Addressing market access barriers in Japan through the WTO: A survey of typical Japan market access issues and the possibility to address them through WTO dispute resolution procedures
Southwick, James D
Japan has one of the lowest weighted average tariff rates in the world, has eliminated most quantitative restrictions (with exceptions primarily in the agricultural sector), and has few remaining formal restrictions on inward direct investment. Yet, Japan continues to run massive trade and current account surpluses with the rest of the world, particularly with the United States. In the view of the U.S. government, these surpluses reflect not just macroeconomic factors, but persistent structural and sectoral market access barriers in Japan:
While Japan has reduced its formal tariff rates on imports to very low levels, it maintains a wide range of other market access barriers including non-transparent, discriminatory standards, exclusionary business practices, and a business environment that protects domestic companies and restricts the free flow of competitive foreign goods into its market.1
Ed Lincoln of the Brookings Institution recently presented economic evidence of these barriers in his book, Troubled Times: U.S. Japan Trade Relations in the 1990s.2 He explains why Japan’s low ratios of manufactured imports to GDP and of manufactured imports to domestic consumption of manufactured products, and its low levels of intraindustry trade in manufactured products suggest the continuing existence of a high level of market access barriers in Japan. He explains why these figures cannot be explained by different factor endowments in Japan as compared to other developed economies.
It would be a mistake to portray the market access barriers in Japan as monolithic or static in or across all sectors. Clearly, much has changed in Japan over the last two decades, and in some sectors, the change has been dramatic. But it also would be a mistake to ignore the repeated concerns raised by foreign companies and governments regarding continued systemic market access barriers that keep foreign penetration of the Japanese market below what it should be in.sectors of potentially huge opportunity for U.S. and other foreign firms. The European Union similarly has continued market access problems in Japan, and has joined the United States in complaining to the Japanese government about the barriers.
Generally, the Japanese barriers of concern to the United States and the EU fall into two broad categories: ( 1 ) restrictive market practices or structures, such as a closed distribution system, cartel-like behavior, and entrenched dealing arrangements that make it difficult for new entrants to compete based on product, service, and price; and (2) regulations and regulatory practices that make it difficult for companies to obtain approval for innovative or competitive products or services, or that limit the ability to compete once approval is achieved.
The ability to reach these types of barriers in Japan through WTO procedures is limited. First, WTO dispute resolution generally is not able to address private anti-competitive or market-restrictive practices or structures. Second, although WTO dispute resolution is able to reach regulatory actions by governments, in Japan the regulations of concern often make no distinctions between foreign and domestic businesses. Rather, the problem more frequently is that the regulations or regulatory practices-by themselves or in combination with restrictive market structures and behavior-disadvantage new entrants, or new products or services. More often than not, foreign companies find themselves in the position of new entrants or of trying to expand their presence through new products or services. Because in most cases, there may also be at Least some Japanese companies in a similar position, it is difficult to prepare a strong de facto national treatment argument. Even when the fact pattern shows a fairly clear distinction between the position of foreign and Japanese companies, the Japanese government often can present a coherent policy rationale for the regulations that is unrelated to restricting market access by foreign companies. Because demonstrating the discriminatory effect often involves showing market structures and practices in interaction with a regulatory regime, a successful de facto case is very difficult to assemble.
A nullification or impairment case is difficult as well; the theory essentially requires proving that new restrictive regulations or government practices were put in place after the most recent round of multilateral tariff or services negotiations. The market restrictive regulations and industry structures and practices in Japan rarely accommodate such demands of timing.
Finally, there is the question of transparency. In general terms, although basic legal rules often are plainly written in Japan, the terms are very broad; the all-important details often are filled in through non-transparent administrative guidance and practice or through reliance on quasi-governmental advisory bodies or industry associations. This kind of reliance on non-transparent means to fill in the details of regulation can make it difficult to demonstrate in a WTO dispute settlement proceeding what rule the Japanese government is following. Assuming that a panel could be persuaded to accept a complaining party’s description of the rules or practices, it still would be necessary in many in cases to further persuade the panel how the interaction between the governmental measures and the market situation restricts market access.
The record to date of WTO and GATT cases against Japan provides few examples of a successful challenge against these types of barriers. The majority of successful cases have involved agricultural or primary products, where the restrictions were straightforward taxes, quotas, or sanitary/phytosanitary regulations. In these cases, the GATT or WTO violation appeared on the face of the rules themselves, or else the market facts necessary to show the violative effect of those clearly stated rules were not seriously in dispute. Cases that successfully address the intertwined web of facially neutral or non-transparent regulation with a market restrictive effect, reinforced by restrictive market structures or practices, are rare. Although some limited examples do exist, it seems doubtful that the WTO dispute resolution mechanism will be able to address, in any systematic way, the types of market access barrier most often complained of in Japan.
Some might argue that it should be so. Matters of market conditions and practices are best left to competition authorities. Matters of domestic regulation should not be questioned absent strong proof of discrimination, nullification or impairment of trade benefits, or a violation of another WTO rule. Even if correct, this view still leaves a challenge to WTO members. What can be done about a member that takes advantage of the more open, transparent, and contestable markets maintained by other members, while continuing to frustrate the expectations of those other members for access to its markets?
To U.S. trade negotiators, this question is especially important. In the pre-WTO era, U.S. efforts to address market access problems in Japan could be guided by considerations of which sectors were most economically or strategically important to the United States. The negotiations could be backed by credible threats, stated or implied, of unilateral sanctions by the United States under section 301 of the Trade Act of 1974 or other similar authority. The WTO dispute settlement mechanism, however, makes it easier for Japan to challenge U.S. sanctions or threats of sanctions than was the case under GATT. As the United States learned in the 1995 dispute with Japan in the automotive sector, a WTO challenge to the United States use of unilateral sanctions significantly weakens the effectiveness of the sanctions as a tool or threat. The United States, therefore, must turn increasingly to affirmative use of the WTO to address concerns in Japan. Now, the important question for U.S. negotiators will be not just whether a sector is economically and strategically important for the United States, but whether the problem in that sector in Japan stands a chance of successful resolution in the WTO. A mismatch between those issues that are important and those that are reachable under the WTO would indeed be unfortunate for the advancement of foreign governments’ efforts to address persistent market access barriers in Japan. It would leave only the moral suasion of the foreign government to convince Japan to change its system or address particular problems (suasion that may increasingly lack force if not backed by a credible prospect of unilateral action or a WTO case) or the hope that market forces and Japan’s own response to its past economic policy mistakes gradually, on their own, are bringing the needed changes to further open the market.
II. OVERVIEW OF U.S. GOVERNMENT EFFORTS TO ADDRESS MARKET ACCESS BARRIERS IN JAPAN
Although U.S. government trade initiatives toward Japan have taken on many different names under different Administrations, there is a very consistent pattern to the problems they seek to address. Table I captures many of the issues addressed by U.S. government efforts toward market access barriers in Japan over the last fifteen years.
These concerns do not necessarily stand in isolation from each other. In a given matter or dispute with Japan, the U.S. often has raised several of these concerns at once. The following discussion elaborates these issues and describes examples of when they have arisen.
A. Distribution Issues
In the area of market structure and industry behavior, the most common complaint from the United States has been difficulty in gaining access to distribution in Japan.3 The European Union repeat edly has raised similar concerns; for example, its 1996 proposals for deregulation in Japan state, “Foreign companies often find it difficult to penetrate the Japanese distribution system. The existence of longterm exclusive or semi-exclusive relationships between Japanese manufacturers, wholesalers and retailers make it difficult for new products to enter into the distribution network.”4
The problem more specifically is that, in many consumer good, intermediate good, and service industries, the Japanese producers possess significant power in the market and stand in a strong position with respect to the distributors in their sector. In some cases, these producers have used exclusive contracts or incentives for exclusive dealings that limit access to the distribution system for new entrants, be they foreign or domestic. Examples of incentives for exclusive dealing include rebate systems, access to manufacturer credit and other financial ties, requirements for the distributor to notify the producer before dealing with another supplier, exchanges of personnel, and systems for inventory control.5 Domination of the distribution system by Japanese producers can create a significant market access problem in many industries in Japan because of the cost, risk, and difficulty of establishing an alternative distribution network.6
In addition to private market structures and practices, the United States and European Union long have expressed the concern that Japanese laws and regulations support and reinforce private restrictive distribution arrangements. The law most often cited in this regard was the Large Scale Retail Stores Law The United States argued that the Large Scale Retail Stores Law preserved a retail structure in Japan characterized by numerous, small retailers with little shelf space for foreign products and little bargaining power with respect to distributors. The theory was that retailers with more purchasing volume would be able to resist terms of trade and other tactics from manufacturerdominated distributors that disfavored dealing in products from other sources.? Large volume stores also could provide a sufficiently large market in themselves to make it economically possible for foreign suppliers to deal directly with the stores, by passing manufacturerdominated distributors. Finally, bigger stores simply would have more shelf space for competing brands. The European Union joined the United States in pressing these arguments.8
The United States has raised other cases of government measures that reinforce restrictive distribution systems. For example, in the 1995 dispute between the United States and Japan over trade in autos and auto parts, the United States argued that Japanese regulations regarding automotive repair and inspection limited the growth of automotive repair chain stores. The United States argued that such chain stores were more likely to deal in foreign auto parts because they had the market power to avoid domination by parts distributors controlled by Japanese auto parts manufacturers. They also could constitute a significandy large customer base in themselves, making direct dealings with foreign suppliers economically feasible for both the supplier and the stores.
1. United States Approaches to Dealing with Distribution Issues
The United States has attempted to address these distribution issues through three basic approaches: (1) as a matter of competition law, (2) through deregulation of measures supporting restrictive distribution structures, and (3) through agreements calling upon the Japanese government to use administrative guidance and moral suasion to loosen the tight relationships between Japanese producers and distributors. Often, the United States has combined these approaches. The results, for the most part, have been wholly unsatisfactory.
a. The Structural Impediments Initative
The Structural Impediments Initiative of the late 1980s and 1990s (the “SII”) represented a concerted effort to deal systematically with core structural causes of the persistent U.S. Japan trade imbalance? The United States raised distribution issues as one of these core structural barriers.10
In response to U.S. concerns, the Japan Fair Trade Commission (JFTC) agreed to implement guidelines on distribution practices and competition policy in Japan.ll The JFTC announced the new guidelines on July 11, 1991.12 Along with issuing these guidelines, Japan generally committed to increase enforcement of its competition laws through increasing the budget and staff of the JFTC, pursuing more formal enforcement actions, and increasing the penalties to be imposed for violations of the law is Japan also agreed to liberalize the requirements of the Large Scale Retail Stores Law.14
The United States followed up on these SII efforts in further “structural” talks on distribution issues.15 In addition, in connection with the Bush-Miyazawa summit of January 1992, the JFTC agreed to look into four sectors of U.S. concern: autos, auto parts, flat glass, and paper products.16
b. JFTC Surveys and Agreements Regarding Flat Glass, Paper; Autos and Auto Parts
For each of the four industries it had committed to examine, the JFTC elected to conduct a survey, carried out by the agency’s economic research division, rather than a formal investigation by the enforcement division. In the survey, businesses were asked to complete and return a questionnaire on a voluntary basis. In this type of survey the economic research division has no authority to compel production of evidence or even responses to it questionnaires. Moreover, in the entire post-War history of Japan, few surveys initiated by the economic research division have ever turned into a formal investigation by the enforcement division.17 Simply put, a survey without formal discovery and investigation is not the best way to uncover proof of conduct in violation of the Anti-monopoly law
Even with this disadvantage, the four U.S.-requested JFTC surveys did find “problematic” distribution practices in each of the four sectors. Yet, it concluded there was no violation of the Anti-monopoly Law Instead, the JFTC gave guidance to the four industries to change the problematic practices. Nine months later, it conducted follow up surveys and declared all problems were solved.
(i) flat Glass
In the flat glass sector, the JFTC initially found that the three domestic manufacturers that control over 95% of the Japanese market each maintained a system of de facto exclusive sales agents. The manufacturers set sales targets for the agents and awarded progressive rebates to the agents for hitting the sales targets in a given year. The JFTC observed that these incentives could restrain the agents from handling competing products. The JFTC also reported that some distributors were concerned that their business with domestic manufacturers would be adversely affected if the distributors decided to carry a competitor’s product.’g The JFTC found these facts problematic, but not a violation of the Anti-monopoly Law. Instead, the JFTC recommended to the three domestic manufacturers that they change their rebate practices and send letters to the distributors stating that the latter were free to deal with competitors. The follow up survey nine months later found that the manufacturers had followed this guidance.
The United States, however, could detect no change in the market place. The big three Japanese glass manufacturers continued to enjoy de facto exclusive relationships with their primary distributors, and foreign manufacturers were making no progress in increasing sales, despite having competitive products and prices.’9 Against this back drop, the United States requested the JFTC to formally investigate the distribution system for flat glass market in Japan.2 The United States Department of Justice also began looking into whether the Japanese market access barriers were actionable under U.S. antitrust law.21
The JFTC did not agree to undertake an investigation, and the U.S. Justice Department did not initiate a case in U.S. court. Instead, the United States and Japan reached an agreement on market access measures for the flat glass sector on January 25, 1995. This agreement included measures by the Government of Japan to promote imports of foreign flat glass, and voluntary statements by Japanese flat glass manufacturers stating that their distributors were free to deal with other suppliers, including foreign suppliers. The distributors answered the manufacturers with their own voluntary statements indicating their intention to deal with a diversity of suppliers.22
The agreement did not work. By mid 1999, U.S. manufacturers’ share of Japan’s flat glass market stood at around two percent, the same as when the agreement was signed in 1995.2s In fact, evidence from mid-year 1999 suggested U.S. exports of flat glass to Japan would hit a record low by year-end.24 Although overall foreign share of the Japanese market in 1998 was up slightly from 1995 (from around 5 percent to around 7 percent), much of the increase came from the foreign subsidiaries of Japanese glass manufacturers, which did not face the problem of gaining access to the distribution system in Japan (since it was controlled by their Japanese parents) .25 The three Japanese manufacturers continued to maintain de facto exclusive relationships with their primary distributors.
