japan Railway Company, the country’s third largest, selected French company Thales to provide a communications-based control system for one of its Tokyo rail lines. The company will have to spend a year designing the system before the final plans can be approved and a contract signed, but if it makes it that far, Thales will become the first non-Japanese company to enter the country’s signalling business.
The French foreign trade minister, Nicole Bricq, described the deal as a “sign of opening up on the part of the Japanese authorities which I must welcome”. But despite such positive developments, a source close to negotiations told us that the European rail industry would not be satisfied that the Japanese were opening up their market until “the contracts start being signed”.
EU and Japan: A misunderstanding
Some commentators believe that the way the Japanese rail industry is structured has caused the European Union to make demands of it that it simply can’t or shouldn’t have to meet.
While EU rail operators are generally state-run or receive strong public subsidy, the Japanese rail industry went through a 20-year process of privatisation between 1987 and 2007. Its three largest firms – JR-East, JR-Central and JR-West, which account for 60% of the passenger market – receive no state subsidy and are publicly traded, so the need to satisfy shareholders comes first.
According to Patrick Messerlin, from the European Centre for International Political Economy, this state of affairs “made it necessary for these companies to be demanding with respect to the railway equipment companies”. He adds that asking recently privatised firms in a heavily competitive industry, to abide by the same procurement rules as government entities under an FTA, would be unthinkable. “Requiring Japan to subject its private passenger rail companies to government procurement would be tantamount to require that, for instance, the European member states’ recently privatised telecom firms, a decade or two ago, should be subject to government procurement procedures in the Japan-Europe free trade agreement… Such a proposal would rightly come as shocking to everybody in the EU.”
Reframing the debate to take in the differences
The key will be to take account of the differences in the way rail operators are structured and write regulations accordingly. For example, the FTA could have a section dedicated specifically to railway procurement and this could be divided into two parts – one governing public companies and organisations, the other private. The private section could acknowledge the need for companies to create shareholder value, while offering clarity on the OSC and transparency on the procurement process.
By understanding and acknowledging the differences between public and private interests in the rail industry, Messerlin argues, it will reframe the debate in a less adversarial manner, allowing both parties to “turn away from the frequent perception of trade negotiations as opposing two countries – indeed, the perspective cherished by the protectionist forces in every trading partner”.
The Japanese rail network is extensive and mature – every year, around 40-50% of Japanese rail capital goes towards making sure signalling systems and rolling stock remain safe and fully functional. With patience and the willingness to acknowledge individual companies’ circumstances, European firms could well gain access to a slice of that pie.