Railways Derailing EU-Japan Talks?

Since the mid-2000s, the EU has made the opening of public procurement markets one of its key priorities in the WTO and in the bilateral agreements it negotiates with the US and Japan.

In this context, the Japan-EU negotiations are crucial because they raise all the key problems to be faced. First and foremost, they involve firms with very different legal and economic status. Most of the EU railways companies are public, subject to very limited competition and deeply in debt. The Japanese railway market is competitive, consists of a mix of a small number of relatively small public companies and many totally private companies, including a number of former Japan Railway companies which have been privatized).  In particular, the three largest Japanese railways companies which represent 60 percent of the whole EU28 rail passenger market are totally private and profitable.  It took some time in Europe to realize these key differences.  The reason for the healthy situation in Japan is that, since the Meiji era, the Japanese railways companies have worked as true urban planners—connecting their tracks and large stores—something that the EU railways companies have started to do only a decade or so ago (and at a very small scale with their very limited station spaces).

Of course, this situation means that it is impossible to include private firms under public procurement rules. However, an option could satisfy both negotiating partners: a “railways” chapter with a public procurement section covering most of the EU rail companies and the few Japanese firms of similar statute and with a private section covering the private Japanese firms and the (possibly increasing number of) EU firms of similar statute. Drafting different but equivalent concessions for the two sections is not be so difficult because the Japanese rail sector is as large as the whole EU28 sector and because a progressive and balanced deal could be expressed on a firm by firm basis (individual private Japanese rail passengers firms and individual state-owned EU rail firms).

Such a simple solution seems currently rejected by a few vested interests—led by the French railway equipment company Alstom. Opposition by vested interests is not a new thing in trade negotiations. But this one is particularly astonishing for five reasons.

First, France has massive offensive interests in getting a Japan-EU agreement concluded. For instance, such a deal is the only insurance policy to protect her agrifood exports in Japan (Japan is the 3rd export market in the world) against the conclusion of the Trans-Pacific Partnership which includes all the key competitors of French agriculture (Australia, Canada, Chile, the US, New Zealand). Bowing to Alstom means creating huge troubles for the French farmers and agrifood business.

Second, French consumers need more competition in the rail equipment. SNCF has been able to buy French because of massive subsidies. The bad state of the French public finance means that such a mechanism is out of reach for a very long time. And SNCF will not be allowed to raise its prices for political reasons. The only option for SNCF—and the host of French commuters using daily local and inter-city trains—is to get better deals when buying its equipment. This situation is not new: it happened with Air France buying Boeing aircraft.

Third, the Japanese rail passengers companies have the same problem than SNCF: getting cheaper equipment thanks to more competition. It happens that the Japanese equipment market is huge. For instance, the three major private Japanese rail companies own 23,000 electric railcars, whereas SNCF owns 3,000.

Fourth, the GE-Alstom deal has induced some commentators to talk about Alstom as leading a future “Trainbus”—a term making a reference to Airbus. Such a perspective needs clarification. Airbus has never aimed at being a “national champion” in European closed markets. Rather, it has chosen to face international competition and to make the necessary industrial alliances to operate successfully in worldwide markets. A Trainbus which would try to keep the EU rail equipment markets closed is certain to be on a collision course with not only SNCF but also with all the EU rail companies of passengers and cargo transport, on behalf of the 400 billions of passengers-kilometer in the EU 28.

Last but not least, the golden market for the next two or so decades is the Chinese market. For instance, in 2012, there have been 145 billion passenger-kilometers of fast-speed trains in China, compared to 51 in France and 79 in Japan. This market is much too big for Alstom alone. Alstom needs to join forces with rail equipment companies which enjoy a great reputation in Asia and which know already well the Chinese markets. Japanese firms are the only ones to master these two cards.  As a result, the “railway” chapter of the Japan-EU agreement should include  “cooperation” aspects enhancing the EU-Japan industrial alliance, in particular at the third countries including China.

So, why to make troubles when the pros and cons are so clear? Is it the traditional French trade negotiation strategy that consists in playing the “naughty kid” up to the last minute in order to get a few short-term advantages—at the costs of building long-term resentment among our EU partners and in the rest of the world? Or, is it the incapacity of the French government to make the French national interest prevail over narrow vested interests?