Under pressure from the United States, the JFTC in 1999 conducted another follow-up survey on the glass industry. Again, the survey was conducted based on voluntary questionnaires without use of discovery or other compulsory powers by the JFTC. The survey concluded that the Japanese manufacturers had increased control over their de facto exclusive primary wholesalers through increasing their equity participation and other financial arrangements with the primary wholesalers.26 The survey also found evidence that some retailers felt harassed when they purchased foreign glass. The JFTC, however, found no violation of the Anti-monopoly Law.27
The exact same pattern played out in the paper sector. Here, the JFTC voluntary survey found some problematic practices between Japanese manufacturers and their primary distributors, but no violations of the law. After issuing some guidance to the industry, the JFTG follow up survey found all problems had been fixed.28 Meanwhile, shortly after the completion of the initial survey, the United States and Japan entered into a bilateral agreement in the paper sector.29 Regarding distribution issues, the agreement called for the Japanese government to encourage major distributors to implement internal AntiMonopoly Act compliance programs, to encourage distributors to deal in more foreign products, and to effectively enforce the Anti-Monopoly Act.
The agreement expired in 1997 with almost no gains for foreign paper suppliers in the Japanese market. The United States has continued to raise concerns in this sector,ss but the progress has been nil.
To date, there has been no meaningful increase in Japanese imports of paper and paperboard products and the level of import penetration for paper and paperboard products in Japan remains the smallest in the industrialized world . . . A key problem, according to U.S. producers, is weak enforcement of Japan’s Anti-monopoly Law and the existence of exclusionary business practices.31
(iii) Autos and Aftermarket?Auto Parts
Distribution also was a central issue in U.S. talks with Japan in the automotive sector. For finished cars, the key concern was access to Japanese dealerships, the distributors for cars. For parts, one central issue was access to the distribution system for replacement parts sold to repair shops, so-called “aftermarket” parts.32
The JFTC’s 1993 voluntary survey of relations between Japanese auto manufacturers and dealers found several issues of concern.33 Unlike in the United States, where Japanese automotive manufacturers entered the market by signing up existing Ford, General Motors, and Chrysler dealers to also sell Toyota, Nissan, and other Japanese products, the JFTC survey found that very few Japanese auto dealers carried foreign cars in addition to their traditional Japanese lines. Although dealers’ contracts with the Japanese manufacturers no longer specifically prohibited the dealers from carrying a competitor’s product (such prohibitions were in the dealer contracts until 1979), nearly half of Japan’s auto dealers did not think that they were free to handle a competitor’s product. Moreover, Japanese manufacturers offered dealers rebates based on the dealers achieving sales levels near their maximum capacity. The dealers therefore were at financial risk if they chose to carry a competitor’s products. The survey also found that many dealers relied on the manufacturer for credit at favorable terms, and in many cases the manufacturer owned an equity interest in the dealer.
Despite these facts, the JFTC saw no need for a full investigation with compulsory powers, and found no violation of the anti-monopoly law. The JFTC issued guidance to the Japanese automobile manufacturers to take into account certain concerns, and, after the follow up survey six months later, pronounced itself satisfied that all problems were rectified.34
Regarding the auto parts after-market, the JFTC voluntary survey found that the Japanese auto manufacturers’ parts sales companies had pressured Japanese wholesalers not to handle “non original equipment” replacement parts.s5 Such “non-0E” parts would include imported parts of equivalent function, but from a different manufacturer or of a different brand from the original part being replaced in a repair shop. In addition to direct pressure not to handle non-0E parts, the Japanese auto manufacturers’ parts sales companies paid wholesalers rebates linked to handling OE parts that competed with non-OE parts. The JFTC said that these rebates “may have the same effect as restricting the handling of non-OE parts by local parts wholesalers . . .”36
As with its other surveys, these findings did not raise sufficient concern for the JFTC to initiate an investigation using compulsory powers. Instead, the JFTC offered guidance, and followed up six months later, giving the industry a clean bill of health.37
The United States, however, saw no improvement in market access. Japanese auto dealers continued strongly to resist dual dealer arrangements with foreign car manufacturers. Foreign suppliers of aftermarket parts continued to have little success in gaining access to Japanese parts wholesalers that sold to the repair shops. Japan also refused any significant deregulation of the rules governing repair car garages, which limits the expansion of specialized repair chain stores (e.g., chain brake, chain muffler, or transmission shops), denying market access to a potential alternative to wholesalers.38
Against the backdrop of these and other concerns, the United States in 1995 threatened nearly six billion dollars in trade sanctions in the form of 100% duties on imported luxury cars from Japan. Japan challenged the threatened sanctions in the WTO. The two sides reached an agreement in June 1995, on the day before the U.S. sanctions were to take effect.39
The auto and auto parts agreement addressed distribution issues in a similar fashion to the flat glass and paper agreements. Manufacturers, dealers, and parts wholesalers agreed to take voluntary steps to make clear that the dealers and wholesalers were free to deal in competing products, and the Japanese government agreed to reinforce this message with its own administrative guidance, including emphasizing compliance with the JFTC’s distribution guidelines.4 Japan also agreed to take steps to reduce regulations burdening the expansion of repair shops.
The distribution aspects of the auto and auto parts agreement (other aspects of the agreement are addressed below) have achieved only modest progress. Regarding dealerships, the USTR wrote in 1999:
Foreign access to Japan’s automotive distribution network remains a problem. . . [S] ome Japanese dealers continue to have reservations about carrying competing foreign vehicles for fear that doing so would compromise their relationships with Japanese manufacturers. . . .41
In the aftermarket, U.S. parts suppliers reported several years of modest increases in sales from a very small base. However, concerns remain that inspection and repair regulations are continuing to suppress the growth of independent garages more likely to deal in foreign partS.42
In sum, after nearly a decade of effort, the United States, by the mid-1990s has made very little progress using competition policy and deregulation requests to address distribution problems in Japan.
c. The Color Photographic Film Case
The WTO Film case initiated by the United States in 1996 was yet another attempt to reach precisely the same set of distribution issues that the United States had been raising with Japan in SII and the flat glass, paper, auto, and auto parts talks. Specifically, the United States was concerned that Japanese film manufacturers with considerable market power maintained de facto exclusive relationships with their primary distributors. Lack of access to the primary distributors significantly impaired access to the consumer market because alternative distribution routes were much more inefficient and costly. As in the other sectors, the JFTC had taken a look at the photographic film sector. Although this sector was on a JFTC watch-list of highly oligopolistic industries in Japan, and the JFTC had observed some troubling distribution practices, the JFTC had not taken enforcement action to address the restricted distribution system.43
In the Film case, the United States presented evidence that the pattern of domestic-manufacturer-dominated distribution seen in so many industries in Japan was not an accident. Instead, it was the result of deliberate Japanese government policy and actions to shape nontariff distribution barriers, replacing high tariffs and investment restrictions that were gradually being removed by Japan in accordance with its GATT and OECD commitments. The evidence consisted of policy statements and administrative guidance from the Japanese government, as well as statements and analysis from advisory committees to the government, industry associations, and chambers of commerce, all describing the actions Japanese industry should take to restructure distribution practices in response to increased foreign competition. The United States also argued that restrictions on large stores under the Large Scale Retail Stores law reflected a deliberate policy to reinforce manufacturer reliance on primary distributors needed to reach the thousands of small retail outlets around the country. Finally, the United States argued that JFTC-approved “industry fair competition codes” limited film manufacturers’ and retailers’ ability to offer certain kinds of sales inducements to distributors and retail customers. The panel, however, was not persuaded that the evidence sufficiently demonstrated the current existence of Japanese government measures designed to support restrictive distribution practices and structures. The panel also was not persuaded that the Large Scale Retail Stores Law, either by itself or in concert with other distribution measures and policies and the industry fair competition codes, violated GATT Article III or nullified or impaired U.S. benefits under the GATT.
The United States, therefore, again came up largely empty handed in an effort to address a restrictive distribution structure in Japan.
2. Recent Developments
Ironically, but perhaps not coincidentally, soon after the Film case, Japan decided to repeal the Large Scale Retail Stores Law At least one scholar has argued that Japan considered the law vulnerable to attack under a GATS argument that the United States initially raised, but did not pursue.44 Japan replaced the law with a new measure, the Large Scale Retail Stores Location Law, about which the United States continues to have significant concerns.45 Nevertheless, over the course of the 1990s, large retailers increasingly have found their way through the law and have increased their share of the retail market in Japan. Some foreign suppliers, therefore, will find it easier to reach consumer markets in Japan, and the increased competition from large stores and electronic commerce may accelerate pressure for restructuring distribution in Japan. Of course, for suppliers of intermediate goods and consumer goods not sold through typical retail channels (such as autos and flat glass), the changes to the Large Scale Retail Stores Law may have little benefit. For such companies, changes brought on by Japan’s long recession in the 1994s-for example, the willingness of several Japanese automakers to accept significant foreign investment may provide the only basis to hope fox improved access to restrictive Japanese distribution structures.
B. “Keiretsu” Buyer-Supplier Relationships
A second general type of market access barrier repeatedly raised by the United States and Europe is the keiretsu relationships between producers and corporate purchasers of products and services. In general, keiretsu refers to close relationships among groups of companies in Japan reinforced by cross-shareholding, exchanges of personnel, long term credit or supply arrangements, and other arrangements that make it difficult for a foreign company to break in. Often, keiretsu are discussed in two categories, vertical and horizontal.
Vertical keiretsu would include, for example, the relationship between a Japanese car manufacturer and the family of parts suppliers that design and build parts for that manufacturer. This type of relationship might be cemented by a variety of considerations, such as manufacturer investment in the equity of the supplier, provision of credit from the manufacturer to the parts company, early and special access to design plans for new car models, dispatch of management and engineering personnel from the manufacturer to the parts company, and other close cooperation. The relationship between the manufacturer and its dealers might also fit within the description of vertical keiretsu, although such distribution issues are distinctive enough to warrant separate discussion.46
An example of a horizontal keiretsu would be a group of companies formed around a particular bank, which tend to deal with each other to the exclusion of competitors doing business with a competing bank’s group. Often, the relationships within the group are reinforced by cross-shareholding, exchanges of personnel, and other considerations.47
The European Union has described the market access concern arising from keiretsu as follows:
The keiretsu inhibits the entry of foreign products into Japan because, at the margin, the [keiretsu-]affiliated firms benefit from a number of advantages in terms of inside knowledge of the buyer’s operation (and often of his competitor’s bidding) and personal association visa-vis non-keiretsu affiliated Japanese firms and foreign competitors. Consequently, even very competitive foreign firms are unable to break the keiretsu relationships: this would explain the low import penetration existing in many Japanese industrial sectors. This is particularly true for foreign intermediate products, which suffer of the special links between major manufacturing groups and affiliated sub-contractors as well as of closed distribution net works. . . .
Keiretsu represents an obstacle also for foreign financial services, because, despite weakening of the control of main banks, there remains a strong bias towards own group financial institutions. This bias makes difficult to foreign financial institutions to penetrate the Japanese market, even if they can offer very competitive services.48
The EU also has said that horizontal keiretsu make it very difficult for a foreign company to take over a Japanese company, “because of the protective intervention of other firms of the keiretsu.”49
Keiretsu market access restraints may not implicate antitrust law because the close dealing relationships may not fit the pattern of collusion among competitors or exercise of market power by a firm to restrict the competitive behavior of another firm. Rather, they may simply reflect a decision among a group of companies in different businesses to service, supply, and purchase from each other first and foremost. Some scholars argue that in some circumstances, keiretsu arrangements can enhance efficiency. Nevertheless, the JFTC has indiGated that under the Antimonopoly Act, concerns may arise if keiretSu member firms act concertedly to exclude competitors from the market, if an influential firm pressures another not to deal with a competing firm, or in other circumstances.50
1. U.S. Efforts to Address Keiretsu Issues
Keiretsu arrangements were one of the six core market access issues raised by the United States in the Structural Impediments Initiative. The First SII Report reflected the view that “certain aspects of . . . Keiretsu relationships [may] . . . promote preferential group trade, negatively affect foreign direct investment in Japan, and may give rise to anti-competitive business practices.”5′ To address these concerns, the JFTC committed to monitor transactions among keiretsu firms for acts of unfair competition. They also agreed to publish guidelines under the Anti-monopoly Law addressing business practices within a keiretsu, and to conduct regular studies of transactions and relationships within keiretsu groups. The JFTC published the keiretsu business guidelines at the same time as the distribution guidelines, on July 11, 1991.52
Along with the SII commitments, the United States pursued several sectoral agreements with Japan in which the types of keiretsu practices addressed in the SII report figured prominently. Among these were talks on semiconductors, original equipment auto parts, paper, insurance, and NTT procurement.53
In the mid-1980s, many U.S. policy makers worried that the economically and strategically vital U.S. semiconductor industry was in danger of losing primacy and dynamism to their Japanese competitors. Japanese manufacturers were rapidly increasing their share of the U.S. market, while keiretsu buyer-supplier relationships in Japan effectively capped foreign share of the Japanese market in the single digits. In one of the few cases of actual imposition of U.S. trade sanctions, the United States, in 1986, applied punitive duties to Japanese imports as a result of barriers in the Japanese semiconductor market.
