Cecilia Malmström is looking to put the EU's creaking trade agenda back on track | Thierry Charlier/AFP via Getty Images Data fight emerges as last big hurdle to EU-Japan trade deal Brussels closes in on its biggest trade agreement.

A dispute over data has emerged as an unexpected obstacle to an EU-Japan free-trade deal only weeks before diplomats expected to seal a political agreement.

After a bruising struggle to secure an accord with Canada this year, European Commissioner for Trade Cecilia Malmström is looking to put the EU's creaking trade agenda back on track by finalizing a coveted deal with the world's third-biggest economy. Japan's economy is about three times bigger than Canada's and a tariff-slicing agreement with Tokyo would deliver a resounding message that Brussels was back in business.

Malmström's problem is that she now faces resistance from lawmakers in the European Parliament and officials in the European Commission's directorate for justice and consumers. Both groups argue that a pact with Tokyo would erode the EU's digital privacy regime.

Data privacy is an unforeseen hurdle to what would be the EU's biggest trade deal. A Japan pact long seemed unlikely mainly because Tokyo was reluctant to accept European agricultural imports, in return for Brussels lowering barriers on car imports.

However, the mood has shifted dramatically on the cars-for-food trade-off. People close to negotiations say that Brexit and the election of Donald Trump in the U.S. have now made a political agreement increasingly likely. Europe's chief negotiator Mauro Petriccione will be in Tokyo next week in a push to close out a deal, which could be signed as early as March.

"Japan would like to work together [with the EU] to establish a state of the art digital economy which can be a model for the rest of the world" — Japanese government spokesman

Japanese negotiators want data flows included in the deal but the EU is unwilling. "For the Japanese, it's a sine qua non," said an industry source following the accord.

Dutch Liberal MEP Marietje Schaake said that this dampened the prospects of a quick conclusion. "The European Parliament will not ratify an agreement that undermines data protection in the EU and the Commission knows this," she said.

Data is a sensitive topic because it is fundamental to card companies and banks. Under existing regulations, if a European business wants to sell products in Japan and store customer data such as card details and names, it needs to do so on Japanese territory and in Japanese servers, increasing the cost of business. The same is true for Japanese banks operating in Europe.

Confronted with this challenge, the Commission said that "it does not negotiate data protection standards in trade agreements. This is true for the Japan free-trade agreement as for any other negotiation."

By contrast, a spokesperson for the Japanese government said: "Japan would like to work together [with the EU] to establish a state of the art digital economy which can be a model for the rest of the world."

The Trump factor

Japan is also looking to the EU deal to recover from recent trade setbacks. Trump's pledge to pull out of the Trans-Pacific Partnership that Tokyo and Washington were negotiating with 10 other Pacific Rim countries has delivered a hammer blow to Japan's trade agenda.

Brexit has also endangered the big investments that Japanese manufacturers such as Hitachi and Nissan have made in the U.K. on the understanding that Britain would remain a member of the single market.

Those fears have fired a rare momentum.

"There is a chance to reach a political agreement by the end of this year," a diplomatic source said, adding that "technical work would continue in the following months." Open issues include agriculture, protected food names and what kind of legal protection will be afforded to investors.

Japan's gambit on data is to push for a privileged status known as an "adequacy decision," which would mean the EU recognizes Japan’s privacy protections as equal to its own, allowing data to flow from one side to the other. The Commission is indeed seeking more of these deals, like the "privacy shield" with the United States agreed over the summer. Only a restricted club of countries such as the U.S., Argentina, Canada and New Zealand has this privileged relationship.

However, Commission sources say that it would take years for Japan's privacy laws to become as robust as those in the EU.

"The agreement is pretty much worthless to the two sides if some language on data flows is not agreed between Brussels and Tokyo" — Hosuk Lee-Makiyama, director of the European Centre for International Political Economy

The two partners could find a compromise on something weaker than "adequacy," allowing the deal to be completed more quickly, but there is disagreement over how strong that language could be.

The Commission’s departments for trade and justice have been squabbling for months over data language in the Trade in Services Agreement (TiSA). Trade officials want data flows included, opening up new markets for Europe’s data economy to expand, and data protection officials want strong safeguards for privacy.

The TiSA deal has become stuck at the Commission’s highest levels, which so far haven’t made up their minds on how to resolve the issue.

Hosuk Lee-Makiyama, the director of the European Centre for International Political Economy and the author of the impact assessment on the EU-Japan trade deal, said the pressure was on to find a compromise.

"The agreement is pretty much worthless to the two sides if some language on data flows is not agreed between Brussels and Tokyo," he said.