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The Elements of Consensus: liberalising EC-Japan passenger car trade in the 1990s

The following is an extract from a longer article published in EU-Japan Relations, 1970-2012: From Confrontation to Global Partnership by Keck, Vanoverbeke and Waldenberger (Routledge 2013). It describes “the Elements of Consensus” – an arrangement between the European Commission and the Japanese Ministry of International Trade and Industry (MITI) which I managed in the late 90s.

 

The 1990s saw the evolution of the European car market from a grouping of several, more or less protected, individual markets to a liberalised, reasonably homogeneous single market.  By the beginning of the new millennium, the landscape of the European passenger car market had changed radically: the protectionist impulse had faded to irrelevance, a leaner, meaner car industry was driving a booming market supplied by traditional European and transplanted Asian manufacturers as well as by a steady flow of imports.  By the end of the decade European and Japanese manufacturers found themselves competing head-to-head on a level playing field and on a more or less equal footing.

While wider economic and political developments were at play, a number of regulatory initiatives accompanied and arguably fostered this evolution.  The establishment of the European Single Market in 1992 and the creation of European whole vehicle type approval transformed the European passenger car market, creating vast economies of scale and weakening the hold of so-called “national champions”.  The arrangement between the European Community and Japan to relax import restrictions gradually – known as “the Elements of Consensus” – was an essential part of the political package which allowed this liberalisation to take place.

The following account is written from the perspective of an official who managed the Elements of Consensus during its final years.  It seeks to describe the way in which the arrangement was implemented during this period, with a particular emphasis on the European side’s objectives and processes.  While this is placed in the wider political and regulatory context, the author does not set out to deliver an academic analysis of the arrangement and its significance for EU-Japan relations during this period.  Rather, by setting out at first-hand a subjective account of its implementation, I hope to leave a record on which others can draw.  In so doing I aim to describe an issue of relevance not only to students of EU-Japan relations but also to anyone with an interest in the practical mechanics of European government.  In the view of the author, the Elements of Consensus represents a fascinating example of the European Institutions’ flexible way of adapting regulatory means to achieve political ends within an ostensibly rigid legal framework.

The push for the removal of internal barriers to trade within the European Community and the creation of the European Single Market by 1993 inevitably implied the removal of existing national import restrictions on Japanese motor vehicles.  Five Member States had these: France, Italy, the UK, Spain and Portugal.  The creation of the Single Market made all sorts of people nervous, at home and abroad.  In Europe, a crowded automotive market with considerable manufacturing overcapacity, there were fears (particularly among certain Member States) that the dismantling of internal trade barriers and import quotas would push some of the more precariously-placed domestic manufacturers over the brink.  Meanwhile, in Japan (and elsewhere), there were fears that the move towards a Single Market, while liberalising internal European trade, would create a Fortress Europe to the exclusion of outsiders.  Fears of a new protectionism ran deep.  The task of managing these concerns in a way which did not undermine the establishment of the Single Market fell to the Commission.  The negotiations with the Japanese MITI and MFA which began in 1987 under the first Delors College culminated in an exchange of letters on 31 July 1991 between Martin Bangemann, Industry Commissioner in the second Delors Commission, and his MITI counterpart.  The agreement represented by this exchange of letters was known as the Elements of Consensus.

The agreement reached saw the immediate abolition of national import quotas; however MITI undertook to ‘monitor’ (i.e. restrain) exports to the five previously restricted markets during a transitional period ending on 31 December 1999.  MITI would also monitor exports to the European Community as a whole over the same period.  The EOC consisted of an agreed estimate of the overall size of the European market in 1999 and the a forecast of the level of Japanese exports to the EU in the same year; the EOC also included predictions agreed between the Commission and MITI on market share for Japanese exports in each of the five previously restricted markets.  For France, Italy and Spain the market share foreseen for Japanese exports would increase year on year; for the UK and Portugal it would actually decrease on the assumption that exports would be displaced gradually by locally-built Japanese brands (‘transplants’), though imports as a whole were forecast to increase in a growing market.  The Commission and MITI would meet twice a year to review demand and calculate the levels at which MITI should monitor exports.  The purpose of the transitional period was to give the European industry a window during which to restructure, after which the Single European Market would be ‘fair game’ to Japan’s car industry.  Both sides notified the arrangement to the GATT.

