In deal as big as NAFTA, EU and Japan agree to free trade

The European Union and Japan have agreed terms for a free trade deal liberalizing almost all trade between the bloc and the world's third-largest economy.

It is the largest free trade deal struck by the EU, bringing together economies representing approximately 27 per cent of global gross domestic product or about $20 trillion US, making it slightly larger than NAFTA.

The final deal was struck the same day the U.K. settled terms of its exit from the EU trade block. It will leave in March 2019, about the time the Japan-EU deal takes effect.

A joint statement by European Commission President Jean Claude Juncker and Japanese Prime Minister Shinzo Abe said the deal had "strategic importance" beyond its economic value.

'Committed' to open markets

"It sends a clear signal to the world that the EU and Japan are committed to keeping the world economy working on the basis of free, open and fair markets with clear and transparent rules fully respecting and enhancing our values, fighting the temptation of protectionism," they said.

Their statement highlighted the protectionist rhetoric being heard from the U.S.

Dubbed the "cars-for-cheese" deal because the EU's chief export to Japan is dairy products, it will slash Japan's tariffs on dairy-related imports, as well as meat and wine.

In return, EU import duties on Japan's automobile sector will be slashed, with some eliminated immediately and some over a 15-year period.

Canada has deal with EU, but not Japan

Canada already has a free trade deal with the EU, ratified earlier this year, but it has not achieved a free trade arrangement with Japan.

Talks with Japan to achieve free trade fizzled out in 2015 and Canada is not yet ready to endorse the TransPacific Partnership, which would include Japan.

Most language in the Japan-EU deal was finalized in July, but the issue of a dispute settlement mechanism remains unresolved. The talks began in 2013, but Japan had pulled away while a TPP deal was being negotiated, only to resume when the U.S. pulled out of the Pacific deal.

The dispute settlement issue will now be dealt with separately. The topic is sensitive for the European Commission, which has faced a popular backlash against traditional settlement arrangements intended to protect investors as protesters argued they could be used to block labour and environmental regulations.

The must now be ratified by EU members and the European Parliament.

The EU is also negotiating a free trade deal with the Mercosur bloc of South America's leading trading nations.

• Trudeau embrace of TPP could hurt tough NAFTA talks with Trump: experts

• Why trade deals like CETA have become a 'whipping boy' for anti-globalization forces