The two countries also reached an agreement to increase foreign access to the Japanese semiconductor market, including a “side letter” containing a foreign market share target of twenty percent. In 1991, the two countries reached a second agreement, in which the twenty percent market share target-still not achieved at that time-was made explicit in the text of the agreement. The United States then terminated the trade sanctions.54
The semiconductor agreements were explicit in addressing keiretsu buyer-supplier relationships as the principal market access issue. The 1991 agreement states:[T] he two governments recognize the need for further efforts and the need to further develop a framework which will provide for increased market access opportunities in Japan for foreign capital-affiliated semiconductor companies and for the promotion of cooperative buyer-seller relationships between Japanese semiconductor users and foreign capital-affiliated semiconductor suppliers.55
The agreement also stated that the “Government of Japan will impress upon the Japanese users of semiconductors the need to make further efforts to increase market access opportunities in Japan for foreign capital-affiliated companies and the need to aggressively take advantage of such opportunities.”56 It was widely recognized, however, that the twenty percent market share target, backed by a sanctions threat, was the real means to address the keiretsu issue. Foreign share in fact crossed the twenty percent threshold at the end of 1993, and went on to reach thirty four percent by 1998.57
b. Original Equipment Auto Parts
Keiretsu purchasing relationships between Japanese automobile manufacturers and their parts suppliers was also a central issue in U.S. Japan talks in the automotive sector. Japanese automobile manufacturers had developed long-term stable supply relationships with parts manufacturers, into which foreign suppliers had a hard time breaking in. A 1993 JFTC survey found that eighty percent of the relationships between parts suppliers and manufacturers were long-term supply relationships, and that auto manufacturers procured many new parts through a design-in process in which suppliers were invited early to participate in new parts development for specific models. The auto manufacturers maintained “cooperative associations” for their parts suppliers, which served to dispense information about technology, design plans, and other information about the automakers’ intentions. The auto manufacturers also held the stock of a majority of their largest parts suppliers, and regularly dispatched executives to help manage the parts suppliers.58 The JFTC concluded that these relationships were mutually beneficial to the parts suppliers and auto manufacturers, and although they might restrict opportunities for new parts suppliers in Japan, they were not anti-competitive.59
Whether or not these relationships violated the Antimonopoly Law, they made it very difficult for competitive foreign auto parts suppliers to sell in Japan. With trade in autos and auto parts accounting for over half of the U.S. Japan trade imbalance, the United States considered it essential for Japan to take steps to increase Japanese auto manufacturers’ procurement of foreign parts.
At the time of the Bush-Miyazawa summit in 1992, the United States had decided to look toward numerical targets in this industry, as it had in the semiconductor industry. Under pressure from the United States, Japanese automakers “voluntarily” announced their intention to increase purchases of parts from non-traditional, foreign parts suppliers. Collectively, the commitments amounted to an increase from nine to nineteen billion dollars annually in foreign parts purchases. The Japanese auto makers also committed to increase to seventy percent the local content of their “transplant” factories in North America.60 They largely met these targets.
In the 1993 to 1995 U.S. Japan auto talks, the United States pushed for increased “voluntary” commitments for parts purchases by the Japanese automakers, for their operations both in Japan and North America. The United States also asked for concrete steps to facilitate greater participation of foreign parts suppliers in the “design-in” process by Japanese auto makers. The United States asked the Japanese government to take responsibility for encouraging these steps by the auto companies, and for providing other incentives for increased procurement in Japan of foreign auto parts.
After its experience with the 1992 auto commitments and the 1991 semiconductor agreement, Japan vehemently resisted any further use of “numerical targets” in U.S. Japan trade discussions. Only after the United States threatened 100% duties on Japanese luxury car imports did Japanese automakers agree to submit “voluntary” purchasing plans. In these plans, the Japanese automakers did not indicate specific values for increased foreign parts purchases, but did announce their intention to include sufficient North American production at their transplant facilities to ensure that the vehicles from those plants were deemed to “originate” in North America under the rules of the North American Free Trade Agreement. The U.S. government and parts suppliers calculated that achieving NAFTA origin would mean a substantial increase in the value of their parts purchases from local suppliers.
Keiretsu buyer-supplier relationships also were a central issue in the 1992 paper agreement, in addition to the distribution issues already discussed. U.S. paper companies perceived that major corporate paper users in Japan had a strong bias toward dealing with Japanese paper companies with which they had keiretsu relationships. A JFTC survey of long term dealing in this sector, completed in 1993 after the paper agreement was concluded, confirmed these tendencies. It found that eighty two percent of the major user companies had dealt with the same paper vendors for over five years and forty four percent had dealt with the same vendors for over twenty years.sl Ninety-two percent of the major users had not changed the ranking of their paper vendors in the last five years and seventy percent had not changed either the ranking or percentage of business allocated among those suppliers 62 Roughly half of the major corporate users owned stock in their paper vendors, and the vendors, in turn, owned stock in the major corporate users. The JFTC, however, found these long-term stable relationships to be justifiable business practices that did not raise Anti-Monopoly Act concerns.
The United States, nevertheless, considered such relationships to substantially impede market access for competitive foreign products. In attempting to address these barriers, the paper agreement did not include numerical targets. Instead, it called upon the administrative guidance and moral suasion of the Japanese government to address keiretsu buyer-supplier issues. The agreement stated that the government of Japan would encourage major corporate users of paper to follow open purchasing guidelines set forth by the Ministry of Trade and Industry. These guidelines were to “reflect a basic recognition that buyers in long-term supply relationships are to expect each supplier to earn and maintain its position as a long term supplier on a competitive basis.”ss The government of Japan also undertook to directly encourage major users to purchase more imported paper, and to conduct annual surveys of conditions in the paper market.
Of course, the government of Japan also committed “to enforce effectively the Anti-Monopoly Act.” However, because the JFTC’s voluntary survey a year later found no problems under the Anti-Monopoly law regarding keiretsu buying practices, this commitment had little effect. Indeed, as already mentioned, the paper agreement, overall, had almost no effect in increasing sales in Japan for foreign paper suppliers.
The U.S. Japan insurance agreements of 1994 and 1996 included an effort to address keiretsu purchasing patterns in this large and important financial services market. Keiretsu purchasing practices were especially strong in Japan’s commercial property and casualty insurance markets because government regulatory practices allowed little varia tion among companies in products and prices, leaving only long standing business ties as a basis for marketing. A JFTC survey in 1987 found that ” [g] roup ties and fostering financial links were the primary factors determining the choice of insurance suppliers, with . . . 75.3 percent identifying [one of these] as the primary factor in choosing their current insurance company.”‘ A 1993 study by the Financial Services Committee of the American Chamber of Commerce in Japan found:[Eleven] keiretsu member companies account for more than 80 percent of the total nonlife [i.e., property and casualty) insurance market in Japan. With respect to the purchasing practices of the . . . groups studied, on average over 70 percent of the nonlife insurance business of these keiretsu groups is given to the respective member insurance companies of the groups. Moreover, at least 92 percent of the insurance business of such groups is handled by financially related insurers.65
The primary thrust of the U.S. approach to the Japanese insurance market was to seek deregulation of prices and contract terms for insurance policies, allowing foreign insurers to compete by differentiating their products and prices. The hope was that foreign companies could overcome the keiretsu purchasing bias in the system if they were allowed to offer more competitive terms. To help keep scrutiny and pressure on the keiretsu practices, the 1994 insurance agreement called for the JFTC to study keiretsu purchasing in the Japanese insurance sector.66 The Japanese government again committed to “strictly enforce” the Anti-Monopoly Law in the insurance sector. While these JFTC efforts did not bring particularly useful results, the deregulation measures have allowed foreign companies to make headway in certain areas of the property and casualty market, such as auto insurance, where they have been allowed to offer more competitive terms.67
e. NTT Procurement
Perhaps one of the longest-running areas of intensive bilateral activity between the United States and Japan relates to purchases of equipment, software, and services by Nippon Telephone and Telegraph, the behemoth Japanese telecom company. NTT emerged in the post War era as a government-operated monopoly provider of local and long distance services in Japan. In the mid-1980s, NTT was supposedly privatized, although it remained majority-owned by the Japanese gov ernment and governed by a special law In a new 1998 law, NTT was further restructured into a holding company with two local and one long distance companies, the latter of which was allowed to enter international service. The two NTT local companies retain an effective monopoly over local telephone service in Japan.
The U.S. concern regarding NTT purchasing has been that its monopoly position in the Japanese market, and its government ownership, allow it to operate to promote Japanese telecom equipment and technology companies, such as NEC, while shutting out competitive foreign companies from this large and important market. Indeed, NTT’s procurement alone accounts for about one-third of Japan’s thirty five billion dollar telecommunications equipment market. In its 1999 NTE Report, USTR wrote that despite gradual improvements in the market, NTT still does not procure on an open and competitive basis:
NTT is still reaping the benefits of its monopolistic legacy and is not fully responsive to market principles in its procurement. Evidence indicates that NTT continues to favor its “family companies” for the bulk of its telecommunications equipment purchases; that NTT confines to over-engineer and underdocument specifications; that specifications are too often Japanspecific or NTT-specific; and that allocation of supplier market share for products is often based on non-transparent criteria. These practices raise costs to NTT and its customers, impede competition, and pose significant market access barriers.69
The United States has approached these NTT purchasing issues through no less than seven sets of agreements addressing NTT procurement, beginning in 1980 and renewed, modified, and extended every few years since. These agreements have not included market share targets, but rather have set out a detailed set of procedures NTT will undertake to provide information, develop specifications, and award procurement opportunities in an open and transparent manner. Over twenty years, the NTT agreements have contributed to a gradual but significant increase in NTT procurement of foreign products and services. Although NTT does not publicly disclose supplier market share information on suppliers, the foreign share of NTT procurement appears to have increased from essentially zero in 1980 to at least ten if not fifteen percent.70 Foreign companies’ share of NTT procurement, however, still lags significantly the share of foreign sales to other, private, non-monopoly telecom companies in Japan. 1
2. Recent Development
While semiconductors, auto parts, paper, insurance, and NTT procurement do not make up all the sectors in which keiretsu buyersupplier practices have been a concern, these examples illustrate that it has been a widespread problem. The United States has achieved a mixed record of success in dealing with this issue, from the unquestionably successful semiconductor agreement, to the reasonably successful insurance and auto parts agreements, to the somewhat successful NTT Procurement agreements, to the wholly unsuccessful paper agreement.
Neither the GATT/WTO nor competition policy enforcement had much to do with the successful outcomes. Rather, it was bilateral pressure that won Japan’s commitments to the numerical targets in semiconductors and auto parts, to the deregulatory steps in insurance, and to the procurement procedures for NTT that have contributed to market access gains against keiretsu practices.
In recent months, some observers have cited indications that large Japanese companies are beginning to sell off their cross-shareholdings in each other. Some say that consolidation and restructuring in the financial sector, along with deregulation and much-heightened competition in that sector, are forcing an end to keiretsu structures and practices.72 It seems too early to tell whether these changes have taken hold or will take hold to a degree so that the United States, the European Union, and other foreign governments will no longer see a concern with keiretsu buyer-supplier relationships in Japan.
C. Cartels and Other ‘Horizontal’ Practices among Competitors
A third category of market access barrier in Japan frequently raised by the United States and other countries is cartels or other horizontal behavior among competitors that restricts market access for foreign suppliers.
Although Japan’s Anti-Monopoly Law prohibits cartels, the law historically has provided numerous exceptions for particular industries or circumstances, such as approved recession cartels.73 Also, in the name of economic development, stable markets, and protecting employment, the Japanese government, at times, has promoted coordination among competitors and encouraged them to avoid excessive competition. In other cases, Japanese law may require or allow industry associations or other industry groups to agree on and enforce restrictions on competition in the market.
The United States has argued that these practices restrict access to the Japanese market in various ways. Activities by industry associations and other industry groups may directly restrict a foreign market entrant from offering competitive prices or sales terms. Government and industry efforts to avoid excessive competition may help weaker Japanese companies maintain keiretsu purchasing relationships when they might otherwise be forced to look toward new, lower cost suppliers, and may limit opportunities for foreign companies to find acquisition targets in Japan. Finally, of course, group boycott behavior can directly limit sales opportunities for foreign companies in Japan.74
1. Association and Industry Activities under Color of Law
There are several examples of market access disputes between the United States and Japan involving private market restrictive behavior among competitors occurring either under express legal authority or as a direct result of conditions created by the legal regime. Two good examples occurred in the disputes on insurance and the Large Scale Retail Stores Law.
Insurance, as a business of statistics, benefits from the pooling of data on losses paid on policies. Pooled data allows greater predictability of the risk to the insurer of a policy. In Japan, the Non-life Rating Organization is statutorily authorized to collect that loss data. In the 1996 U.S. Japan insurance talks, the United States complained that the rating organization also was allowed to collect data on the expenses of non-life insurance providers, as well as losses paid. With industry data on expenses as well as losses, the rating organization was able to calculate industry standards for insurance premiums, operating under an exemption from the Anti-Monopoly Law.