A couple of months before each round of consultations, the Commission’s Directorate-General for Industry (DG III) would gather market data from several consultants specialising in the automotive market and build a case for the evolution of demand in each of the five formerly restricted markets, in Germany, and in the EU as a whole.  The official responsible for the file would begin to prepare a detailed negotiating brief by initially identifying a realistic spread in the evolution of demand for each country and region, and then by assessing which level of demand would be of most help in achieving the Community’s negotiating objectives.  Depending on the country or region in question, this might be high, low, or somewhere in the middle to give us room to adjust our forecast during the course of negotiation if by doing so we could help achieve a better result on other markets. (footnote 1)

In this way, a set of negotiating positions could be assembled for each market and for the EC globally: some figures from which we could start; the figures where we would ideally settle; those which would be acceptable; and our bottom lines.  As the result for each market would influence our objectives in all the others, a ‘fourchette’ was given, but in reality calculations had to be made on the fly during negotiating sessions which often came down to horse-trading between markets, using data from consultants to justify demand predictions in certain markets which would in turn deliver the figures agreed between the two lead negotiators. (footnote 2)

The informal nature of the EOC relieved the Commission of any formal requirement to consult Member States on the preparation of the file or on its outcome.  Politically, however, it was necessary to keep stakeholders on board at all stages.  During the preparations for each round of consultations, Commission officials would be in regular contact with Member State officials to sound them out on potential outcomes.  This was particularly important in those cases where special treatment was likely to be required.  Industry representatives also maintained close contact with the Commission, through expert level contacts and also high level visits as well as letters.  The Commission also answered several questions in the European Parliament on the application of the arrangement.  Internally, too, it was important to satisfy interested parties that the arrangement was being managed appropriately.  DG III [Industry] would consult DG I [Trade] on the preparation of the mandate.  When in due course it was submitted to Commissioner Bangemann for his approval, his Cabinet would also consult Trade Commissioner Sir Leon Brittan’s Cabinet to secure their agreement before negotiations could begin.

The results of the biannual communications would be communicated to the Commissioner in the form of a detailed note.  The Commission would then issue a press release in which the agreed forecasts for demand and for exports in the five previously restricted markets and in the EU as a whole (EU15 after 1995) would be stated.  The Commission would communicate these figures to Member States in writing via COREPER, at which the breakdown between EU12 and EU3 would be given orally.

During its final years, the Elements of Consensus ceased to have the high political profile it had enjoyed at its inception.  This was due, in part, to the success of the Commission and MITI in managing its implementation.  Monitoring levels had not been breached; the supply to the EU as a whole had not been restricted; the formerly restricted markets had progressively opened; and difficult ad hoc issues had been resolved effectively.  Most importantly, the European industry had taken full advantage of this window to restructure.  The EOC looked increasingly anachronistic in an era of globalisation where European carmakers began to take the challenge to Asian manufacturers: who could have predicted in 1987 that by 1999 Renault would own a major stake in Nissan, or that Peugeot would build engines for Honda?  Or indeed that Toyota would export cars produced in its own French factory back to Japan?

The Elements of Consensus was a fascinating file for a young official embarking upon his career.  It was both highly technical and extremely political.  Its sui generis nature provided a deeply instructive insight into the workings of the European Union, demonstrating the Institutions’ ability to find innovative solutions to complex issues.  In hindsight, it seemed to mark the end of one kind of politics and the beginning of another.  For the EU and Japan it seemed to coincide with the end of an era of tension and the beginning of a new period of cooperation; and in many ways it represented that change.

 

(footnote 1 – It can readily be imagined how difficult it was to disentangle the objective on one given market from those on others, and from the global objective.  In my own case, I approached it initially by spending some considerable time devising a spreadsheet in which I could enter values for demand and see how they interacted with figures for other markets and globally; also how they affected overarching negotiating objectives such as the ‘disproportion’ – the difference between the rate of change in Japanese market share and the rate of change in the market as a whole.  The aim was always to see Japanese market share grow more slowly (or shrink more quickly) than the market as a whole.  This of course was an entirely mathematical calculation deriving from the agreed forecast of demand and on the global monitoring level agreed for the EU; and the spreadsheet was an invaluable tool in getting to learn how the figures interacted with one another.  Too high a forecast for demand in France, say, could make it hard to bring down the global monitoring level enough to preserve a healthy disproportion.  Conditional formatting flashed a comforting green number at me when we were well within our comfort zone; a cool blue when we were safely within our negotiating mandate; and red when we were at risk of losing our shirts.  While the use of software tools to model outcomes has since become standard, at that time in the mid ‘90s it was still something of a novelty.)

(footnote 2 – Here again, the benefit of access to a spreadsheet which could give an instant snapshot of the overall result for any set of figures was a huge benefit to our side in responding quickly to developments in the negotiations.  The use of this spreadsheet had its risks, though, as well as its benefits.  Any errors in data entry could have serious consequences down the line.  If the author may be forgiven an anecdote, the following demonstrates this.  During one round of consultations, in Brussels, both sides found themselves at a stalemate: the Japanese side seemed unable to move beyond a global monitoring level which (according to our calculations) would seriously erode the disproportion; and as we pushed them, they became visibly frustrated to the point that they looked ready to walk out at one stage.  Finally, in the small hours, careful scrutiny of our figures showed an error in a small but crucial entry made some weeks earlier in the spreadsheet.  Once corrected, the figures fell into place and we were able to offer MITI a much more acceptable proposal which was readily accepted.  However, the author still lies awake at night sometimes wondering what would have happened had the data entry error been in MITI’s favour, rather than the Commission’s.  The episode also sheds an interesting light on the working methods of the Commission and its heavy reliance on individual experts.)