As a practical matter, all non-life insurance providers making use of the rating organization data were required to charge rates within a narrow band of the average. In theory, an insurance provider could submit an application to the Ministry of Finance for a product using data other than rating organization data. However, even if a company believed it could persuade the Ministry to approve a product departing from the rating organization rates (which is not likely, based on history), the rating organization could kick the upstart company out of the organization and deny it further access to rating organization data for other products. The Ministry of Finance argued vehemently that it could not stop a rating organization from kicking out a member in such circumstances, despite its statutory oversight of the rating organization. This practical inability to depart from rating organization rates, without risking future access to rating organization data, was a serious obstacle to foreign insurance companies offering more competitive products and prices in Japan.
After lengthy debate and negotiation, the Japanese government agreed to ensure that an insurance company could depart from a rating organization’s price without losing access to its data.75 In addition to this general commitment to break the cartel of the rating organization, Japan agreed specifically to approve auto insurance policies proposed by foreign insurance companies that would depart significantly from rating organization rates.76 Those foreign insurance companies reportedly have made significant sales gains in those products, but overall the U.S. government continues to complain that: “Japan has not fully implemented its obligations with regard to reform of the non-life insurance rating organizations, which continue to engage in cartel-like actions, such as by imposing form and rate uniformity on consumers for products.”77
b. Large Scale Retail Stores Law
The United States has long argued that the limitations on stores under the Large Scale Retail Stores Law were imposed by more than just the formal procedures through which the Japanese government imposed limits on floor space, hours of operation, and days open.78 Rather, an equally powerful limitation came from the informal regulatory process imposed by the large stores’ smaller competitors.
The informal review process arose because the law required the builder or owner of a large store to give an explanation of its plans to local interested parties after it had submitted a formal notification to the government of its intention to open a large store.79 Then, prior to opening the store, the retailer was required to submit another notification, and the government undertook a review to determine if any adjustments were needed in the store’s floor space or hours or days of operation.8 In making this determination, the government was required to take into account the views of the Large Stores Council, a formal advisory council to the Japanese government dominated by small retailer interests.gl A large retailer that did not try to accommodate these local interests could face stiffer adjustments than if they tried to cut a deal with their competitors controlling the Large Stores Council. Cutting a deal sometimes meant agreeing to more than the types of adjustments provided for in the law. It could mean paying out right bribes to small retailers. For example, they might pay for improvements to or advertisements for the shopping center as a whole.82
A study from the Japan Fair Trade Commission pointed out how these mechanisms effectively allowed local retailers to impose cartellike restraints on their large-store competitors.
Store opening adjustment procedures based on the Large Stores Law are believed to have produced a situation in which those planning to open a store have no choice but to deliver a full explanation to local retailers even prior to filing [their notification to the government] and, in some cases, to undertake significant adjustments with local retailers in order to avoid a decision from the Large Store Council requiring substantial reductions in store floor space in accordance with opinions of local retailers. Conversely, some of those planning to open a store go ahead with [their notification to the government] without undertaking any prior adjustments, or any sufficient adjustments with local retailers, only to receive, after going through the deliberation process by the Large Store Council, a recommendation to substantially reduce floor space area from the Minister of International Trade and Industry. Therefore, those planning to open a store are unfairly hindered from opening new stores and freely developing business. In some cases, [the process] can also increase the level of business risk for those planning to open a store.83
While it may be hoped that repeal of the Large Scale Retail Stores Law will weaken or end these cartel-like restraints on the expansion of large stores, the replacement of the law with a new Large-Scale Retail Location Law raises concerns about the possibility for local business interests to continue restricting their large-scale competitors for economic reasons cloaked as local traffic management, parking or environmental concerns.84
c. Other “Cartel Enabling” Laws
Although the insurance and large stores examples illustrate the problem of cartel behavior induced or enabled by the legal regime in Japan, they are far from the only examples. Briefly, some other cases worthy of mention include:
(i) Fair Competition Codes
The JFTC authorizes industry associations to create self regulating codes on advertising that can effectively restrain competition by new entrants. USTR described this problem as follows:[T]he JFTC allows “fair trade associations” (essentially, private trade associations) to set their own promotion, advertising and labeling standards through self imposed “fair competition codes.” This creates difficulties, especially for newcomers who are unfamiliar with local guidelines. Trade associations can, and often do, use the cover of these codes to set additional standards that are stricter than the JFTC regulations under the Premiums Law.85
(ii) Business Reform Law
The 1995 Business Reform Law fits the classic model of governmentled coordination to avoid excessive competition in difficult economic times, and to guide industry restructuring. The law allows firms in the same industry to jointly form proposals for restructuring their businesses and to receive government subsidies or tax breaks if their plans are approved. In the case of such coordinated industry plans, the law provides that the reviewing minister (e.g., the Minister of International Trade and Industry) may decide to consult with the JFTC regarding the joint application. Only then may the JFTC provide its advice to the requesting ministry. The U.S. government has strongly criticized this consultation mechanism because it “may be construed as an Antimonopoly Law exemption.”86
2. “Private” Cartels
Cartel behavior in Japan that is not directly tied to laws or regulations has also been a market access concern for the United States. This type of private cartel behavior occurs in the steel and stevedoring industries, for example.
The steel industry is one sector of perennial U.S. concern about cartels in Japan. As one scholar described: “IT]he steel industry [in Japan] also fits the pattern of a market governed by a producers’ cartel supported by interindustry relational contracts with buyers enforced by sanctions against firms that try to buy from outside the cartel. “87 The USTR most recently explained the concerns as follows: With respect to Japan’s domestic market, it is alleged [by U.S. industry] that Japan’s five integrated producers discuss and coordinate output, pricing, and market allocation goals-with the knowledge of Japan’s Ministry of International Trade and Industry. In addition, it is alleged that Japanese mills have entered into a series of arrangements with foreign counterparts to regulate bilateral steel trade. It is believed that these arrangements, as well as tight control by major integrated producers over steel distribution channels in a manner which strongly discourages imports, explain the fact that the market shares of Japan’s five large mills have remained absolutely stable over the last three decades.88
In 1998, there was a rapid increase in Japanese steel imports into the United States. This contrasted with the lack of any improved access to the Japanese market for U.S: made steel-indeed the lack of any movement in the three-decades-old allocation of market share in Japan among the major producers, despite the deep and prolonged recession in Japan. This became a major source of trade friction between the United States and Japan.
b. Stevedoring Services
Another recent case of major U.S. Japan trade friction over a cartellike situation involved the exclusionary practices of Japanese stevedoring companies. This issue became one of the handful of cases over the years in which the United States imposed trade sanctions on Japan. Specifically, on September 4, 1997, the United States imposed a fine of $100,000 on each U.S. port call by a vessel owned or operated by the three major Japanese shipping lines.89 The United States described the cartel-like barriers as follows:
American carriers serving Japanese ports encounter a highly restrictive, inefficient and discriminatory system of port services. The Japan Harbor Transport Association (JHTA), a trade association of stevedoring companies, uses a system of “prior consultations” (the requirement that carriers submit to the JHTA 60 days in advance notification of any new request or change in operational plans) to control competition, allocate harbor work among JHTA member stevedores and terminal operators, and frustrate the implementation of any cost-cutting by carriers. . . . The [Ministry of Transport] protects the JHTA’s position by refusing to license new entrants into port service businesses and by supporting the requirement that lines submit their plans to the JHTA to prior consultation.90
Other examples further demonstrate the type of private cartel barriers that U.S. companies have complained of in Japan.91 The U.S. government has dedicated a significant effort to encouraging the Japanese government to strengthen Antimonopoly Law enforcement against cartels, and to abolish exemptions to the Antimonopoly Law While there have been some improvements in the area of anti-cartel enforcement, the United States continues to voice concerns about the JFTC’s comparative institutional weakness and insufficient enforcement resources.92
D. Regulatory Barriers
The central issue with regulatory barriers in Japan is not so often discrimination against foreign products or services as it is a bias against new entrants, new products, and lower prices. This bias may appear in laws or regulations that are simply too rigid or vague, allowing Japanese industry to fill in the details to thwart competition. A recent OECD study of regulatory reform in Japan described the problem as of the early 1990s:
In several sectors, entry was regulated by supply-demand balancing by the ministries. Permission for new entry or the expansion of existing firms into new routes, products or regions was granted only if there was excess demand so that existing producers would not be harmed. . . . An extensive network of permits and licenses created barriers to the development of new products as well as entry of new firms: in financial services new products were subject to long delays in regulatory approval until all institutions in the same category were capable of introducing the product, another aspect of the so-call convoy system . . . . Finally, substantial barriers to competition in some sectors are due to legally sanctioned self regulation by industry or professional associations.93
There should be no disagreement that gradual regulatory reform is occurring in many of Japan’s most regulated sectors, such as financial services and telecommunications. However, even within these sectors, many restrictive practices are only changing incrementally, as seen in the above discussion on the insurance sector. The OECD Study acknowledges regulatory changes in Japan, but emphasizes that ” [t] he need for more rapid progress is urgent.”94 The OECD Study also points out that private anticompetitive practices could undermine the benefits of regulatory reform.95 Thus, one may be cheered by the gradual progress of regulatory reform in Japan, but it would be far premature to assume that the types of concerns raised in the past about regulatory market access barriers in Japan will not continue to arise for some time to come
The preceding discussion has identified several U.S. Japan issues involving laws or regulations that were not discriminatory on their face but that had the effect of restricting new entrants, products, or prices.96 A couple of additional examples will help further illustrate the problem.
1. Pharmaceuticals/Medical Devices
Since at least as early as 1985, the United States has complained that Japan’s slow and burdensome approval processes for new pharmaceuticals and medical devices has restricted access to the market for competitive foreign products. These matters were a central issue in the MarketOriented, Sector-Selective (MOSS) discussions launched by President Reagan and Prime Minister Nakasone in their Los Angeles summit in January, 1985. The report of those discussions a year later stated, The U.S. side raised the market-opening issues from the view point of removing barriers to trade and/or to the conduct of business in Japan by foreign firms. The U.S. side stated that in many cases the issues reflected inefficiencies and inflexibilities in the regulatory system which had the effect of impeding the entrance into the market of new producers and new products, and of influencing business decisions even when health and safety questions were not at stake.97
Among the specific issues pressed by the United States were speeding the approval of new products and accepting foreign clinical test data (so that clinical trials need not be re-run in Japan). Japan agreed to address both these issues. To speed the approval of new products, Japan agreed to implement a “time clock” representing the “outer limits” of the time period needed for processing a new drug or new medical device application. For new drugs, the period would be eighteen months; for new devices, the period would be one year.98 Regarding foreign clinical test data, Japan agreed to accept such data for pharmaceuticals, except when immunological or ethnic differences between Japanese and foreigners warranted separate trials. For medical devices, foreign data would be allowed except for implantable devices and “those affecting organic adaptability.”99
Eleven years later, the United States and the European Union continued to complain that slow approval procedures and failure to accept foreign clinical test data impaired access to the Japanese market for foreign pharmaceutical products and medical devices. Although that maximum time for approval of pharmaceutical products was supposed to be eighteen months, the Ministry of Health and Welfare was able to “stop the clock” through asking companies for more information. As a result, the average approval time was much longer than eighteen months. Regarding foreign clinical test data, the exception requiring Japanese testing in the event of ethnic or immunological differences came to swallow the rule that foreign clinical data would be allowed.
The United States and the European Union, therefore, continued pressuring Japan to speed the approval process and commit to greater acceptance of foreign clinical test data. Japan issued a new set of commitments in May 1998 under the U.S. Japan Enhanced Initiative on Deregulation and Competition Policy 1 Japan committed to shorten its standard processing period for new drug applications to twelve months, and to implement newly agreed international guidelines on the acceptance of foreign clinical test data.loi By mid-1999, foreign companies began to notice some improvement in approval procedures and, in at least one high-profile case, Japan had approved a foreign pharmaceutical product based largely on foreign clinical test data.’2 However, concerns about delays in applications and use of foreign data remained, as the European Union indicated in a submission to Japan in October 1999:
Problems faced by EU exporters of pharmaceuticals . . . to Japan include long handling procedures and requirements that clinical tests have to be performed in Japan although similar tests have already been approved by the U.S. or EU authorities. Such problems in general slow down the entry of innovative products, whatever their origin, onto the market. . . . It has been estimated that since 1991, over 80 % of all the world’s pharmaceutical innovations have not been licensed for use on the Japanese market.103
Of course, slow approval procedures hinder the introduction of new products by Japanese as well as foreign companies. A reluctance to accept foreign clinical data could adversely affect Japanese companies in addition to foreigners, since Japanese companies increasingly conduct trials overseas and also market in Japan products licensed from foreign companies. Nevertheless, the result is to restrict access to the market for competitive foreign products.
2. Telecommunications Services
Despite regulatory restructuring of the telecommunications sector in Japan and the entry of several new domestic and foreign carriers over the past decade, the United States and European Union continue to voice strong criticisms of the telecommunications regulatory structure in Japan. A central criticism is that rates for other companies to connect with NTT’s network-critical for almost any other telecommunications services provider to compete in Japan-are several times higher than comparable rates in the United States and Europe.104 Although the United States and European Union repeatedly have urged Japan’s Ministry of Posts and Telecommunications to implement more competitive rates”‘5 and received commitments from Japan to do so”6 the problem of interconnection rates persists at the top of the bilateral agenda for both the United States and Europe.
High NTT interconnection rates, which are set by government ordinance in Japan, 17 certainly impair competition for NTT’s domestic competitors in Japan as well as foreign-owned companies. They are a trade concern, not necessarily because they discriminate against foreign companies, but because they inhibit the ability of foreign companies to pursue competitive opportunities in Japan. As USTR has stated, “[c]urrently in Japan, there is a dramatic over-regulation of nondominant carriers and an insufficient regulation of dominant carriers.”108
In sum, the demise of regulatory obstacles to market access in Japan has been greatly exaggerated, despite undeniable changes in many sectors. Observers can expect many continuing complaints of regulations that restrict new entrants or competitive products and prices in Japan.
E. Government Procurement Issues
The final principal category of common U.S. complaints about market access barriers in Japan is government procurement practices. Beginning in the 1980s, the United States negotiated a series of agreements with Japan aimed at increasing foreign sales to Japanese government entities. These included agreements for government procurement of computers, supercomputers, satellites, medical devices, telecommunications equipment, and construction services.109
Generally, these negotiations addressed sectors either where government purchases accounted for a significant percentage of the market in Japan, or where the United States believed it could achieve a “demonstration effect” in the private market by winning commitments for increased purchases by the Japanese government. Often, the United States pointed out that the foreign market share of government purchases stood well below the foreign share of the private market for such products in Japan.110
The discussions rarely, if ever, involved explicit “buy national” procurement rules in Japan. Rather, the problems generally were in the process of disclosing information about procurement opportunities, the development of specifications, and the basis for evaluating bids (e.g., lowest price versus overall greatest value). Although Japan was an early signatory to the 1979 GATT Procurement Code, the bilateral agreements generally took a “GATT Plus” approach, adding more detailed provisions (regarding information and notice, specifications, bid evaluation, award challenge procedures, etc) than required in the GATT, lowering the threshold for coverage below the GATT floor, and including Japanese government entities not covered by the GATT Code. Results under these agreements have been mixed:
In computers, the foreign share of government purchases grew in the first years of the agreement, it then began to fall off again. As of the end of 1998, foreign share stood at the same level as when the agreement was signed, about fifteen percent. This figure compares with a more than thirty percent share that foreign suppliers have of the private computer market in Japan.lil Foreign companies’ share of the Japanese government market for personal computers has fallen by half since the 1992 agreement was signed.112
In supercomputers, the 1990 agreement initially led to significant increases in the foreign share of Japanese government purchases of supercomputers, particularly in 1993 to 1994. More recently, the U.S. firms have been stuck with winning only one or two contracts per year from the Japanese government, for a share of around ten to twenty percent of the market, as compared to the close to fifty percent share of the non-government market in Japan.113
The foreign share of Japanese government telecommunications equipment and services procurement has fallen dramatically since the agreement was signed in 1994, from around thirteen percent to four percent.114
The record under the construction services government procurement agreement may be the most abysmal. Foreign firms won only about $50 million worth of government construction contracts in Japan in 1998, down from a peak of around $300 million in 1989, out of approximately $250 billion in public works procurement in Japan.115 The report on the medical technology procurement agreement is somewhat better. There, foreign share has increased slightly under the agreement, from around thirty nine to forty-two percent.116
The satellite procurement agreement has a very narrow scope. Only five procurements (for a total of about one billion dollars) have fallen within the agreement since its signature in 1990. U.S. companies have won all five contracts, however.
One interpretation of the results under these procurement agreements is that no amount of detailed engineering of procurement rules can overcome a possible “buy Japan” mentality among Japanese government agencies. Certainly, U.S. and other foreign manufacturers are highly competitive in all the areas covered by these procurement agreements, and it seems difficult to explain the disparities in foreign share between the government and private markets if not in terms of such a mentality It may be no coincidence that foreign share increased initially in several of these agreements in the early 1990s, at a time when the United States was exerting considerable political pressure on Japan, only to fall off in the late 1990s when the ability of the United States to apply bilateral pressure to Japan appeared diminished.
III. APPRROACHING JAPANESE BARRIERS UNDER WTO AGREEMENTS
Not all trade issues between Japan and the United States or the European Union fit squarely within the five categories discussed above. These categories, however, do capture a good percentage of the effort and concerns of the United States and Europe toward market access barriers in Japan. As much as one may hope that recent developments bespeak a fundamental change in Japanese market barriers, it seems likely that the United States and Europe will continue to have concerns in these areas for some time. Unfortunately, a review of GATT and WTO cases against Japan finds little basis for encouragement that these types of problems can be systematically addressed through WTO dispute resolution.
A. Market Structures and Practices
The possibility to address restrictive market structures and practices in Japan not clearly linked to government measures is remote. In general, of course, most WTO obligations apply only to government measures, not actions or market structures taken or created by private industry. Yet, some attempts have been made.
In 1986, the European Community requested a working party under GATT Article XXII:2 to examine the market in Japan for copper ores and concentrates. The EC pointed to “‘questionable practices’, including . . . concealed import restrictions, possibly hidden subsidies, and a price cartel operated by the Japanese producers.”117 A personal representative of the GATT Director-General prepared a “good offices report” finding no violation of Japan’s GATT obligations and no evidence of a producers’ cartel.118
In 1983, the EC raised a complaint that Japan’s low level of manufactured imports represented a “situation” nullifying or impairing the EC’s benefits under Article XXIII:1 (c) of the GATT.119 In contrast with Article XXIII:1 (a), which addresses violations of GATT rules, and Article XXIII:1 (b), which addresses government measures which nullify or impair GATT benefits even if they do not violate its rules, Article XXIII:1 (c) addresses, simply “any other situation” causing nullification or impairment. The EC complained of the “continuing imperviousness of the Japanese market resulting from an inherent tendency to favour domestic products rather than imported goods.” The EC alleged that the “difficulty of penetrating the Japanese market” resulted from keiretsu structures, closed distribution systems, restrictive regulations for the introduction of new products or prices, and “less visible barriers.”20 The EC requested the establishment of a working party to examine the matter, but the matter was not pursued beyond this request.
In the 1996 Japan Film case, the United States, in addition to its GATT and GATS complaints, requested consultations with Japan under a 1960 GATT decision on restrictive business practices. The 1960 Decision provided for consultations under GATT auspices in the event a GATT member considered that restrictive business practices in another GATT member’s territory were nullifying or impairing GATT benefits. The European Union requested to join the consultations. However, the Japanese Government conditioned the U.S. request on the United States also agreeing to consult on alleged restrictive business practices in the United States. The United States and European Union both strongly objected that such linkage as a condition to consultations was contrary to longstanding GATT principles.121 Japan, however, refused to break the linkage and the consultations were not held.
Thus, the record to date on reaching restrictive business practices and market structures in Japan using GATT mechanisms has been completely unsuccessful. Although some might argue that the type of “non-violation” complaint raised by the EC in 1983 has not been fully tested, the litigation risk for a complaining party in such a case would be immense. No precedents exist to suggest what types of “situations” might be considered to nullify or impair GATT benefits under Article XXIII(1) (c). The burden would be on the complaining party to set forth a detailed demonstration of market restrictive behavior and structures, perhaps also supported indirectly by government measures or government/industry cooperation. It would entail, in essence, litigating a case like Film under a different legal theory. One could expect Japan to vigorously contest each factual element. Because it is fair to say that in Japan Film the United States won on the law but lost on the facts, one has to be wary of a case with even less legal context and more dependence on establishing the complaining party’s version of the facts.
B. Restrictive Regulations
Burdensome or restrictive approval procedures for new entrants, products or rates disadvantage innovation regardless whether the innovator is Japanese or foreign. However, because foreign companies depend on new products or prices to break in or expand in the Japanese market, and because entrenched Japanese companies have other bases to compete such as control over distribution and keiretsu relationships, the bias against innovation is a genuine bias against foreign suppliers.
Potential WTO arguments for addressing this type of issue in theory might include violations of “national treatment” principles, “nonviolation nullification or impairment,” or possibly arguments under the WTO Agreement on Technical Barriers to Trade or the GATS provisions on domestic regulation. Each theory has serious drawbacks for trying to reach typical Japanese market access barriers.
1. National Treatment
Whether the context is trade in goods or trade in services, the national treatment principle, in essence, requires that the Japanese government afford imported products or foreign suppliers no less favorable treatment than that it affords like domestic products or suppliers. Less favorable treatment means government measures explicitly discriminating against foreign products or suppliers, as well as government measures “neutral on their face” that create conditions of competition adverse to imports or foreign suppliers, as compared to like domestic products or suppliers.122
The types of Japanese government measures most often complained of by the United States and European Union almost never are discriminatory on their face. Rather, measures such as slow and rigid approval procedures (e.g., pharmaceuticals, financial services, telecommunications services), pricing policies that either directly restrict aggressive new pricing (e.g., insurance) or effectively allow established suppliers to discipline discounters (e.g., fair competition codes and large stores rules), or regulations that otherwise reinforce entrenched producers and discourage competition (e.g., telecommunications interconnection regime) limit market entry or expansion for new domestic as well as foreign suppliers. While the entrenched suppliers protected by such regimes most often are Japanese, those adversely affected normally include identifiable competitors or would-be competitors in Japan as well as abroad. In such circumstances it is exceedingly difficult to prove, even assuming the facts as set forth by the complaining party, that the government measures create conditions of competition adverse to foreign suppliers as compared to like domestic suppliers.
The difficulty is magnified by the need to prove a very complicated set of legal and economic facts even to demonstrate the existence and nature of the government measures, their relative restrictiveness or rigidity, and their adverse impact on the ability of new market entrants to compete. As GATT and WTO panels have widely noted, Japan relies on informal and non-transparent government-industry interaction to establish the “real” regulatory regime. For example, nothing on the face of the insurance, pharmaceutical, or telecommunications laws of Japan demonstrates a comparatively restrictive regime for companies that wish to compete aggressively against established suppliers, through offering more competitive products or prices. Such comparative restrictiveness becomes apparent to companies in their specific experiences dealing with the Japanese government. One may attempt to demonstrate it statistically (e.g., that eighty percent of pharmaceutical innovations introduced outside Japan since 1991 are not available in Japan) or anecdotally, but such statistics are open to other interpretations and explanations, and such anecdotes are difficult to bring forward without exposing individual foreign companies to retaliation at the hands of the regulators being challenged. Moreover, in any event, statistics and anecdotes are at best a difficult basis to establish the existence, nature, and effect on market opportunities of government measures not apparent on the face of the written law.
To be sure, there have been cases where the complaining party successfully established the existence of administrative guidance in Japan. In the Japan-12 case, involving restrictions on imports of agricultural products, the panel reported “some difficulty . . . in establishing the exact nature of the domestic restriction.”123 Nevertheless, the panel was able to find that “the measures did in fact emanate from the government.” The panel concluded that the measures were enforced through the practice of “administrative guidance,” which “is a traditional tool of Japanese Government policy based on consensus and peer pressure.”124 Similarly, the panel in the Semiconductor case found a subtle and non-transparent web of administrative guidance and government-industry actions to be actionable government measures.125 In the Film case, the panel also found several of the reports, decisions, and items of administrative guidance cited by the United States to be government measures for purposes of the GATT.i2s How ever, the panel declined to conclude that several other items raised by the United States were government measures.
The Japan-12 and Semiconductors cases involved import or export restrictions which, once their existence was established, were relatively straightforward violations of the GATT. The added difficulty in a national treatment case against facially neutral but competitionrestricting regulations is the need to prove not just that a measure exists, but that it has the effect of restricting competition, and that such effect creates adverse conditions of competition for foreign as compared to domestic suppliers. This chain of facts is extraordinarily difficult to establish. Thus, in Japan Film, although the panel was persuaded of the existence of some (but not nearly all) of the measures alleged by the United States, the panel was not persuaded of the several additional factual links necessary to show such measures violated the national treatment provisions of the GATT
A very similar problem exists regarding a non-violation case. In a non-violation case, the complaining party must show that an action by the defending government, taken after the defending government made a market access commitment (e.g., a tariff or services sector commitment) has modified the conditions of competition adversely for imports or foreign suppliers, as compared the conditions the complaining party could have expected to prevail-generally, the conditions existing at the time the defending party made the market access commitments. 127
Many of the problems of proof affecting a national treatment case also affect a non-violation case against the type of facially neutral, competition-restricting regulations frequently complained of in Japan. Not least is the problem of proving the market conditions and their causal relationship to government measures that are, in many cases, not clearly written laws or regulations but a complex and nontransparent series of interactions and uses of subtle pressure between industry and government in Japan.
Beyond this shared problem with a national treatment case, however, is the even more daunting issue of timing. Because a non-violation case is based on the theory of expectations upset by government actions not reasonably anticipated, success generally depends on showing that Japan has made conditions of competition for foreign suppliers worse after making a market access commitment. While the problem of competition-restricting regulation and government practice may pervade many sectors in Japan, as a general rule the trend has been toward gradual liberalization or keeping things more or less the same. It is uncommon for government measures to be more market restrictive now than at the time of past tariff concessions, service sector commitments, or other market access commitments. For example, while regulation by Japan in telecommunications, financial services, distribution, and pharmaceuticals continues to be a significant market access issue for the United States and Europe, few would disagree that the written rules and their application are at least somewhat more liberal (and in some areas of financial services dramatically more liberal) now as opposed to ten or fifteen years ago. Thus, the ability to reach these kinds of regulatory barriers with a non-violation nullification and impairment argument is questionable.
3. TBT Agreement and CATS Analogs
Since many of the regulatory market access barriers in Japan relate to the approval of products, one might be inclined to look to the WTO Agreement on Technical Barriers to Trade (the TBT Agreement) to address these barriers. The TBT Agreement provides that technical regulations shall not create unnecessary obstacles to international trade, and for that purpose, shall not be more trade-restrictive than necessary to fulfill a legitimate objective such as safety or protection of health or the environment.128 Technical regulations also shall be based on performance rather than design, “wherever appropriate,”129 and shall be based on international standards, where such exist.
There may be some cases in which the TBT Agreement could be useful for addressing regulatory restrictions in Japan, particularly, specific product technical requirements. For example, for years a U.S. company complained that Japan’s classification of construction “nail guns” as firearms unduly restricted market access. Other technical regulations for construction materials and other products also. have been an issue.130 In such cases where clearly identifiable, product specific regulations appear substantially more burdensome than international practice, or are based on performance rather than design, there may be a case to address them under the TBT Agreement.
However, the TBT Agreement is much less likely to be helpful in cases where the criteria for approval of a product are not unreasonably stated in the law, but in practice are applied in a way that delays or restricts competition on product characteristics or price. Here again, the medical sector is instructive. It would be difficult to argue that the written rules for approving new pharmaceuticals or medical devices in Japan fall outside the international norm. It is the application of those rules that leads to long delays on new product introductions. Dissecting the vicissitudes of Japanese practice regarding the approval of particular medical and pharmaceutical products in order to show unduly restrictive technical requirements would prove a highly difficult task.
Also, many of the regulations and practices that have been the subject of U.S. and European complaint deal with services sectors, where the TBT Agreement does not apply. For services, the analogous disciplines are in GATS Article VI. There, the requirements are that approval requirements be objective and transparent, not be more burdensome than necessary to ensure the quality of the service, and not be in themselves a restriction on the supply of the service.131
As with the TBT Agreement, there may be some cases in which service sector approval regulations run afoul of these requirements. However, in many cases, Japan’s rules on their face may not appear all that unreasonable or out of step with international practice. The problem, again, will be in the way the rules are applied. Demonstrating that innocuous-sounding rules in fact are applied to limit competition on price or product terms is a difficult factual proof.
Perhaps a more encouraging development can be found in the GATS “reference paper” for commitments on telecommunications services, which affirmatively requires Japan and other WTO Members to regulate telecommunications in a pro-competitive manner. The United States reportedly threatened Japan with a WTO challenge under these commitments if Japan failed to address U.S. concerns, raised in the Enhanced Initiative on Deregulation, regarding the regime for interconnection with NTT.132 If it proves effective, such a theory would be an encouraging development, since the underlying regulatory problemhigh interconnection rates-fits the typical mold of a barrier against the offering of competitive prices and services that restricts new entrants and non-dominant carriers both in and outside Japan. However, even if this case proves successful, this affirmative requirement for procompetitive regulation is unique to telecommunications under the WTO.
4. The Litigation Record
The litigation record to date includes no case in which the complaining party was able to overcome the double hurdle of proving, first, the existence of a non-transparent measure and, second, that a facially neutral measure had the effect of impairing conditions of competition in Japan for foreign suppliers. In addition to the Japan-12 and Semiconductors cases already discussed (in which the existence of nontransparent measures was proved, but once proved the violation appeared on the face of the measures rather than their comparatively disadvantageous impact on imports), the record includes:
a. Agricultural Quota Cases
These cases dealt with import quotas or restrictions on primary products, including beef,’ss citrus,134 leather,135 leather footwear,lss and thrown silk yarn. All of these cases were successful in leading to the modification or removal of the import restrictions. In most of these cases there was no serious dispute as to the existence of the measure or its terms, and in those cases that were not settled, the violation of the GATT essentially was discernible in the terms of the measure itself.
b. AgricultUral Varietals talS TeSting 137:
The primary issue in this case was whether the requirement to test each variety of a product for absence of infestation was consistent with Japan’s obligation under the WTO Agreement on Sanitary and Phytosanitary Measures (SPS Agreement) not to maintain restrictions lacking scientific justification or more trade-restrictive than necessary to achieve the desired level of phytosanitary protection. The existence and terms of the Japanese measures or their effect on imports were not in dispute (although the panel did find that Japan’s failure to publish certain requirements was in violation of transparency rules of the SPS agreement).138 The question was whether scientific evidence justified Japan’s requirement. The panel found that it did not.
c. Sound Recordings
The Sound Recordings case involved Japan’s failure to provide 50 years of copyright protection for sound recordings in existence when the WTO went into effect. Japan applied 50 years of protection only prospectively, to works copyrighted after the effective date of the WTO. The United States initiated WTO proceedings claiming that the failure to extend 50 years’ protection to pre-1995 works violated Article 12 of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights. The terms of the measure in Japan were not in dispute. Before the matter was decided by a panel, Japan agreed to change its law to implement 50 years protection for works pre-dating the WTO as well as those post-dating it.139
d. Alcoholic Beverages:
The Alcoholic Beverages case addressed differences in domestic taxation between shochu, a white spirit of largely (but not exclusively) domestic manufacture in Japan, and various white and brown spirits and liqueurs such as vodka, gin, whisky, brandy, rum, and others, which were usually imported. The law was “facially neutral” in the sense that all shochu, domestic or imported, was taxed equally, and all the other beverages, domestic or imported, were taxed equally. The rates applied to the latter products, however, were higher than the rates applied to shochu. The issue was whether the different categories of product should be considered “directly competitive or substitutable,” and thus whether the differences in rates of taxation violated GATT requirements to tax like imported and domestic products equally and not to tax directly competitive or substitutable products so as to afford protection to domestic production.l4 The panel found, and the Appellate Body affirmed, that the imported products were “like” or “directly competitive or substitutable” with shochu, and that the differences in taxation violated GATT Article III:2. The case therefore stands as a successful attack on facially neutral measures with a discriminatory effect against imports in Japan. However, the difference in treatment among the products in this case was clear on the face of the tax law.141 There was no dispute that the law treated the different products differently, only whether those differences in treatment were legally actionable because of the products being “like” or “directly competitive or substitutable.” The case therefore offers little comfort for trying to address in the WTO the types of facially neutral measures in Japan in which proof of the existence of the measure and its discriminatory or market restrictive effect is indirect, complicated, or highly factdependent.
In short, the review of the record gives little encouragement about the ability to reach under the WTO the kind of facially neutral but competition-restricting regulatory or government/industry barriers in Japan.
C. Government Procurement
The picture regarding use of the WTO to address government procurement barriers in Japan is somewhat brighter. At least in government procurement, there is no question of government action and responsibility. Still, the reach of the WTO Agreement on Procurement may be limited. The premise underlying many of the U.S. – Japan procurement agreements was the need to go beyond the procedures and coverage of the WTO agreement to address the types of practices that appeared to be limiting foreign participation in Japanese government contracts. Obviously, the WTO Agreement cannot address a procedure it does not require or a procurement it does not cover. Moreover, part of the idea behind the U.S. Japan procurement agreements was that a certain amount of pure political pressure and scrutiny also could help counteract a perceived “buy national” mentality that might overcome even the finest engineering of procurement procedures. The WTO agreement, of course, cannot not substitute for that political pressure with respect to procurements or procedures outside its scope.
Nevertheless, there have been cases when a procurement matter in a sector of particular concern to the United States and covered by a bilateral agreement also gave rise to possible WTO action. In such cases, the WTO Procurement has afforded good leverage. For example, in 1997 Japan’s National Police Agency excluded a U.S. company from the specifications development process for a major prospective procurement of a nation-wide police radio system valued at hundreds of millions of dollars. The United States argued that these actions violated Japan’s obligations both under the bilateral telecommunications procurement agreement and the WTO procurement agreement. The United States threatened to take action under either or both agreements. The matter was resolved when the National Police Agency agreed to start over its procurement process using the WTO and bilaterally-agreed procedures.142
Such examples of successful recourse to WTO procedures on procurement matters, however, appear limited in number. It seems unlikely Japan will make sufficient “mistakes” in procurement procedures to open itself to many WTO challenges.
IV. NON-WTO REMEDIES
The difficulty in reaching typical Japanese market access barriers through WTO challenges is compounded by the increasing difficulty of reaching those barriers through any other means.
Any close observer of U.S. Japan trade discussions recognizes that it is much more difficult for the United States to threaten unilateral sanctions against Japan than was the case before the WTO Agreement took effect. Japan’s WTO challenge to the threat of U.S. sanctions during the 1995 U.S.Japan auto dispute succeeded in focusing intense criticism on the U.S. use of sanctions, both internationally and, to some degree, within the United States. While the United States has relied on the threat of sanctions in disputes with Japan after the auto talks, it has avoided sanctions potentially subject to WTO challenge. For example, although the United States imposed sanctions on Japanese shipping lines in the 1997 stevedoring services dispute, the United States has no commitments on maritime shipping under the GATS. Also, although the United States threatened Japan with sanctions in a 1997-1998 dispute on aviation traffic rights,l4s aviation traffic services also are outside the scope of the GATS. Similarly, in 1997, three agencies of the U.S. government asked the Federal Communications Commission to hold up applications by NTT and another Japanese long distance company, KDD, pending resolution of certain trade issues. However, the United States lifted those sanctions before its obligations under the WTO agreement on basic telecommunications took effect on January 1, 1998.
The broad and expanding reach of the WTO makes it increasingly difficult for the United States to find possible sanctions outside the scope of potential WTO challenge by Japan. Accordingly, in choosing sectors and market access barriers to pursue in Japan, the United States must either adjust its expectations to gains it may achieve in the absence of a credible sanctions threat, or limit its ambitions to matters in which another source of leverage exists.
To date, any hope of approaching distribution or keiretsu issues in Japan through use of competition laws has proven woefully misplaced. Competition law attacks on cartel-like market access barriers in Japan have yielded only minimally better results.14 The Japan Fair Trade Commission’s record of reluctance to initiate formal investigations of market access concerns raised by the United States may stem in part from a not unnatural resistance to foreign political pressure, but it also stems from the JFTC’s practice of requiring a great deal of proof before it commences to investigate. At least one U.S. official has expressed exasperation at a policy apparently requiring a foreign government, having no jurisdiction to compel production of evidence in Japan, to produce near-absolute proof of an ongoing competition law violation in Japan before Japanese competition authorities will undertake any formal and compulsory gathering of evidence within their own jurisdiction to determine if such violation of law exists. It is at least arguable that such a high threshold for opening investigations masks a more fundamental difference in competition enforcement philosophy (or capability) between Japan and the United States.
A recently-concluded antitrust cooperation agreement between the United States and Japan may offer some possibility to improve this situation, through providing a more formal and less political basis for a referral of a matter to the JFTC. However, the possibility for the U.S. Justice Department to make a referral to the JFTC has long existed. The agreement would not compel the JFTC to act upon the referral other than to “carefully consider whether to initiate enforcement activities.”45 Moreover, the agreement apparently would change neither Japanese law and practice, which requires a high degree of proof of a violation before initiating an investigation, nor the ability of the United States to gather evidence in Japan to present to the JFTC.146
With little near-term prospect of significantly increasing the effectiveness of competition authorities in addressing market restrictions in Japan, and diminished prospect to effectively utilize the threat of unilateral sanctions, the leverage to address market access barriers in Japan increasingly must come from use of the WTO agreements. The ability to reach those barriers through the WTO therefore has become a matter of real importance to trade authorities. Unfortunately, that ability in many important respects remains unproven.
The best news for foreign companies seeking to expand in Japan may be the current optimistic reports that many of the old ways of regulat ing and doing business in Japan are changing under the combined pressure of prolonged recession, momentum from deregulation in such key areas as financial services, and the advance of new technology such as the Internet. If such change indeed becomes, or has become, self-sustaining from within Japan, concerns about the difficulty of reaching market access barriers in Japan using WTO rules, competition policy, or bilateral leverage may fade. In a less optimistic scenario, though, this difficulty could present a much more serious challenge to Japan’s trading partners. And the lessons for other WTO members who may admire merchantilist trade policies are powerful.
1. OFFICE OF THE UNFrED STATES TRADE REPRESENTATIVE, 1999 NAT’L TRADE ESTIMATE REP. ON FOREIGN TRADE BARRIERS 205 [hereinafter 1999 NAT’L TRADE ESTIMATE REP.].
2. EDWARD J.. LINCOLN, TROUBLED TIMES: U.S.-JAPAN TRADE RELATONs IN THE 1990S (1999).
3. USTR’s 1999 NTE Report states, “A longstanding United States concern has been that business practices in Japan’s distribution system have limited access of foreign suppliers to a number of sectors . . .” 1999 NAT’L TRADE ESTIMATE RuP., supra note 1, at 215.
4. EU Proposals for Deregulation in Japan, European Union Office of External Relations: Commercial Policy and Relations with North America, the Far East, Austrialia, and New Zealand (1996).
5. See generally, Japan Fair Trade Commission, The Antimonopoly Act Guidelines Concerning Distribution System and Business Practices, July 11, 1991 [hereinafter JFTC Antimonopoly Guidelines], reprinted in H. IYORI & A. UESUGI, Ti ANTIMONOPOLY Laws AND POLICIES OF Jnr^,N, at app. H: (1994).
6. See IYORI & UFSt7Gl, supra note 5, at 107:
Distribution keiretsu [i.e., restrictive manufacturer-distributor relationships] may work to foreclose the access of foreign products into the Japanese market. A manufacturer’s dominant position might work as a disincentive for distributors to lower their prices. A distributor’s dependence on a particular manufacturer would make distribution channels exclusive and raise entry barriers significantly.
A 1982 report by a Japanese expert study group on distribution issues states: “It is often pointed out that lack of clarity and complexity in payment standards becomes a means of controlling the manufacturer’s distribution; also, it is a primary factor in making the distribution system complex and irrational; and is one of the obstacles to foreign companies doing business in Japan.” Study Group on Distribution Issues, Anti-Monopoly Policy and Rebate System: Distribution Considerations (1982) (on file with author).
7. As an example of the powers of larger retailers, in the mid-1990s, Daiei, the largest supermarket chain in Japan, acquired a reputation for using imports for “price destruction”using lower-priced imports to force better deals from domestic manufactuers. See Edward W. Desomond, et al., The Price is Right: FightingJaparxese Deregulation, Discounters Bring Showers a New Deal: Bargains, TIME, Apr.1,1996, at 36;Japan: The Shrinking Surplus, ECONOMIST, Feb. 3,1996, at 31. “When Daiei, a supermarket retailer, decided in 1994 to import Dutch beer, domestic beer prices
. . . dropped by one-third. “Romtion in Progress: A Survey of Business in Japan, EcorrotSnsr, Nov 27, 1999, at 16 (separetly paginated insert) [hereinafter Survey of Business in Japan].
8. A 1996 EU report on Japanese trade barriers states:
Small shops count for over two thirds of total retail sales in Japan . . . . A majority of them are very small and carry almost exclusivelyJapanese products. Larger floor space tends to give room also for foreign products, and thus imported consumer goods would be more easily available if the number of large stores would be higher.
EU Proposals for Deregulation in Japan, supra note 4.
9. A White House press release emphasized this purpose: “The talks were designed to identify and resolve the structural impediments that contribute to economic tensions between the two countries. Accordingly, the [SII report] identifies specific areas impeding the adjustment of the trade imbalance in both countries.” Press Release by OFFice of THE PRESS SECRETARY, Wart HousE, Statement by the Press Secretary, Z 2 (Apr. 5, 1990) (on file with Law and Policy in International Business).
10. Japan also raised seven structural problems in the United States, including: U.S. savings and investment patterns, improvement of U.S. competitiveness, corporate behavior, government regulation, research and development, export promotion, and workforce education and training. See Joint Report of the U.S. Japan Working Group on the Structural Impediments Initiative, Tokyo,Japan June 28, 1990) [hereinafter SII Report] .
11. The guidelines would address:
Non price vertical restraints (restraints on dealing with competitors’ products or imported goods, territorial or customer restriction, and restraints on sales methods), interference into distributors’ business, rebates or allowances, return of unsold goods … systematizations regarding purchasing of commodities by large scale retailers, coercion into purchase, and coercive collection of contribution, which fall into unfair trade practices.
First SII Report, supra note 10, at III-12.
12. SeeJFTC Antimonopoly Guidelines, supra note 5, at493. The guidelines described types of actions by influential or dominant manufacturers toward their distributors that were illegal per se or potentially a violation of the law if causing certain market-restrictive effects. The Ministry of Trade and Industry also issued a set of distribution guidelines, although they were more ambiguous regarding business practices to be avoided. See Ministry of International Trade and Industry, Guidelines for Improving Business Practices, (June 25, 1990) (Provisional Translation) (on file with Law and Policy in International Business).
13. See First SII Report, supra note 9, at IV I-7.
14. Japan implemented a series of revisions to the law starting in 1990. See Ministry of Trade and Industry, Directive No. 35, Guidance for Prior Explanations of Builders Carrying Out a Notification for a Class I Store (May 24, 1990) (Partial Provisional Translation) (on file with Lam and Policy in International Business); Ministry of Trade and Industry, Directive No. 24, Independent
Regulations of Local Public Organization Regarding Store Openings (Jan. 29, 1992) (Provisional Translation) (on file with Law and Policy in International Business); Ministry of Trade and Industry, Directive No. 25, Guidance for Local Explanation to Those Who Have Submitted Notification for Construction of Class I Large Scale Retail Stores (Jan. 29,1992) (Provisional Translation) (on file with Law and Policy in International Business).
15. Through 1992, this dialogue continued under the SII process. In 1993, when the Clinton Administration took office, discussion of competition policy and deregulation was folded into a policy called the “U.S. Japan Framework for a New Economic Partnership” (Framework). In 1997, the forum became known as the “Enhanced Initiative on Deregulation and Competition Policy Issues” (Enhanced Initiative). In these succeeding fora, the United States continued to call upon Japan to strengthen enforcement of its competition laws, to improve remedies and penalties, provide a private right of action, and to address anti-competitive market structures and practices affecting distribution.
16. See U.S. Japan Global Partnership Plan of Action (Parts I and II) Adopted by President Bush and Japanese PrmeMinisierMiyazawa,Jan.9,1992, 9 BNAInt’1 Trade Rep. (BNA) 125 (Jan. 15,1992). 17. In a discussion between the author and an official of the Japan Fair Trade Commission,
the official indicated that in only one case has a survey by the economic research division resulted in an investigation by the enforcement division. The one case referred to involved the Mitsukoshi department store, which was cited for abuse of dominant position with respect to its suppliers. See IvoRi & UESUGI, supra note 5, at 127-28.
18. See Press Release by the Japan Fair Trade Commission, JFIICFo Up the Surveys on Flat Glass, Passenger Car, Auto Parts and Paper Industries (Tentative Translation) (Dec. 22,1990 [hereinaf terJJI`TTC Followed Up the Surveys].
19. See U.S. Japan Frameo Talks Begin on Market Access for Flat Glass, 11 Int’l Trade Rep. (BNA) 988 (June 22.1994).
20. See Office of the United States Trade Representative, Submission by the Government of the United States to the Governmnet of Japan Regarding and Administrative Reform in, Japan, at 29 (Nov 15,1994):[The United States requests the JFTC to] use the compulsory investigatory powers provided in sections 40 or 46 of the AMA [Antimonopoly Act] to determine whether producers, agents or distributors in the flat glass industry and in the passenger car industry are engaged in practices that violate the Antimonopoly Act or have otherwise created a market situation that is subject to remedy under the provisions of the AMA.
21. See U.S. Considering Action Against Japan Under U.S. Antitrust Law, Official Says, 11 Int’l Trade Rep. 381 (Mar. 9, 1994).
22. See Measures by the Government of Japan and the Government of the United States of America Regarding Flat Glass, at 1-6 (Jan. 25, 1995) (on file with Law and Policy in International Business). .
23. See U.S. Officials Press Japan on Flat Glass; Formal Consultations Planned this Spring, 16 Int’l Trade Rep. ($NA) 615 (April 14, 1999).
24. See Japan Will `Consir’ U.S. Request an Flat Glass Market Share Problems, 16 Int’l Trade Rep. (BNA) 996 (June 16, 1999).
25. See 1999 NAT’L TRADE EsTE REP., supra note 1, at 256.
26. See Toshio Aritake, JFTC Finds No Antitrust Violation in Japanese Fad Glass Market, 16 Int’l Trade Rep. (BNA) 861 (May 19,1999).
27. See Aritake, supra note 28, at 861.
28. See Japan Fair Trade Commission, supra note 20, at 6 sec. 4 i 1.
29. See generally Agreement on Measures to Increase Market Access in Japan for Foreign Paper Products, Apr. 5, 1992, U.S. Japan [hereinafter Paper Agreement].
30. See 1999 USTR NAT’L TRADE ESTIMATE REe., supra note 1, at 257.
31. Id. With no progress in any other direction, the United States returned to pressing for further tariff reductions in the paper sector. In 1998, Japan blocked efforts by member countries of the Asia Pacific Economic Cooperation forum to agree to a package of tariff cuts including on paper products. Id.
82. Another key issue for parts was increasing sales of parts to Japanese manufacturers. This issue was not so much a distribution issue as a matter of breaking into long-term keiretsu dealing arrangements between manufacturers and their parts suppliers, as discussed below.
33. Japan Fair Trade Commission, Survey of Distribution of Passenger Cars ( June 29, 1993). 34. SeeJFTCFoldod up the Surveys, supra note 18.
35. Japan Fair Trade Commission, Survey on the Transactions Between Firms of Automobile Parts (June 29,1993).
37. SeeJFTCFollarued ufi Surveys, supra note 18, at 6.
38. For a description of the issues addressed in the automotive agreement, see James T
Southwick, Introductory Note, Japan-United States: Automotive Afreement and Supporting Documents Automotive Agreemnt and SupportingDocuments, 34 LL.M. 1482 (1995).
39. The parties finalized the details of the agreement in August 1995. See generally Measures by the Government of Japan and the Government of the United States of America Regarding Autos and Auto Parts, U.S.Japan, Aug. 23,1995, at 2.
41. See 1999 USTR NAT’L T. EsrnKn’cE Ree., supra note 1, at 251. 42. Id at 252.
43. See generally Japan Fair Trade Commission Economic Research Survey Council Report, The Competitive Situation in 10 Highly Oligopolistic Industries (Aug.1992) (on file with Law and Policy in International Business).
44. SeeSara Dillon, Fuji-Kodak, the WTO, and theDeath ofDomesticPotal Ctituencies, 8 MINK. J. GLOBAL TRADE 197, 203-04 (1999). The United States requested consultations with Japan under the GATS regarding the Large Scale Retail Stores Law, but did not take the matter to a panel.
45. See 1999 USTR NAT’L TRADE Esc*crinmre REP., supra note 1, at 216.
46. Among other things, the relationship between a dominant or influential manufacturer and its distributors is treated as a specific issue under the Anti-monopoly Act and the JFTC’s distribution guidelines, as discussed above.
47. See generally MICHEAL L. GERLACH, ALLIANCE CAPITALISM: THE SOCIAL ORGANIZATION OF JAPANESE BUSINESS (1992).
48. European Union, External Relations: Commercial Policy and Relations with North America, The Far East, Australia and New Zealand, Summary of Market Access Problems in Japan (1996) (on file with author).
50. See IYORI & UEsuGI, supra note 5, at 341-44. 51. SII Report, supra note 10, at V-1.
52. See IYORI & UESUGI, supra note 5, app. H, at 493.
53. The United States also pursued further dialogue on keiretsu issues in “structural” talks under the Framework and Enhanced Initiative.
54. For a discussion of the Semiconductor Agreement negotiations, see Merit Janow, Trading with an Ally: Progress and Discontent in U.S. Japan Trade Relations, in THE UN1TED STATES, JAPAN, AND AsIA 52, 625 (Gerald L. Curtis ed.,1994).
55. Arrangement between the Government of Japan and the Government of the United States of America Concerning Trade in Semiconductor Products, art II-l, June 4,1991 [hereinaf ter 1991 Semiconductor Agreement].
56. Id. art. 2.3.
57. See 1999 NAT’L TRADE ESTE REe., supra note I, at 261.
58. See Japan Fair Trade Commission, supra note 35, at sec. 4(1). For an additional description of these buyer-supplier relationships, see JAMES WoMACK ET AL., LE SYSTEMS QUi VA CHANGER LE MONDE THE MACHINE THAT CHANGED THE WORLD (1992).
59. See Japan Fair Trade Commission, supra note 35, at sec. (4) (1 ) (A) ( (b) ) (a). 60. Janow, supra note 54.
61. Japan Fair Trade Commission, Survey of Inter-Company Transactions on the Marketing of Paper, at 47 (June 29,1993) .
62. Id. at 48.
63. Paper Agreement, supra note 29, art. 2.4.
64. See Charles D. Lake II, Liberalizing Japan’s Insurance Markex in UOG THE Burs*nucau.T’s KuacnotGt,116,122 (Frank Gibney ed.,1998).
65. Id at 122-23 (quoting American Chamber of Commerce in Japan, Study of Japanese Insurance Procurement Practices within Keiretsu Groups (1993) )
66. See Charles Lake & James Southwick, Introductory Note, Japan-United States: Measures Regarding Insurance, 34 LL.M. 661 (1995).
67. Also, in the life insurance market, foreign companies in the late 1990s for the first time were able to acquire Japanese life insurance companies that had reached bankruptcy or extreme financial distress in Japan’s long recession.
68. See 1999 NAT’L TRADE ESTIMATE REP., supra note 1, at 232.
70. Su id.
71. See id.
72. See Survey of Business in Japan, supra note 6, at 5-9 (arguing that foreign investment, mergers of financial institutions, and new accounting rules are beginning to force a loosening of keiretsu ties and business practices).
78. See IYORI & UESUGI, supra note 5, at 93-97.
74. See generally MARK TILTON, RESTRAINED TRADE: CARTELS IN JAPAN’S BASIC MATERIAL INDUSTRIES (1996).
75. See Press Release by Office of the U.S. Trade Representative, Executive Office of the President, Press Release No. 96-97, Ambassador Barshefsky Settles Insurance Dispute with Japan (Dec. 15,1996); Supplementary Measures by the Government of the United States and the Government of Japan Regarding Insurance (Dec. 24,1996) (on file with Lam and Policy in International Business). The agreement stated:[T]he Ministry of Finance has decided to take actions to undertake fundamental reform of the rating organization system . . . through elimination of obligations for members of a rating organization to use rates calculated by the rating organization, while allowing members of a rating organization to use, for the purpose of calculating rates, the statistical data collected by the rating organization. Id.
76. See id. art I(4).
77. 1999 NAT’L TRADE ESTIMATE REP., supra note 1, at 238.
78. According to Japanse government data during 1992-95, Japan’s Ministry of International Trade and Industry (MTTI) ordered floor space reductions in 4530 of applications for large stores (those with 3000 sq. m. floor space and larger). See WTO Panel Report, Japan-Measures Affecting Consumer Photographic Film and Paper, WT/DS44/R, 1 5.329 (Mar. 21, 1998) [hereinafter Japan-Film Panel Rer].
79. Ministry of Trade and Industry Directive No. 93, Guidance for Local Explanation to Those Who Have Submitted Notification for Construction of Class I Large Scale Reatil Stores (Jan. 29,1992) (Provisional Translation) (on file with Law and Policy in International Business).
80. See Law Pertaining to Adjustment of Business Activities of the Retail Industry for Large Scale Retail Stores, Art. 7 ( I ) (on file with Law and Policy in International Business) .
81. A WTO Panel noted that a survey by Japan’s Mangement and Coordination Agency
found that in the overwhelming majority of cases, the authorities designate the local chambers of commerce and business associations as the main or only parties to provide views to the Large Stores Council. The survey found that in 99.2 percent of the cases, the recommendations of the Large Stores Council were based directly on the views of the lcoal chambers of commerce or business associations in the locality where the store was to be opened.
Japan-Film Panel Report, supra note 78, at 5.352. In a June 1995 study the Japan Fair Trade Commission found that “existing local retailers” were “influential” members of the Large Stores Councils. See Concerning the Reevalutaion of Government Regulations in the Distribution Sector,Japan Fair Trade Commission 19 (June 1995).
82. A JFTC study found that some large stores “have been forced into what amounts to an adjustment process due to demands from existing local retailers to make out an agreement.” Id. at 16.
83. Id. at 24-21.
84. USTR recently wrote, “the United States remains extremely concerned with the
possibility for abuse or inconsistent application of the new authority by local governments.” 1999 NAT’L TRADE ESTIMATE REp., supra note 1, at 216.
85. Id at 247. 86. Id. at 248.
87. Janow, supra note 54, at 169; Tilton, supra note 80, at 169. 88. 1999 NAT’L TRADE ESTIMATE REP., supra note 1, at 262.
89. Set id. at 259.
90. See U.S. TRADE REPRESENTATIVE, 1997 NATAL TRADE ESTIMATE REP. ON FOREIGN TRADE BAURs 228 [hereinafter 1997 NAT’L TRADE TE REP.].
91. Exports of soda ash, an input for glass manufacturing, were another such example:
U.S. exporters of soda ash continue to be concerned about exclusionary practices on the part of Japanese producers, to include setting quotaas on the amount of imported product that is sold in Japan and pressuring distributors to limit their purchases of U.S. soda ash. A cartel of four major Japanese suppliers of soda ash controls the major portion of the soda ash market in Japan.
U.S. TRADE REPRESENTATIVE, 1995 NAT’L TRADE ESTIMATE REP. ON FOREIGN TRADE BARRIERS 202. 92. See 1999 NAT’L TRADE ESTIMATE REP., sufira note 1, at 246.
93. ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT, REGULATORY REFORM IN JAPAN 33-34 (1999)
95. “As regulatory reform stimulates structural change, vigorous enforcement of competition policy is needed more than ever to prevent private market abuses from reversing the benefit of reform.” Id at 12-13.
96. These include: ( 1 ) The auto parts aftermarket regulations, which restricted expansion of specialty repair stores through imposing burdensome tool, equipment, shop floor space, and minimum employee requirements; (2) The implementation of the insurance law, in which the Ministry of Finance was reluctant and slow to approve products departing significantly from the price or term of existing products (which of course gave the competitive advantage to large-scale incumbent companies with established keiretsu relationships and/or strong distribution channels); (3) The Large Scale Retail Stores Law, which limited floor space and hours and days of operation for large stores, and subjected the stores to review by smaller competitors.
97. U.S. AND JAPAN MOSS NEGOTIATING TEAMS, REPORT ON MEDICAL EQUIPMENT AND PHARM YCEUTICALS MARET-ORIENTED, SECTOR-SELECTVE (MOSS) DISCUSSIONS 1 Jan. 1986) (report to Minister for Forein Affairs Abe and Secretary of State Shultz) (emphasis added) [hereinafter “MOSS Report”].
98. See id. at 12. 99. Id at 10.-11.
100. SCE OFFICE OF THE U.S. MADE REPRESENTATIVE Bc DEPOT OF COM., FIST JOINT STATUS REPORT oN THE U.S. JAPAN ENHANCED INlCiATiVE oN DEREGULATION AND COMPETITION POUr (May 15,1998) .
101. See id.
102. That product was the anti-impotence drug, Viagra.
103. Commission of the European Communities, EU Priority Proposals for Regulatory Reform in Japan 18 (Oct. 29, 1999) (emphasis added) (on file with Lam and Policy in International Business) [hereinafter Commission Proposal].
104. See 1999 NAT’L TRADE ES”I7MATE REP., supra note I, at 241; Commission Proposal, supra note 103, at 10.
105. See Office of the U.S. Trade Representative, Submission by the Government of the United States to the Government of fapan RegardingDeregulation, Competition Policy and Transparency and Other Government Practices in Japan, at 3 (Oct. 6, 1999) ; Commission Proposal, supra note 103, at 10.
106. See OFFICE OF THE U.S. TRADE REPRESENTATIVE 8c DEFT OF COM., SECOND JOINT STATUS REPORT ON THE U.S.JAPAN ENHANCED INITIATIVE ON DEREGULATION AND COMPETITION POLICY 2 (May 3,1999) [hereinafter SEoOND JOINT STATUS REPORT .
107. NTT’s interconnection rates are calculated based on the Interconnection Accounting Rules for Designated Telecommunications Facilities and the Interconnection Cost Calculating Rules on the Interconnection Rates for Designated Telecommunications Facilities, both of which are ordinances of the Ministry of Posts and Telecommunications. See id, at 2.
108. 1999 NAT’L TRADE ESTIMATE REP., supra note 1, at 228.
109. The NTT procurement agreements originally were government procurement agreements as well, since NTT was a government corporation. More recently, NTT has become a private company majority owned by the Japanese government. The barriers in selling to NTT fit well with a keiretsu analysis as well as a government procurement analysis.
110. Such was the case for example, in talks on procurement of computers, supercomputers, and medical devices.
111. See 1999 NAT’L TADE EsATE REe., supra note 1, at 231.
112. See id. at 233. 113. See id. at 231.
114. See id. at 233. 115. See id. at 229.
117. WORLD TRADE ORGANIZATION, t11`IALYCICAI. INDEX: GUIDE TO GATT LAW AND PRACTICE 652 (6th ed.1995) [hereinafter ANALYTICaL INDEX].
118. See id.
119. Japan-Nul&’fication or Impairment of the Benefits Accruing to the EEC under the General Agreement and Impediment to theAttainment of GATT Objectives, GATT Doc. L/5479 (8 April 1983). 120. The EC specifically cited:
(i) visible, and even more important, certain less visible trade barriers in a number of area;
(ii) problems in certain areas because of excessively complicated approval, testing and customs procedures;
(iii) the marked concentration and interlining of the structure of production, finance and distribution in Japan, which makes it difficult for foreign suppliers to establish Japanese distribution channels.
121. See 1997 NaT’L TRADE ET REPre Rye., supra note 90, at 226-27.
122. See WTO Appellate Body Report, European Communities-Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, Zi 212-13 (Sept_ 9, 1997) (issuance of import licenses altered the conditions of competition in favor of purchasing domestic bananas, contrary to GATT Article III:4); See id. at (para)(para) 223–24 (allocation of licenses created less favorable conditions of competition for foreign service suppliers contrary to GATS Article XVII).
123. GATT Panel Report,, japan Restrictions on Imports of Certain Agricultural Products, Nov.18, 1987, GATT B.LS.D. (35th Supp.) at 66 (1988).
125. GATT Panel Report, Japan-Trade in Semiconductors, May 4, 1988, GATT B.LS.D. (35th Supp.) at 116 (1989).
126. See e.g., Japan Film Panel Report, supra note 78, at 10.161 (finding MITI’s 1970 Guidelines to be measures within the meaning of Art. XXIII:1 (b) ).
127. See, e.g., Japan Film Panel RerOrg supra note 78, at i 10.161 (non-violation case requires showing that conditions of competition are upset by application of a measure not reasonably anticipated at the time of a tariff concession). The non-violation provision of the GATS has not been tested before a panel, but based on precedent from the analogous GATT provision, a panel likely would require a showing of disadvantageous conditions of competition.
128. See Agreement to Technical Barriers to Trade, Apr. 15, 1994, art. 2.2, Marrakesh Agreement Establishing the World Trade Organization, Annex IA, in RESULTS of THE URUGUAY ROUND OF MULTILATERAL TRADE NEGOTTATIONS 1 (1994) [hereinafter RESULTS OF THE URUGUAY ROUND] 138, 139 (1994).
129. Id art. 2.8.
130. See 1999 NAT’L TRADE EsTE REP., supra note 1, at 210.
131. See General Agreement on Trade in Services, Apr. 15, 1994, art. 6, WTO Agreement, in RESULTS oFT= URuGUAy RoUND, supra note 128 ( 1994) 327, 333 ( 1994), 33 LL.M. 1168, 1173.
132. In the May 3, 1999 announcement of new NTT interconnection commitments under the Enhanced Initiative on Deregulation, USTR stated:
Since the relationship between retail and interconnection rates relates to Japan’s WTO obligations to safeguard competition, the United States will henceforth review the proposed tariff in light both of the measures agreed to under the Enhanced Initiative and Japan’s WTO obligations.
United States Trade Representative, Second Joint Status Report Under the U.S. Japan Enhanced Initiative on Deregulation and Competition Policy 2 (May 3, 1999).
133. Japan Restrictions on Imports of Beef, GATT Doc. C/M/219 (Apr. 8. 1988) (complaint by Australia; settled with Japan agreeing to remove quotas); Japan-Restrictions on Imports of Beef and Citrus Products, GATT Doc. L/6322 (Mar. 29, 1988) (complaint by the United States; settled on same terms as Australia complaint).
134. Japan Restrictions on Imports of Beef and Citrus Products, GATT Doc. L/6322 (29 Mar. 29, 1988) (complaint by the United States; settled with Japan agreeing to remove quotas).
135. GATT Panel Report, Panel on Japanese Measures on Imports of Leather; May 15/ 16, 1984, GATT B.LS.D. (31st Supp.) at 94 (1985) (complaint by the United States; panel found quotas in violation of GATT).
136. SeeANmvncat. INDEX, supra note 117, at 756.
137. See WTO Panel Report, Japan-Measures Affecting Agricultural Products, WT/DS76/R, (Oct. 27, 1998) (complaint by the United States).
138. See id. at (para)(para) 8-105- 8-116
139. See 1997 NAT’L TRADE ESTIMATE REP., supra note 96, at 201.
140. WTO Appellate Body Report, Japan-Taxes on Alcoholic Beverages, WT/DS8/AB/RL WT/DS10/AB/R, WT/DSll/AB/R (Oct. 4, 1996).
141. See WTO Panel Report, Japan-Taxes on Alcoholic Beverages, WT/DS8/R, WT/DS10/R, WT/DSll/R, at it 2.1-2.4 (July 11, 1996).
142. See 1997 NAT’L TRADE EsrtntaTe REe., supra note 96, at 200.
148. See id. at 218-19.
144. The Japan Fair Trade Commission was helpful, at the request of the United States, in addressing cartel-like market-access barriers in Japan affecting U.S. exports of soda ash. See A. Wolff, Unanswered Questions: The Place of Trade and Competition Policy in the Seattle Round 5 ( June 20, 1999) (unpublished paper, delivered at the OECD Conference on Trade and Competi..*.,v
145. Agreement between the Government of the United States of America and the Government of Japan Concerning Cooperation on Anticompetitive Activities, Art. V (Oct. 7, 1999) [hereinafter “U.S. Japan Antitrust Agreement”].
146. At least one observer questions whether competition authorities share trade authorities’ view of the importance of opening foreign markets to greater competition:
Trade ministers are looking primarily to other peoples’ markets to be open, accessible, contestable. Competition authorities have had their focus directed inward. They have aimed to have their own home markets open, accessible, contestable.
A. Wolff, supra note 144, at 5. This observer added that publicly known examples of U.S. Justice Department efforts to open foreign markets for U.S. companies “are extremely few.”
JAMES N. SOUTHWICK*
* Of counsel, Dorsey & Whitney LLP. From 1996 to 1997, the author was the Deputy Assistant U.S. Trade Representative for Japan at the Office of the United States Trade Representative. During that time, he headed USTR’s Japan office, worked with the U.S. Trade Representative on all aspects of formulating and implementing U.S. Japan trade policy, and led U.S. Japan trade negotiations in a variety of sectors;
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